Austrians and Keynesians Agree on One Thing, and It Is the Important One

The last hundred years of macroeconomic management have used every financial instrument invented to draw effort and money out of the public: insurance, mortgages, hedge funds, derivatives, the stock market, accounting fraud, foreign exchange manipulation. Each was sold as a service to the population, and each, in its boom phase, became a mechanism for extracting from it.

Two schools of thought claim to explain why. They despise each other. And when you strip away the vocabulary, they are saying the same thing.

The Austrian Case Has Merit

Let me start with the position that respectable economists are trained to dismiss, because it deserves better than dismissal.

The Austrian school holds that government control of money is the root of the cycle. A central bank expands credit; the cheap credit funds investments that would not pay at honest interest rates; the boom that follows is not prosperity but the misallocation of a decade's savings; and the bust is the economy discovering what it has done. Rothbard, its most uncompromising voice, argued that if the public understood what had been done in its name — the transfer of purchasing power from savers to borrowers, from the periphery to the institutions nearest the state — it would be outraged.

He was right about that, and the record supports the mechanism more often than the mainstream admits. Boom after boom has followed the same shape: credit is loosened, the minority positioned to use it uses it, prices rise, the minority takes its gains, and the public pays twice, first through inflation and then through the bust. The minority in power has never shown the ability to restrain itself during the boom, because the boom is when it is getting paid. I have written elsewhere that the cycle has a political factor; the Austrians saw it first, and said it loudest.

The school's conclusion is drastic. If government control of money produces this reliably, government should not do central banking at all. And since monetary power is a substantial part of what a modern state is, this amounts to a drastic reduction in the state overall. The Austrians accept that. They accept even that it would strip the state of powers we might want it to have — breaking up monopolies, for example — on the argument that the state never uses those powers without an ulterior motive anyway.

The Left Says the Opposite, and the Same

Now the other side.

The Keynesian and broadly left position is that the state has never had enough power to do its job. The job is to represent the public against concentrated private interest: to regulate the banks, to spend into the slump, to tax the boom, to hold the financial sector to account. Where it has failed, the failure is that it was captured, underfunded, deregulated, or outmanoeuvred by the interests it was supposed to restrain. The remedy is more state, better staffed and more willing.

Notice what this concedes. The Keynesian instruments were available for a century, and the century produced the parade of booms and busts just described. Counter-cyclical policy was used, and it was used at least as much to the public's detriment as the strict laissez-faire that, as the left correctly points out, never actually existed. Spending into the slump happened. Taxing the boom did not. The theory required both halves and the institution delivered one, and the half it delivered was the half that enriched its friends.

So the left's own account is that the state, given the tools, did not use them for the public. Which is exactly the Austrian complaint, arrived at from the opposite premise.

The Agreement

Put the two side by side.

The Austrians say the state is a predator and must be disarmed. The left says the state is a guardian that has never been allowed to guard. Both are saying that the government does not represent the true interest of the people. One says it cannot; the other says it has not. The diagnosis is shared. Only the prescription differs, and the prescriptions differ because each side has a different theory of what a stronger or weaker state would do next.

That agreement is the finding, and it is more important than either school's programme. When two traditions that agree on nothing else, that have spent a century calling each other fools, converge on a single observation about the state, the observation is probably true.

Why Neither Prescription Works

Here is where I part from both.

The Austrian remedy, disarm the state, assumes the vacuum stays empty. It does not. Monetary power that the state relinquishes is picked up by whoever is largest in the private sector, and there is no reason to expect a private cartel to be a gentler holder of it than a captured public one. The Austrians are right that the state has abused the power. They have not shown that anyone else would refrain.

The left's remedy, strengthen the state, assumes that a stronger version of an institution that has served a minority for centuries will start serving the majority. But the failure was not one of strength. The state had the tools. It used them for the people who were closest to it. Giving it more tools gives those people more tools.

Both remedies leave the actual variable untouched: who the state answers to. Government has been a minority throughout the period both schools are describing, and a minority represents minority interests, naturally and without conspiracy. That was true under the gold standard and under fiat money, under laissez-faire and under the managed economy. Nothing in either programme changes it.

The Conclusion the Agreement Points To

If a century of evidence, read by two hostile schools, produces the shared verdict that the state does not represent the public, then the useful question is not how much power the state should have. It is how the state comes to want what the public wants.

That is a question about the structure of decision-making, not about monetary theory. It is the one both schools are standing next to and neither will ask, because each has already decided the answer is the state's size. The size is not the problem. The distance between the people who decide and the people who pay is the problem, and it has been the problem under every monetary regime we have tried.