by Wladimir Kraus
Abstract: Essentially, there are two competing views of how to overcome an economy-wide recession/depression. The Austrian view understands the free-play of competition as the most potent means to overcome the short-run mismatch between an excessive boom-level of nominal wages/prices and depressed crisis-level volume of aggregate spending. In the Keynesian view, the disastrous mismatch between desired saving and planned investment inherent in capitalist economies requires the government to step in and take up the burden of spending to infuse the lacking demand for products and labor.
The thought experiment presented in the paper is designed to provide the reader with a direct comparison of major analytical claims of the two competing approaches to assess the ability of each of the two to affect, positively or negatively, employment, capital accumulation, and the general standard of living/real wages.