In the continued aftermath of the 2008 financial crisis, people on both the left and right side of the political spectrum have proposed various solutions to the country’s economic woes. Although the Republicans and Democrats offer different answers, their views don’t differ very much in terms of the governing theory behind them. Instead of the ‘Republicrat’ false dichotomy, a few congressmen, such as Rep. Justin Amash, R-Mich., and former congressman Ron Paul, R-Texas, have returned to basic economic theory to create prosperity.
I believe that if one wants to understand proper economics, one must ask a simple question: Do I support economic central planning? To those who remember the downfall of the Soviet Union or know of the failure of the current Venezuelan economy, this may seem like a pointless question. Clearly, history has proven that central planning doesn’t work ubiquitously. However, politicians in the United States continually propose legislation in favor of government planning (albeit to a milder degree than failed socialist states). President George Bush’s bailouts or President Barack Obama’s Affordable Care Act are two examples where politicians thought that government planning and action was necessary to fix the economy.
Economic activity is nothing more than the summation of individual exchanges. There is no metaphysical entity known as the “market.” Marketplaces do not exist independently of the individuals that compose them. The purpose of an exchange is to give away something of lesser value for something of greater value. The reason trade happens is because value is subjective. I may value oranges more than apples, whereas the opposite is true for the person I’m trading with. Thus, we make a mutually beneficial exchange. The idea that value is subjective, which seems intuitive to most, is the exact reason why government economic solutions fail miserably.
The government is not an omniscient, benevolent being. Government is nothing more than a collection of completely fallible individuals trying to make decisions for everyone. This can create a massive problem economically speaking. How can the government decide what action to take if it doesn’t know the subjective value individuals place on goods? Can it even make an effective policy decision if no good is inherently more valuable than another? The answer is it can’t.
In 1936, John Maynard Keynes flipped the world of economics upside down by suggesting that government fiscal policy was a necessity to solve economic externalities. Since then, we have been ravaged by failed government policy. Keynes’s theory has been proven wrong time and again, yet big government advocates cling to it as their lifeblood.
In 2003, five years before the 2008 crisis, Paul made the following prediction:
“The special privileges granted to Fannie [Mae] and Freddie [Mac] have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.”
This prediction was extremely and scarily accurate.
How could Paul make such a prediction when Paul Krugman, arguably the most prominent modern economist, could not? The answer lies in the fact that Paul subscribes to an economic school of thought known as the Austrian School. The Austrian School, which champions the aforementioned theory of subjective value and the efficiency of markets free from intervention, has provided elegant explanations as to why recessions and booms occur and how to obtain prosperity.
Austrian economists, such as the Nobel Prize-winning economist F.A. Hayek, believe that economic distortions are created by government intervention. They hold that markets are efficient and do not lead to monopolies when unregulated. Instead, monopolies are created when people with power use government regulation to “stack the deck” against those without power. A perfect example is the EpiPen crisis. The price of EpiPens has skyrocketed because FDA regulation has prevented competitors from entering the market, creating a monopoly. Despite the fact that the Austrian School economists have created one of the greatest economic theories of all time, one simply won’t learn Austrian School economics at university. It is not because the Austrian School theories have been debunked—far from it. It is because economics is not taught without an ideological bent.
History should have taught us that government does not solve economic crises—it causes them. Yet, when it comes to attending university, we are taught by textbooks, not history. We must reach beyond the classroom and consider the multitude of different economic theories if we are to find truth. Instead of merely taking one theory as true, we must test them against each other, theoretically and empirically. In both cases, the Keynesian belief falls short whereas the Austrian School has held firm. It is time we return to the theory that will lead us to proper policy. Through this we find that government cannot fix the economy, only free markets can.
Ben is a sophomore majoring in political science. Send all comments to opinion@dailycardinal.com.
