May 5 (Bloomberg) — All hail Keynes. That's the message in President Barack Obama's decision to nominate Janet Yellen, Peter Diamond, and Sarah Bloom Raskin to fill vacancies at the Federal Reserve. This trio makes sense only if you believe the philosophy of the most influential economist of the modern era, John Maynard Keynes.

What makes them odd choices is that the events of the past five years don't make Keynes look good. Other schools of economic thought come to mind instead. One is the public choice school, which holds that Keynesianism uses crises as pretext to enlarge governments.

Recent history also validates Austrian economics. This camp asserts that government involvement in markets is inherently dangerous. Austrians were among the first to warn that the hybrid status of government sponsored enterprises like Fannie Mae and Freddie Mac could lead to disaster.

The Austrian school says that government doesn't have to be the only creator of currency, an idea that seems at least plausible in the era of PayPal. These economists assert that monetary authorities often push interest rates too low, causing distortions that lead to violent economic crashes.

How did we get here? In the 1930s Keynes introduced the idea that a government's relationship to a nation's economy should be like that of a mechanic working on a car. The mechanic is performing constant tune-ups on the engine, always weighing trade-offs. When parts break down, the decision is whether to tinker or replace them. Too much oil, and the car fails; too little, and the engine freezes.

Master Mechanics

Yellen, the San Francisco Fed president whom Obama nominated to serve as the central bank's vice chairman, is expert in evaluating such trade-offs. Diamond is an authority on one crucial part of the engine, Social Security. Raskin, Maryland's commissioner of financial regulation, specializes in financial governance.

Today the Fed is deeply divided between those who would feed the economic engine a large amount of Keynesian oil and those who would use slightly less. Among those who have favored restraint is Richard Fisher, president of the Dallas Fed, who warned a few years ago that loose money can cause inflation. It's "like kudzu, requiring near toxic doses of counter measures to overcome," he said.

Keynes pushed his ideas to challenge the orthodoxy of classical economics. Now Keynesian orthodoxy is the rule throughout Washington. It even dominates our universities, leaving non-Keynesians with only a few redoubts such as the University of Chicago and George Mason University. Yet our society prides itself on its intellectual diversity.

Alternative Voices

Asking Democrats to give up Keynesianism is like getting suburbanites to stop driving SUVs. But Republicans aren't much better. Most of them have been steeped in these ideas and don't seem interested in fresh thinking.

There are, of course, non-Keynesians who would make good Fed governors. One is Lawrence White, a professor of economics at George Mason, whose criticism of the manipulation of money is prescient. Another is George Selgin, an economist at the University of Georgia's Terry School of Business, who has done important work on the value of private money and questioning the Fed's money monopoly.

They would point out that deflation isn't always the pure evil that Fed Chairman Ben Bernanke says it is. "There is such a thing as virtuous deflation," says Jerry Jordan, a former president of the Cleveland Fed who is in the Austrian school. Steven Horwitz, an economist at St. Lawrence University, is an expert in trying to keep money neutral — unlike Keynesians, who use it like a tool.

New Goals

Gerald O'Driscoll, a former staffer at the Dallas Fed, who is now a senior fellow at the Cato Institute, would also be a good choice for a seat at the Fed. He's pointed out that the 1920s saw deflation and economic growth simultaneously.

More important, these economists would try to stop the federal government from owning and managing our banks. These Austrian and public choice adherents would also work to spin off Fannie Mae and Freddie Mac, and to narrow the discretionary aspect of all government regulation.

If these goals sound dreamy, recall that Keynes battled against an equally formidable establishment. Today's economic rebels can actually take courage from him. Keynes wrote that difficulty lies "not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

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