There’s a fierce debate going on today between economists who favor increased government spending (more federal stimulus money, anyone?) to spur the economy and those aghast at the very mention of the word, favoring free play of private sector market forces towards economic recovery and, eventually, prosperity once more.

The first group is identified with the ideas of John Maynard Keynes (“The General Theory of Employment, Interest and Money”), who exerted a heavy influence on Franklin D. Roosevelt (whose New Deal policies worked then) and on Kennedy, and today seems to have entered into Obama’s economic policy formulations. The second subscribes to the concepts articulated by Austrian economist Frederick Hayek (“The Road to Serfdom”), who argued for a bottom-up approach to achieve a freer, more enterprising private sector making a greater share of economic decisions vis-à-vis the government. .

The future prosperity and stability of the U.S. economy, and thus people’s economic prospects, hinge on the resolution of the debate, if there’s ever going to be one.

To be sure, there is much to commend on both sides. But present evidence (as George Mason University’s Russ Roberts says, “The stimulus has barely dented the unemployment rate, while government spending and deficits are soaring”) seems to support the arguments of Hayek’s adherents, as they point to the “alarming” expansion of federal control over health care, as well as the energy and housing markets, all representing potentially large chunks of gross national product (GNP).

As everyone can see and feel, the economy is still in a pickle, as jobs (and therefore income—and the all-important “economic engine, consumption”), continue to shrink, business activity and investment have stalled, and all three levels of government struggle with deficit gaps.

Only the export sector seems to enjoy some kind of comfort level, but even this is subject to a lot of uncertainty in the face of a roiling global market.

The prestige of the economics profession has at the same time suffered a hit, along with its so-called deductive method, i.e., the dependence on the use of mathematical techniques for economic modeling and forecasting. Obvious examples are the housing and Wall Street busts, even with the use of some econometric wizardry and cutting-edge computers.

The economic problem is a huge one, complicated even more by an array of socio- and geo-political considerations.

Let’s hope some workable theoretical and practical resolution is reached sooner or later between the two economic camps. Otherwise, the temptation to consult Paul the Oracle may prove irresistible.

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Published: July 29, 2010 - Volume 9 - Issue 15