If you have been confused about the differences between the Keynesian and Austrian schools of economics, may I humbly propose an analogy that may help your understanding. If you don’t think this is accurate or helpful then please let me know. I’m new to this myself.
Fire policy -- In the early 1900s the US Forest Service implemented a new policy to aggressively suppress all forest fires. Citizens didn’t like to see trees burn and the lumber companies saw profits going up in smoke. Over the years they obtained equipment, trained men, and worked out elaborate plans. With a lot of time and money they reduced fire damage considerably.Over the years the forest management experts began to notice problems. Without periodic small fires the undergrowth became thick. It ignited easier, acted as additional fuel making the fire hotter, and sent it up into the crowns of the mature trees. This spread the fire faster and farther, killing more of the forest.With further study they found that in the pasts forest experienced periodic small fires which cleared the undergrowth and burned up the deadwood. They usually did not reach the crowns and burned themselves out without doing great damage. They triggered the tree seeds to sprout and start a healthy new generation. The mature trees also grew better. The old policy of trying to manage nature was counter productive. The policy was changed to allow the natural cycle to return.
Keynesian school – All recessions are bad and must be suppressed by government actions. This protects established businesses and jobs. The methods are elaborate and costly, but a benefit to the public overall.
Austrian school – When markets stray too far from reality they must be purged by adversity. This clears unneeded or failing enterprises so capital is not allocated wastefully, and new businesses can emerge. Periodic small recessions are the price of a healthy economy.
Recent situation -- Unfortunately, after decades of total suppression many forests were overgrown tinder boxes. At Yellowstone National park the “hands off” policy let a fire get completely out of control before they used aggressive suppression. 36% of the park burned and much of this area is still black 20 years later. At Los Alamos a “controlled burn” to clear undergrowth ran away from them and destroyed 400 houses. Yellowstone – Bear Stearns, Lehman Brothers, current economic predicament.Los Alamos – Recognizing the problem and the perils of trying to make up for past mistakes.I have often found a good analogy helpful to understand or explain a concept. It is easy to push one too far, but if used properly it can be a good tool. Is this one accurate or helpful? What do you think?http://www.chrismartenson.com/forum/keynesian-vs-austrian-economics-made-simple-good-analogy/40845