Schools of Economics and the Stakes for Your Financial Plan

Background: John Maynard Keynes and Keynesian economics

John Maynard Keynes (1883-1946) is widely regarded as the founder of modern macroeconomics.

His work, The General Theory of Employment, Interest and Money (1936), challenged the classical view that markets always self-correct and full employment was a natural outcome.

Keynes argued that demand drives supply and that in times of economic downturn, governments should intervene, via spending, fiscal policy and monetary policy, to support demand and avoid large-scale unemployment.

Why his ideas were adopted:

• The Great Depression had shattered confidence in the self-correcting markets. Keynes offered a framework for large democratic states to manage economies, protect jobs and maintain social stability.
• Post-WWII reconstruction and the welfare-state era embraced active policy tools in ways very consistent with the Keynesian paradigm.
• As a result, many modern economies built their monetary and fiscal policy frameworks around Keynesian-style thinking.

The Austrian school of economics: origins and main beliefs

The Austrian school traces its roots back to late-19th century Vienna.

Founders include Carl Menger (1871, Principles of Economics) and subsequently economists such as Ludwig von Mises and Friedrich A. Hayek.

Key tenets:

• Methodological individualism: economic phenomena stem from individuals’ choices, not aggregate “societies” or “classes”.
• Subjective theory of value, marginal utility, time-preference and capital heterogeneity.
• Emphasis on free markets, limited government intervention, sound money and scepticism about central-bank manipulation of money and credit.
• The Austrian business cycle theory: artificially low interest rates and credit expansion by central banks lead to malinvestments, boom then bust.

Leading Austrian economists and what they believed:

• Ludwig von Mises argued for laissez-faire capitalism and warned of the calculation problem in centrally planned economies.
• Friedrich Hayek emphasised the knowledge problem (no central planner can know all the dispersed information in an economy) and argued for market processes, spontaneous order and monetary discipline.
• More recent Austrian thinkers continue to emphasise sound money, limited state, and asset preservation via private property and real savings.

Why the world being largely Keynesian matters - and what that means

Since the gold-convertibility of the US Dollar was severed in 1971, many economies have operated under fiat currency regimes, with central banks and fiscal authorities capable of expanding money and credit in a discretionary fashion.

One US dollar in 1971 is equivalent in purchasing power to about eight dollars today - meaning the dollar can now buy only about 12.5% of what it could in 1971.

What the adoption of Keynesian mechanics (active policy, fiat money, credit expansion) delivers:

It provides flexibility in economic policy, enabling governments to respond to crises.

But it also raises structural risks: money debasement, purchasing-power erosion, accumulation of debt, decoupling of productivity from reward, and distortion of price signals.

From the Austrian perspective these distortions matter: central-bank credit expansion distorts interest rates; malinvestment occurs; boom becomes bust; savings are penalised via inflation; those unable to hedge real assets are exposed to loss of wealth.

Linking the system’s deficiencies to societal outcomes

The Austrian critique links the current monetary paradigm to a set of systemic consequences:

• Erosion of real incomes and standards of living: as money supplies expand, price levels rise, and real purchasing power falls (see the 700%+ cumulative inflation since 1971).
• Decoupling of productivity from reward: when price signals are distorted and money is created ex nihilo, incentives shift; wealth can accrue through asset inflation rather than productive output.
• Breakdown of traditional structures and societal norms: when savings are penalised, debt accumulates, and wealth shifts to those with access to credit and assets, social stratification deepens.
• Excessive risk of systemic failure: if the monetary system relies on ever-greater expansion of credit, the cycle of boom and bust may accelerate, increasing systemic fragility.

From the Austrian viewpoint, the monetary and fiscal system built on Keynesian practices carries latent vulnerabilities, which make proper financial planning not optional but imperative for anyone seeking to preserve and build real wealth in an uncertain global context.

Why the Austrian view suggests a (relatively) better place and what that means for investment

Under a system more aligned with Austrian-school principles, the emphasis shifts to: sound money (limited or no arbitrary central-bank money creation), robust savings, real capital accumulation, honest interest-rate signals, and minimal distortion from government intervention.

Why that matters for you (and your clients) in financial-planning terms:

• Real assets (property, companies, commodities, and “sound money” assets) are defensible when fiat currency is being debased.
• Fixed-supply assets become attractive hedges: for example, some proponents link Bitcoin (with its capped supply) to Austrian ideas of sound money and currency competition.
• Diversification beyond fiat currency exposures becomes essential.
• Long-term planning must incorporate the risk that monetary expansion and inflation may erode standard expectations of returns unless one builds appropriate resilience.

In short: the Austrian view sees the current system as tilted in favour of credit expansion, monetary dilution, and asset-holders; but it also points to a model in which structural rules are tighter, savings rewarded, and value preserved in real terms.

Implications for expats

As expat wealth-advisers we can draw these inferences for our clients:

• Advice costs and product choice matter: high fees eat real returns, especially when inflation runs.
• Low-cost funds and core allocations make sense given the tail risk from monetary and systemic distortion.
• Currency risk is heightened: if one holds assets denominated in a fiat currency whose purchasing power may decline, the real return may be lower than expected.
• Holding real assets and diversifying away from pure fiat currency exposures helps build resilience.
• Planning horizon must account for “systemic risk” of the monetary design itself - not just market risk or interest-rate risk.

Without active financial planning, an expat client finds themselves at the mercy of these forces: money printing, inflation, currency devaluation, and structural asset shifts. With a disciplined strategy aligned to a model that anticipates these forces, the adviser adds real value.

Optimism in action

This is not fatalistic. Recognising the structure means acting. Some actionable themes:

• Focus on assets that resist debasement: property overseas in stable jurisdictions; companies generating real cash-flows; inflation-hedged assets.
• Consider finite-supply currency alternatives (e.g., Bitcoin) or tangible store-of-value holdings - always tempered by suitability, risk and regulatory context.
• Build into the plan assumptions around moderate inflation, currency weakening, and the possibility that real return on fiat-denominated savings may be lower than nominal.
• Maintain low costs: since inflation bites real returns, every basis point of fee saved improves long-term outcomes.
• Emphasise longevity of planning: for expats, cross-border exposure increases complexity (tax, currency, asset mobility) and planning must be robust to macro shifts.

Summary

In summary: we live in a monetary system heavily influenced by Keynesian economics - active policy, fiat money and credit expansion. From an Austrian-economics perspective that system carries structural vulnerabilities: erosion of purchasing power, decoupling of productivity and reward, asset inflation, and hidden risks for savers. For expats whose wealth is built in one currency, lives across borders and savings need to last decades, these risks are non-trivial.

The good news: by building a financial plan grounded in real assets, diversified currency exposure, cost-aware investment structures and an awareness of the macro system, we shift from being passive victims of monetary debasement to proactive preservers of value.

This means positioning not just for “market risk” but for monetary structure risk - and making sure the cost, choice and philosophy of our advice align with that challenge.