Understanding economics can quickly get complicated for the average person, especially when the information you hear may vary between different schools of economic thought. There are many different theories and principles that advise on the best way to invest, save, and spend wisely. Two of the most popular schools of thought are Austrian economics and Keynesian economics. Which one is the right fit for your investments and financial planning?
In this guide, we will take a quick overview of these two viewpoints as well as some of the differences between them so that you can figure out which one you more closely adhere to.
What is Austrian Economics?
Austrian economists believe that the market will take care of itself for the most part–also sometimes known as laissez-faire economics. They believe that society should have a set of reasonable laws and that people should try to adhere to them to the best of their ability.
The main component of the Austrian School is the reliance on gold and other precious metals as a way to back a currency. Not because these metals are intrinsically necessary, but because they cannot be created out of nothing. The Austrian School claims that Keynesians tied-to-nothing fiat money will always lead to inflation, because governments cannot resist the appeal of printing free money.
With that condition met and fewer restrictions or market regulations, they believe that the market will ultimately restore itself when a downturn occurs. There may be some unemployment or recessions from time to time, but at the end of the day, Austrian economists believe that the market will reach a point of equilibrium if left to its own devices.
In other words, Austrian economists believe that there should be minimal government planning to increase wealth. They adhere to a philosophy that your savings and private investments will be more useful to the overall economy than anything that the government could institute.
What is Keynesian Economics?
Keynesian economics comes in at the opposite end of the spectrum, advocating for more and more government intervention. Instead of private savings and investments, they believe that the real key to economic growth lies in spending.
To promote more spending, governments will need to institute policies to reverse the effects of recessions on the market at large. This is the opposite of the laissez-faire approach of the Austrian economists, who believe that success in the market lies in saving, investing, and the individual decisions of the average person.
Keynes believed that governments should step in to help the economy during market downturns and let off when the market recovers.
Austrian Economics vs. Keynesian Economics: Which is Best?
When it comes to comparing the two models, it is easy to see that there is a different approach to government oversight in these models. The question is: which one is best for the economy at large and for your investments?
Perhaps the biggest difference between Austrian economics vs. Keynesian economics lies in the overall role that the government should play in the market. Austrian economists believe that the market will balance itself out over time. Recessions are a necessary component of the economy because they will help society avoid even greater market fallout down the road.
To this end, Austrians believe in minimal government oversight. Instead of bailing out any failing businesses, they believe that the government should allow them to fail to free up space in the market for a superior competitor.
On the other hand, the primary difference here is that Keynesians believe markets are inefficient and the government is required to help balance them out. They might need to increase spending from the government to stimulate the market, alter interest rates, or print more money.
Austrians argue for small government while Keynesians argue for more government oversight to help set the market right again.
When it comes to helping an economy thrive again, inflation is another key area where Austrians and Keynesians tend to vary. Austrian economists believe that inflation can actually harm economic growth, especially if it is due to an increase in printed money (which is a go-to for Keynesian economics).
Instead, Austrian economists believe in what is known as deflation, or price reductions. In turn, this encourages people to spend more to take advantage of the improvements to their finances and makes it more likely that people will invest. Over time, your money will buy you more.
Keynesian economists take the opposite stance, arguing that inflation is good for the economy. As prices increase, most people will turn to borrowing which increases the spending that they depend on for a healthy economy. Over time, your money will buy you less.
They argue that falling prices encourage people not to spend their hard-earned dollars which harms the economy over time.
Types of Currency
In addition to the marked differences in approaches to the market, the basis for currency is the other major difference between Austrian economics vs. Keynesian economics. Austrian economists believe in money that is backed by a real asset, most notably gold. This makes it more challenging to print more money whenever the economy needs an influx of cash.
On the other hand, Keynesian economists believe in fiat currency which is instead backed by the government. It has no real basis for the amount of money circulating in the economy and gives the government the power to increase circulation in accordance with policy.
Only The Austrians Can Explain the Booms and the Busts
At Magellan Planning Group, we believe that Austrian economics reigns supreme in the field of investments and the market. As we like to say, “Only the Austrians can explain the booms and the busts, and only the Austrians can predict them.”
Our approach is to understand the cycle of both booms and busts, both allowed in the overall cycle of the market in Austrian economics. This insight into the Economic Super-Cycle can help us adjust your holdings accordingly.
We will help you determine how much income you need to retire right away and your future income needs, and help you determine how likely you are to hit those financial goals. In turn, we can then assess what needs to change in your plan to increase your chance of success.
If you are ready to implement a solid saving strategy to prepare for retirement based on the benefits of Austrian economics, schedule a consultation with Magellan today!