History of Financial Crises - The Austrian School of economics and Keynesians_ approach towards financial crises - Christopher Payne

International Business Studies Group A
The Austrian School of economics and Keynesians' approach towards financial crises Looking at the history of mankind both times of prosperity and recession may be noticed. Throughout the time many economists have been researching different kind of bubbles, panics and manias. They have been trying to define crises, explain their causes, course and methods of coping with bad economical situation. The attitudes towards financial crises vary among thinkers and differ from source to source. In this paper I would like to present an approach of Austrian and Keynesian economists towards the economic problems.
At the beginning, I would like to explain the Austrian School of economics. It is a non-empirical and a priori school of economic thought that has its origins in Vienna, in Austria Empire. Its founders and first followers consist of economists like for example Ludwig von Mises, Friedrich Hayek and Israel M. Kirzner. The recognition of Austrian economist has changed from mainstream to heterodox several times throughout the history of economical thought. Because of huge criticism Austrian economics has been considered outside the mainstream of economic thought from the middle of the 20th century. Nevertheless, its reputation rose in the mid-1970s, after Nobel Price for Friedrich Hayek. Unlike the mainstream economics, the main principles of Austrians are methodological individualism and rejection the use of any empirical research, modes and statistical methods. From Austrians' point of view, precise scientific research and experiments are impossible because of its insufficiency and unreliability. They are against of using statistics, mathematics and econometrics. Austrian economists think that those methods does not apply to economy, because in their opinion economic theory should be derived from basic principles of human action which are too complex and active to calculate with numbers. This assumption is a base for a discipline called praxeology. All of those reasons make markets and economies less tamed in Austrian theories. Austrian approach particularly focuses on uncertainty that entrepreneurs and banks has to face while making investment decisions. According to Brett H. McDonnell, the author of the paper “Of Mises and Min(sky): Libertarian and Liberal Responses to Financial Crises. Past and Present”, this uncertainty makes a significant contribution towards instability within the financial system.
Representatives of the Austrian School of economics are also in favor of so called laissez-faire policies and lack of governmental influence in financial markets. In other words, Austrian economists claim that the fewer and weaker the state interventionism, the better for the country. They greatly distrust the government and believe that its interference should be very limited. As a justification of the distrust of government intervention, the Austrians emphasize the problems of ignorance.

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… mainstream economists there is an opinion that Austrians do not notice disadvantages of their theories because they avoid using any explicit research. The Austrian business cycle theory is also believed to be incorrect.
Another school of economic thought I would like to focus on is the Keynesian economics. Representatives of this school are followers of John Maynard Keynes - a British economist of early…
…, Keynesians truly support governmental intervention into national economy. Keynes confronted the opinion that the market itself has ability to reach equilibrium when there is no economic actions of the government. Actually, Keynesians believe that lack of regulations and active public policies in the market can be a reason for deep crises and ineffectiveness of self-regulatory mechanism. According to the…
… especially by Austrians Mises and Hayek. The main argument used against Keynesian policy was high cost of conduct and growing debt burden that it brings. Many weaknesses of Keynesian solutions were displayed during the oil crises in 1970s.
To sum up, there are many differences between the Keynesian and Austrian schools of economics. There is a prominent discrepancy relating to methodology - Keynesians are…
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