Schools of Macro-Economics

Regardless of rhetoric, Democrats and Republicans both apply Keynesian principles to their policy decisions. Libertarians and a handful of liberty-oriented Republicans would inform their decisions by Austrian economics or monetarism, often associated with Milton Friedman and the Chicago School of Economics. Why is this the case, who’s right, and how do we move forward? To answer this question, let’s first define the general principles of each school of thought.

Keynesian Economics

Libertarians tend not to buy into Keynesian economics, because of the requirement for government intervention in the market. This school of economics is focused on the boom and bust cycles of the economy. Boom cycles are defined by economic prosperity when most people are employed, businesses are profitable, and people are not afraid of spending money. Bust cycles are defined by high unemployment, and low spending. Through policy decisions, Keynesians will use the power of government and the federal reserve to pump money into the economy, in an attempt to prevent a deep recession or depression. This stimulus spending may go to corporations, and/or individuals who are most impacted by the changes in the economy. But, is it moral, and does it work? To answer this question, we must first consider how Keynesian economics compares to monetarism.

Monetarism

Many libertarians subscribe to monetarism. This is the economic school of thought championed by economist Milton Friedman of the Chicago School of economics. Its underlying principle is that the total money supply in an economy drives the demand side of short-run economic activity. This is expressed by the equation of exchange, MV = PQ.

  • M: the supply of money
  • V: the velocity of turnover of money, or how many times per year a unit of money in the form of currency or bank deposits is exchanged for goods and services
  • P: the average price of goods and services
  • Q: the quantity of goods and services produced

Monetarists like Milton Friedman assert that causation occurs from left to right in the equation. If the money supply increases at a given velocity, then the price or quantity of goods and services produced will increase, too.

Austrian Economics

Many libertarians, and in particular, anarcho-capitalists (ancaps) subscribe to the Austrian School of economics. Rather than using formulas, it is based on logic and reason. It starts with the premise that the economic values of goods and services are subjective, and not objective. They are valued at whatever people are willing to pay for them, and different people put higher or lower value on different types of goods and services. Like monetarism, Austrian economists postulate that an increase in the supply of goods and services will diminish their subjective value. This is known as the diminishing marginal utility of goods and services.

To learn more about the different schools of economics, check out some of the books on our list.