Economics Discussion Assignment (Keynes vs Hayek)
PLEASE RESPOND IN FIRST PERSON AS IN “YOU DID WELL…”
1: Laura
In the field of economics, there are two main theorists that claim to know the best way in which a country should handle its economy. As mentioned in Great Debates in Economics: Keynes versus Hayek, these two theorists are John Maynard Keynes and Friedrich August Hayek (605). Both of these individuals have shaped the twentieth century’s world of economics. However, the world has still not reached a conclusion on which theory is truly best for an economy. Economists and political scientists across the world have all taken one side or the other. Though most countries have often relied on the Keynesian model of economics.
The Keynesian theory is concerned with centralized economic plaining by the government. According to Keynes, effective policy will keep the economy on track because politicians will make sure to take the advice of economists. A market that is capitalistic only leads to booms that produce inflation and busts that generate unemployment. Thus, the government should be in charge of supervising the economy by using fiscal and monetary policy to control aggregate demand (Keynes versus Hayek 606). Monetary policy should be keep interests low and government spending would have to be raised in the event of a recession so as to offset inadequate investments. Keynes argued that he best way to get out of a recession was to also stimulate consumption by reducing taxes. He alluded that when people have to pay less in tax, they will spend more and contribute to the economy. Thus, the government should rely on economic budget deficits as the main funding for consumption activities because these will be beneficial to the economy in the long run (Keynes versus Hayek 607).
On the other Hayek believed in setting the market free. Hayek thought that too much government was harming to the economy. He believed that “the economy would be more stable if decision makers followed stable policies and refrained from activist interventions” (Keynes versus Hayek 606). Hayek argued that booms are caused by large credit expansions that push rates to very low levels (Fight of the Century). These low interest rates will only lead to recessions because business will end up undertaking investments that will not be profitable in the long run. As a result, markets should be left alone. People should be left to make their own plans and in the end dynamic competition will benefit the economy. For this reason, Hayek argued that decentralized individual planning and a free market economy were the best option for dealing with an economy.
Overall, the theories presented by Keynes and Hayek have both greatly influenced the field of economics. Nevertheless, countries should not base their economic actions by taking one side. The government cannot have full control of the economy because the market will eventually reflect specialized interests. Similarly, the market should also not be left alone because private investments are often unreliable. Therefore, when deciding how to handle their economy, countries should find a balance between the theories of Keynes and Hayek.
Works Cited
EconStories. ""Fight of the Century": Keynes vs. Hayek Rap Battle Round Two." YouTube. YouTube, 27 Apr. 2011. Web. 01 Aug. 2017.
"T4KeynesHayek.pdf." Google Drive. Google, n.d. Web. 01 Aug. 2017.
2. Michael
The economic theories of Keynes and Hayek have been debated since the end of World War II. The question that they both tried to answer was essentially how big a role should the government play in the economy. Keynes felt that the government should have a larger role while Hayek felt the government should have a more hands off approach to economic policy.
Keynes had an outgoing and dominant personality and his message was well suited for the “we’re fixing it” mentality of politicians.(605) Keynes believed that during a recession, or bust, that increased government spending could help turn the economy around by increasing consumption and spending. He believed that if you give the consumers more money, a stimulus package, this would help to balance out the economy, essentially predicting that the consumers will spend the money and not save it. He was very much in favor of central planning in order to correct market failures and help to balance out interest rates. Keynes believed that the government should have an active role in setting regulations so they can basically control the markets. Keynes main focus was on how government spending can “fix” the economy.
Hayek was a quiet and unassuming man and in some ways so were his policies. He felt that recessions were caused by improper government policies during a recent boom. He believed that a government stimulus, which Keynes favored, would slow the adjustment process and would only prolong a recession. Hayek firmly believed that decision making directed by market prices will be a much more reliable method. He was in favor of decentralized planning, believing that individuals should be left free to make their own economic decisions. He believed that the political incentive structure caters to interest groups and in turn would result in shortsighted policies. Hayek believed that the economy was “organic” and could not be controlled because individual decision making was not essentially predictable.
Looking at all the information neither Keynes nor Hayek was completely right. Like many great debates on important topics both of their theories can be used to help the economy. Sometimes a stimulus package coming from increased government spending is the right solution and sometimes it will just create inflation and just prolong the issue. Keynes was more of a short run economist while Hayek tended to look at more long run solutions. The best solutions may be ones that can address short term issues without creating long term problems. “Put another way, there is ‘government failure’ as well as ‘market failure’”.(609)
Works Cited
“T4keyneshayek.pdf.” Google Drive. Google, n.d. Web. 02 Aug 2017
