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Breaking the Secret Code of Macroeconomics Lingo (Part III: Hayekians) September 5, 2012 12:00 AM | Tagged as Dynamic Scoring, Hayek, macroeconomics

 Hayekian Principles

 

Frederick August Hayek was an Austrian economist whose work in the last half of the 20th century confounded the Keynes dogma. Among other universities, he resided at the University of Chicago and his principles are nicknamed “the Chicago School” or “the Austrian School”.  His most famous treatise was The Road To Serfdom (1944).

 

Hayekians believe in limited government and free markets.  They recognize that government spending comes at a significant price. The government does not have a money tree. The Keynesian multiplier conveniently forgets to subtract the amount that is taken out of the private economy to pay for the government spending. This means the multiplier is actually less that 1.0 over the long run. Hayekians believe the Keynesian multiplier is bunk.

 

These Hayekians believe that fixing a recession is best done by focusing on supply in the economy, not demand. If the government would reduce spending and permanently reduce tax rates, money left in the private economy would be put to good work. Creativity would jump. Businesses would be formed or expanded. Capital purchases would soar. Job would be created. The economy, as measured by GDP, would grow.

 

 Dynamic Scoring

 

Hayekians recognize that the static scoring in Keynesian models is also bunk. When people are taxed at high rates, their economic incentive to produce is reduced. This affects the economy negatively.  As proof, consider the effect if tax rates were increased to 100%. The economic incentive to work would be zero. The economy would sink to nothing. So the tax revenues curve starts upward as lower tax rates are increased. It then bends down as the increasing tax rate approach 100%.  This bending effect is often called the Laffer Curve, after Arthur Laffer, one of President Reagan’s chief economists. Hayekians argue that current marginal income tax rates are too high and if the rates would be reduced, the economy would grow and the tax revenues would increase to the government. Generally, Hayekians believe that this increase should be used to reduce government debt, not increase government spending.  Hayekian models attempt to model this curve and reflect the increasingly negative effect of higher marginal income taxes on the economy. This is a “dynamic” scoring calculation.

 

The Wall Street Journal Editorial Page and Other Notable Hayekians

 

Because Hayekianism started at the Chicago School, near the Great Lakes, Hayekians are sometimes known as “fresh-water economists”.

 

Notable Hayekians are Arthur Laffer, Milton Friedman (late), Thomas Sowell, Robert Mundell, Ed Prescott, and the Wall Street Journal editorial page editors.  These editors constantly poke their journalistic finger in the Keynesian eyes of the Wall Street investment bankers. These opinion page editors are not the same editors that produce the rest of the WSJ. The opinion pages are the last three pages of the front section in each issue. This is why The Biz Bucks Guy teaches class participants to read these three pages each day.  

 

Hopefully, these three blogs on macroeconomics lingo will help Biz Bucks students read about, comprehend, and critically analyze opinions of thinkers of both the “salt water” and “fresh water” varieties.  Part IV is a Biz Bucks opinion on Macroeconomics.


Posted By The Biz Bucks Guy
Posted in MacroEconomics | 2 Replies
Monday, September 10, 2012 2:26 PM
Thanks, Bonnie. Comments like yours get me up in the morning to write.
Posted by: Biz Bucks Guy
Wednesday, September 5, 2012 7:06 PM
Absolutely fascinating insights into economics and the current state of the union. Thanks so much for this post. I really learned a lot!
Posted by: Bonnie

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