Saturday, August 28, 2010

Spreading Hayek, Spurning Keynes

Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls "dress Crocs," hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

To these free-market economists, government intrusion ultimately sows the seeds of the next crisis. It hampers what one famous Austrian, Joseph Schumpeter, called the process of "creative destruction."

Governments that spend money they don't have to cushion downturns, they say, lead nations down the path of large debts and runaway inflation...

"What I'm really worried about is an endless cycle of deficits, debt, and debasement of currency," Mr. Boettke says. "What we've done is engage in a set of policies that's turned a market correction into an economy-wide crisis."...

And the tenures of Paul Volcker and Alan Greenspan at the Federal Reserve seemed to quell doubts about the central bank's ability to manage the U.S. economy.

But all along, the Austrians weren't so sure. Economics, they feared, was increasingly narrow and technical but not necessarily wise. They also remained skeptical of the Fed's approach to targeting stability in consumer prices.

That shouldn't be the Fed's goal, says Mr. Boettke, who a friend lured back to George Mason a year after he was denied tenure. The Fed, he says, should be to make money "as neutral as possible, like the rule of law, which never favors one party over the other."...

It wasn't a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.

read the WSJ article

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