Keynes vs Hayek, Recasting the Discussion

Arnold Kling’s When Labor is Capital:

The Keynesian prescription for a recession is to increase government spending. Even if the resulting output is not valuable (the proverbial digging ditches and filling them in again), the thinking is that this will stimulate productive output. Again, this is based on the theory that economic activity is spending. Supposedly, spending will encourage more spending, through the “multiplier” effect. . . .

From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market’s recalculation problem more confusing. It will delay long-term recovery, rather than hasten it. . . .

What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

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