Keynesian Vs. Austrian Economics

Jan. 16, 2015 8:45 AM ET39 Comments

By Team Multi-Act

As always the best way to explain anything is with a story - and in this case a true story.

Forest fires are a major concern in many parts of the U.S., upsetting lumber companies who saw profits burn and individuals who saw the trees ablaze. The Government decided to try and better the situation. They spent money and time to train personnel and improve infrastructure and after a few years, they had stopped the various small fires from breaking out. Everybody seemed happy. Success? Not really.

A few years after this there was a forest fire, and it burnt hotter and faster than ever, burning down nearly 32% of the forest! Soon there were more of these larger fires that were similarly fierce and destructive. But why was this happening? Hadn't they solved the problem? Soon they realized that those small forest fires that used to occur actually helped burn away all the undergrowth and deadwood, without actually reaching any of the mature trees and larger parts of the forest. By preventing these small fires, the undergrowth and deadwood had now accumulated, now acting as a fuel to the fire and spreading it further into the forests and even destroying many of the older mature trees.

The Lesson: Nature was better off not disturbed in this case; nature takes care of itself in the long run.

Austrians feel the same way about the free markets, and government intervention. They even propose that periods of depression are just a cycle in any healthy economy, acting just like the cleansing fires in the forest! In the aftermath of a depression, new business opportunities and industries will emerge, and this is how capitalism and business cycles occur. Keynesians, on the other hand, have always advocated rules, laws, taxes, etc. to control and mould market forces.

This article was written by

Baij is a cofounder and the CEO/CIO of Multi-Act EquiGlobe Limited. His investment philosophy primarily rests on buying businesses with wide moats and owners of high quality assets at bargain to reasonable prices. Baij writes on several investment and other topics of interest to him. Baij’s author page at SSRN lists some of his research papers including his research papers on high quality stocks. With George (Yiorgos) Allayannis, Baij co-authored an academic case study (Comerica Incorporated: The Valuation Dilemma) and a technical note (Bank Valuation Issues). Baij earned his MBA from Darden Graduate School of Business at University of Virginia in 2009 where he was the Sr. Portfolio Manager of the Cavalier fund at Darden Capital Management (DCM).

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