The Western and Austrian schools are all varying forms of the same argument with respect to the socio-political implications of economic policy. The Austrians are the most extreme proponents of pure laissez faire economic policy, which is to say that they believe that the market outcome is pure and correct, and can only be made less efficient and correct by government intervention. The Austrians disagree with important points of the economic theory of other schools, but these differences are primarily on issues unrelated to social/political interaction.
The basic premise of Adam Smith and all of his knowing and unknowing followers is that individual self-interest, free from all forms of government intervention, produces the optimal, most efficient collective outcome. An "Invisible Hand" could be trusted to allocate rewards appropriately, while a more intentional act by a regulatory body could only disrupt the blind justice of free markets. The end goal is to maximize the size of the economic pie. The economy which produces the largest pie is the most efficient, and by Western definitions, the best. The only exception to Smith's ban on government intervention is in the policing of monopolies.
Von Mises, a patriarch of the Austrian school who furthered the work of von Hayek, argued in 1920 that "centrally directed socialistic economies cannot succeed in coordinating vast numbers of interrelated decisions, in large part because of the information problem arising from non-market forms of resource allocation." (Richard Vedder, Review of Austrian Economics 10, no. 2, 1997: 77-89) This is to say that the government, a non-market agent, cannot allocate resources efficiently on a large scale because of the complexity of a large-scale economy. Many Austrian school thinkers even believe that most monopolies should be left alone, as the market "knows" best what its needs are in terms of competition.
Keynes, it should be pointed out, believed that it was the government's role to participate in the economy using counter-cyclical demand management. This meant that the government, Keynes thought, should manage demand by increasing public sector spending and incentives to private sector spending (by lowering taxes) in times of slow private sector demand and decreasing government spending and incentives to spend (by raising taxes) when private sector demand is strong. In other words, this is an operation of the government as a single economic agent upon the private sector as a separate, unified economic agent. The most important conclusion of the Keynesian school, albeit a debatable one, was that markets do not tend towards stable growth rates or towards a full-employment equilibrium. Notably, Keynesians stop short of prescribing any role for the government in the management of issues with specific areas of the private sector. This leaves us to assume that Keynes basically agrees that the private sector, within itself, is best left to its own devices, so long as the government manages the macroeconomy well enough to let the microeconomy function smoothly. As such, for this discussion, Keynesians will be discussed indiscriminately as being in the same camp with the neoclassicals.
The neoclassical errors are basic and crippling. There are three significant fallacies in the Smithian tradition. The first is the assertion that economic efficiency ought to be the exclusive aim of an economy. In reality, this was an arbitrary claim with disastrous consequences. Economics is a social science, not an objective science. It is a science that arises naturally among all animals, and it has its foundations in self-interest. It is no mystery that the neoclassicals draw criticism from politically liberal opponents for promoting economic Darwinism, because the principles of this school of economics are the same as those of Darwin's evolution. What the neoclassicals have given rise to is a justification for the commoditizing of human labor and even life.
Marx' criticism is correct: individuals in a capitalist society are worth only what their labor is worth. When their demand is inelastic (econospeak for demand that is insensitive to changes in price. Demand for pharmaceuticals to treat serious diseases is an obvious example of an inelastic variety), they are the least protected, because producers exert power over them. When their health is poor, their productivity as laborers suffers, and then their income suffers. When their income suffers, their health suffers further, and so on, converging to miserable subsistence for large numbers of citizens. The neoclassical has forced a flawed economic idealism upon the world's working classes, offering no evidence that the maximization of the pie's size is more important than the quality of its distribution. As will be discussed later, it is not at all surprising that the biggest proponents of this system are those that have the most to gain by it: the already wealthy. In a laissez faire economy, a substantial level of wealth predating the "free market" competition offers unlimited advantages.
The second criticism of the neoclassical system revolves around an implicit assumption that regulatory intervention is inherently bad, when one is concerned with the maximization of the size of the economic pie. The reality of social power structures is that intervention with free markets happens more regularly and more effectively at the individual level than at the institutional level. In other words, the neoclassicals ignore the fact that one economic agent (in particular, when this agent is a person) actually has the potential to exert control over other agents: to debase, to exploit, to injure, to rape, to cast out of society altogether, or to murder. As such, there is no such thing as "fair competition," so critical to the neoclassical argument. So the question in reality is not whether or not the market of free, unfettered competition should be interfered with, but whether the interferences with fair competition that occur at the micro level-i.e., those interferences that individuals impose upon other individuals-should be regulated. This is a question that has not been properly answered to date.
A later section on economic history delves into this further. For now, let it suffice to say that economic liberty, which is the goal of the neoclassical proselyte, has disastrous consequences for fair competition. Literally brute force prevails over other skills, subordinating art, grace, intelligence, innovation, and peacefulness to war, aggression, violence, and foul play. This phenomenon is eminently observable among children in a playground. Without rules, there is no doubt that the physically strongest and most determined child (or perhaps just the least empathetic) will end up king of the hill, demanding a tribute of lunch money from all the other children. While we may be offended that not all that much has changed between the days of childhood and today, the cold light of history dictates that there are no intrinsic morals among humans when economic superiority is at stake. We have a capacity for altruism and objective justice, but we prefer the easy relaxation of such standards in favor of gaining an upper hand by any means available or easily invented.
But the third error of neoclassicism is the gravest. While scholars expound upon the benefits of hands-off economic policy, they ignore an important and perhaps overly practical point. If the market is ideally an unregulated competition, what should the starting position of the competitors be? An example will demonstrate this difficulty clearly. In what is now the United States, the self-aggrandizing, self-proclaimed beacon of free markets and democracy, there had previously been a large and highly cultured indigenous population. It is not important for this discussion that the European impression of these cultures was jaded and self-serving. But, within four hundred years of the arrival of the European colonizers, almost the entire populace was either displaced or killed. This, no doubt, was devastating to the survivors. And it is at this position that the free market competition should commence? Not too much after the colonization effort was earnestly underway, a second chapter of Euro-American brutality ensued. Forcibly enslaved peoples were transported like cheap cargo from Africa to this same sadistic colony of colonies, with the ensuing indenturement lasting for its own four hundred years or so. And, after the first four hundred years had passed in chains, another seventy were spent fighting for basic human rights. This battle was finally, albeit tenuously, won in the 1960s, less than forty years before this writing. After five hundred years of oppression for descendants of African slaves, and after a more severe and ongoing oppression of indigenous populations, why do neoclassicals assume that a fair competitive environment exists? Imagine the outrage of plump Americans everywhere if the Sydney Olympics were prefaced by a systematic torture and maiming of all American athletes, male or female, adult or child. Would the results of the competition that followed be viewed as fair? As even approximately reflective of a true free competition?
I assert that intervention is severely underrated by neoclassicals. But this, as later chapters will indicate, is completely understandable.