My take is this: there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account.

That is Tyler Cowen, commenting on the Mandel Hypothesis, which is that much of the growth from 1997 through 2007 was illusory.

One way to think of the Mandel hypothesis is that we misallocated a lot of resources. First, we built dotcom businesses that had no viability. Then we built too many houses relative to the increase in households, and we put too many people to work creating phony wealth by trading mortgage paper. All along, we spent too much on medical services with high costs and low benefits.

According to both Austrianism and Keynesianism, a misallocation of resources can cause a boom. In the canonical Austrian story, government manipulation of interest rates causes too much long-term investment, leading to a boom, followed by a bust. In the canonical Keynesian story, paying workers to dig ditches and fill them in again can cause a boom.

In the Austrian story, a boom caused by misallocation is a bad thing. In the Keynesian story, a boom caused by misallocation is a good thing. On that, I prefer the Austrian perspective.

However, many Austrians seem to believe that only government manipulation of interest rates can cause a misallocation. Keynesians believe that waves of euphoria and pessimism in the private sector also can cause misallocations. On that, I prefer the Keynesian perspective.

Right now, the Keynesian perspective would say that we can afford to misallocate resources in order to avoid having them be unemployed. The Austrian perspective would say that we need to adjust downward our expectations in light of the fact that a significant amount of the wealth we thought we had a year ago does not in fact exist.

The Keynesian perspective is that the government might as well spend like crazy, because somebody has to. The Austrian perspective is that our ambitions need to be scaled back–both for private and for public consumption.

In the current environment, I think that the Austrian perspective has a lot of merit. We have misallocated a lot of resources, and we have to pay a price for that (on the other hand, I think that the government statistics may under-estimate the welfare gains from innovation, a point which Cowen seems to be making in the quotation above).

I think that the Keynesian perspective is only valid up to a point. Unfortunately, our policies go way past that point. The policies fail to acknowledge that we hold some bad assets, in every sense of the term. Trying to deny the losses by encouraging bank prop-ups and other forms of extravagant collective spending worries me. Such policies risk causing more harm than good.