Ojete

In this article, some of the main arguments of the ideological war between Keynesian and Classical economists are shown. The article focuses on one of the Classical school of economic thought:Austrian Economics, championed by Ludwig von Mises and Friedrich von Hayek.
The opening paragraph refers to the fact that the immediate policy response to the unraveling of the 2007 crisis in manydeveloped economies: Fiscal stimulus. A fall in consumer confidence as a result of the world economic turmoil leads to a shift of the IS curve in the IS-LM model. The economy is in a short-term equilibriumwhere there is underproduction. The quintessentially Keynesian policy would not be to wait until the economy adjusts back to equilibrium (in the long run we are all dead), but to increase publicspending so that the IS curve shifts back to its original position. Spain’s initial response to the 2007-??? Crisis, the so-called Plan E, is a good example of this (and on how it can be a bad idea).
Thearticle also summarizes some of the points of the Austrian theory:
“A one-paragraph explanation of the Austrian theory of business cycles would run as follows. Interest rates are held at too low alevel, creating a credit boom. Low financing costs persuade entrepreneurs to fund too many projects. Capital is misallocated into wasteful areas. When the bust comes the economy is stuck with the burdenof excess capacity, which then takes years to clear up.”
The explanation fleshes out how the interest rates were, indeed too low. Spain and Italy are cited as examples of this. In fact, these twocountries reached the highest rate of second home ownership within the EU. That is a clear symptom of excessive ease of credit (due to the EU-wide common monetary policy, with relatively low interestrates). In the US, it is argued that interest rates close to 0 led to the housing bubble whose burst collapsed the country’s economy. Also, capital misallocation seem to have taken place in form of the...