Competing Economic Policy

Economics has several competing schools of thought surrounding one major issue: the role of government intervention. Just like markets, economies are explained by supply and demand, specifically the demand of all people and companies within the economy and the supply of all companies. Specific government policies affect either demand or supply and are called demand-side and supply-side policies, respectively. Demand-side policies are things like taxation, government spending, or fiddling with interest rates, and these tend to work quickly, as policy goes. Supply-side policies are things like direct government provision (e.g. health care, oil), education, reducing impediments to business, and these policies generally take a long time to have an effect. Governments will always strive to increase supply as much as possible, because increased productivity reduces inflation and increases employment. Disagreement results from how best to increase supply and how to use demand-side policies.

The two main schools of thought in economics are the Neo-Classicalist and Neo-Keynesian schools. Neo-Classicalists believe that in the long run, supply will reach full employment of resources and be fixed, so increasing demand will cause inflation and decreasing demand will cause recession. Neo-Keynesians believe that you cannot reach full employment because the economy is constantly in flux, and the closer you get to fully employing resources the more inflation you have. Therefore Neo-Keynesians suggest using demand-side policies to balance inflation and employment.

There's a third school, the Austrian school, that goes further than Neo-Classicalists in condeming government intervention. All economists accept that markets are imperfect and therefore do not provide the socially optimum level of output, namely where both producers and consumers benefit the most. Some markets work fairly well, for instance the market for wheat in Canada produces as much wheat as consumers want, and farmers are happy so long as the weather is good. Some markets don't work well at all, like private health insurance, as we can see from the U.S., and work much better when run efficiently by governments (it's possible, I'll write about how at a later date.) While Neo-Classicalists advocate limited government intervention and Neo-Keynesians advocate substantial intervention, Austrian economists do not believe there should be any government intervention. They believe that while governments may have good intentions, the market they're trying to fix would be better if left alone. This is the economic basis for Libertarianism, and it is part of Ron Paul's platform. It's not as central as his opposition to the war in defining his candidacy, but small government and true conservative ideals are cornerstones of his platform.

The most compelling argument for libertarianism is philosophical and requires another post to discuss, but economic libertarianism ignores that fact that governments are the only agents that can address market failures. They're certainly not the best agents imaginable, but libertarians must acknowledge that some other entity must step into the role played by governments in addressing market failures. Hopefully this post will help you understand why the Swedes advocate government intervention, why conservatives talk about small government, and why libertarians don't want any government at all.