7 Key Differences Between Keynesian vs Austrian Economics

7 Key Differences Between Keynesian vs Austrian Economics

Keynesian vs Austrian Economics

Austrian Economic theory oppose to government intervention in the market while Keynesian Economics advocate for it . Keynesian economics and Austrian economics are two major schools of thought in macroeconomics. They vary from each other based on the role in economy and ways to manage the economy. In this article, firstly we will briefly discuss what is Keynesian Economics and Austrian Economics. Secondly, We will discuss about the similarities between these two schools of thought in macroeconomics. Finally, we will broadly discuss Keynesian vs Austrian Economics.

What are Keynesian Economics and Austrian Economics?

Keynesian Economics

John Maynard Keynes has developed the Keynesian theory to response the Great Depression in 1930. According the main focuses of the Keynesian theory, insufficient level of aggregate demand can create a recession and increase the unemployment. John Maynard Keynes advocated for the government intervention to increase the aggregate demand of nation. According to him, demand side policies such as fiscal policy and monetary policy can be utilized for that.

Fiscal policy means changing the government expenditure level and taxation level with the intention to influence the output level of the economy.

What is expansionary fiscal policy?

Monetary policy is a demand-side economic policy that is accomplished by the central bank (in USA, Federal Reserve Bank) to influence the money supply of a country.

Monetary policy : Objectives and tools

Austrian Economics

Friedrich Hayek, Ludwig von Mises, and Carl Menger developed the theory of Austrian Economics in the late 19th and early 20th centuries. Austrian Economics Highlights the significance of the personal value that people assign to products and services. This theory oppose to the government intervention to the market because government intervention can discourage the investment and innovation of a nation by distorting the market prices.  However, Austrian Economics supports sensible monetary measures, like the gold standard, in order minimize inflation.

Similarities between Keynesian Economics and Austrian Economics

Before discuss the differences between Austrian Economics vs Kenesian Economics, it is important to clarify the similarities of Keynesian Economics and Austrian Economics. So, let’s understand the similarities between these two concepts.

Focus on the Business Cycle: Both schools consider about the economic fluctuations in business cycles and they try to understand about the causes and consequences of fluctuations of the business cycles.

Importance of Information: According to these two theories, information and expectations can influence the behavior of the parties in market and ultimately economy. As examples according to Keynesianism, changes in the business confidence level can influence the aggregate demand while according to Austrian Economics, malinvestment caused by misinformation in the price system.

Methodological Individualism: Both approaches ground their analysis in the behavior and choices of individual economic agents, businesses, and consumers, recognizing the emergent properties of the market from these micro-level interactions.

Policy Intervention: Both theories acknowledge about the economic policy interventions. However, Keynesians favor to the government interventions while Austrians oppose to the government interventions.

Differences between Keynesian vs Austrian Economics

Keynesian economics and Austrian economics are two opposite schools of thought in economics. These schools differ in the policy implementations, assumptions, methods, and so on.

Market efficiency:

According to Austrian Economics, free markets are efficiently operating. So, the resources are allocated optimally in these markets. However, according to Keynesian Economics, free markets are not efficiently operating. There can be market failures including recessions and higher unemployment.

Value and price:

As mentioned by the Austrians, the value of a good is subjective and it is determined by the marginal utility. On the other hand, Keynesians believe that the value of goods is objective and the price level is derived by the aggregate demand level of a country.

Types of currency:

Money backed by a real asset, most notably gold, is what Austrian economics believe in. Because of this, printing more money when the economy needs a boost to its capital becomes more difficult. Conversely, fiat currency, which is supported by the government, is what Keynesian economists believe in. The amount of money in circulation in the economy is determined by it, and the government is able to expand it in accordance with policy without any genuine basis.

Government intervention:

Austrian Economic theory is opposed to government intervention to the market because government intervention can discourage the investment and innovation of a nation by distorting the market prices.  Keynesian Economic Theory advocated for government intervention to increase the aggregate demand of a nation. According to John Maynard Keynes, demand-side policies such as fiscal policy and monetary policy can be utilized for that.

Inflation:

Austrian economics contend that inflation, particularly when it results from a rise in the amount of money in circulation, can actually be damaging to economic expansion. Deflation, or price decreases, is what Austrian economics instead advocate. Thus, in order to benefit from their financial benefits, people are encouraged to spend more, which increases the likelihood that they will invest. Your money will eventually buy you more. Keynesian economists, on the other hand, contend that inflation benefits the economy. The majority of individuals will borrow more when prices rise, which raises the expenditure necessary for a robust economy. Your money will eventually buy you less. According to them, declining prices lead consumers to save more of their hard-earned money, which eventually hurts the economy.

Business cycles:

According to the opinion of the Austrian Economists, business cycles are created by credit expansion and contraction that are derived by the central bank manipulation of interest rates. But according to the believes of the Keynesian Economists, business cycles are occurred because of the changes of the aggregate demand. 

Economic method: 

In order to infer economic principles from human behavior, Austrian economists apply deductive reasoning and logic. To test and evaluate their theories about the economy, Keynesian economists employ both mathematical models and empirical data.

Table summary: Keynesian vs Austrian Economics

FactorAustrian EconomicsKeynesian Economics
Market efficiencyFree markets are efficiently operatingFree markets are not efficiently operating
Value and priceThe value of a good is subjective and it is determined by the marginal utilityValue of goods is objective and the price level is derived by the aggregate demand level of a country
Types of currencyMoney is backed by real assetsFiat currency, which is supported by the government should be utilized.
Government interventionOpposed to government intervention in the marketAdvocated for government intervention to increase the aggregate demand
InflationContent that deflation benefits the economyContent that inflation benefits the economy
Business cyclesBusiness cycles are created by credit expansion and contractionBusiness cycles occur because of the changes of aggregate demand.   
Economic methodApply deductive reasoning and logicEmploy mathematical models and empirical data.

Which is the best? Austrian Economics vs Keynesian Economics

We cannot clearly say that which the best one is. Because Both Keynesian and Austrian economics have their own strengths and weaknesses. When we consider about Keynesian Economics, is more applicable when the economy is suffering from a recession. Because Keynesian economics theory is a short-run oriented economics theory. Austrian economics is more focused on promoting the long-term growth of an economy. We have to decide the most appropriate economic policy based on the goals of the economy and the current situation of the economy.

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