"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." ~John Maynard Keynes
I am not a expert in economics but I consider myself knowledgeable enough to have an opinion. I will be more than happy to admit I am impartial. Most have little clue of what economics entails and ever fewer are concerned about it. Unfortunately, it does matter... In fact, it matters much more than who is running Congress or who is sitting in the White House. With the advent of a Central Bank in the United States in 1913, it was inevitable that the central bankers would have to invent or elevate an economic model that would make their role essential in the functioning of the economy. Luckily or otherwise, John Maynard Keynes came along with his General Theory and his animal spirits... however, his wasn't the only idea, at the time there was another economist, F.A. Hayek, who pointed out the problems with the Keynesian economic model and advocated another model -the Austrian model of economics. The major problem with Keynes' theory according to Hayek... inflation and malinvestment would always create a Boom and then a Bust. The lines were drawn.
With all the money that could be printed to back up his "idea", it wasn't long before Keynesian economics ruled the world... and politicians, especially those who had no interest in being fiscally responsible, jumped for joy!
It's not easy to explain economics to the average lay person... especially with all the technical vocabulary. But esentially the difference between Keynes and Hayek is Keynes sets the people up at the top with a money printing (legalized counterfeiting) machine. Whenever trouble comes along... just print more money to increase demand. Hayek (Austrian economics) on the other hand, would be more identifyable to the average person as the way we all have to run our household... if we don't have enough money coming in... we have to either find another source of revenue, increase productivity or cut spending. The advantage to government's with the Keynesian model is... they have one unending source of money. The problem is, other than an ever increase debt load, the money may very well be wasted on things that aren't productive... and so we end up with the Boom and then the Bust. Just in the past 20 years we've had the Savings and Loan crisis, the dot com/ Nasdaq bust, and the "sub-prime" Mortgage crisis. Each one created a boom but then ended with a larger bust. People who thought they were rich one day realized soon after they were in fact... broke. In the Austrian model... slow downs occur but these slowdowns spur reinvestment. And although there may be several slowdowns... these are typically not market wide but mainly a specific industry or segment of the economy.
That's the simple version. There is much more, of course, but the bottom-line is to understand that we currently live in a Keynesian Monetary system... which means the rules that most people have been taught (which most would call being fiscally responsible) are not the ones that provide the best solutions to getting ahead and may in fact lead to financial disaster. See my blog on the New Rules of Money for reference.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (Wikiquote on John Maynard Keynes)
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."~ Henry Ford
A mucic video was recently released that gives a peek into the competing economic philosophies.
As Robert Kiyosaki explained in his New Rules of Money and his book "Rich Dad Poor Dad", as individuals, we can't change the system but understanding the system we can make much better decisions that lead us to success in what would otherwise be failure. Another opportunity!
The battle of letters Keynes vs. Hayek
***Update 11/2/10***
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