John Maynard Keynes vs Friedrich Hayek - Research Paper Example

John Maynard Keynes vs Friedrich Hayek Since the end of World War 2, the fundamental and conflicting ideals pertaining toeconomic freedom between Friedrich von Hayek and John Maynard Keynes have engulfed the economic landscape for a long time. Evidently, both of these renowned economists advanced different perspectives concerning economic freedom pertaining to markets, monetary policy, and fiscal policy. It is important to note that both economists believed the effect of economic ideas on public policy was enormous.

In the period after Word War 2, there was a pertinent economic question that sought to examine the right role that government should play in the economy. According to Keynes, the governments’ role related to the borrowing of funds for spending on pertinent issues like public works. In turn, the deficit spending would be utilized in job creation that eventually increases purchasing power. In addition, Keynes argued that attempts at balancing the budget by the government during a slump would only make situations worse rather than better Arnon, Arie, Weinblatt, and Warren, 23).

This was in reference to the Great Depression that occurred between 1929 and 1932. Keynes noted that owing the contraction of economies, governments adjusted by setting up budget deficits through cutting spending and raising taxes. Consequently, he formulated the General Theory in 1936. The theory attempted to explain why recovery was increasingly feeble. To this end, he theorised that in the advent of a major shock, in most cases a drastic drop in investment, there existed no automatic recovery systems in a market economy.

Furthermore, the economy would witness a increase in shrinking until it attained a measure of low stability. Keynes termed this phenomenon as “under-employment equilibrium” (Keynes, 35). The reason advanced for this phenomenon was that the capacity of activity, employment and output, was dependent on the aggregate level of spending power or demand. This meant that if spending power decreased, output would equally decrease. Consequently, in such a scenario it was the duty of the government to increase its own spending that would eventually offset the decrease in public spending.

Hence, Keynes asserted that cutting of government spending was totally wrong in the event of an economic slump. On the other hand, during an economic boom, the right policy at the Treasury is a hair shirt. To this end, Keynes’s point of view created the foundation for macroeconomics which provided a holistic view on government use of deficits, fiscal policy, tax and spending. Moreover, Keynes asserted that such economic tools could be applied in the management of aggregate demand and consequently guaranteed full employment.

Friedrich Hayek challenged Keynes economic views. As opposed to Keynes, Hayek was of the opinion that long term recovery from a post-boom crash extended beyond the need for adequate spending. In addition, it called for resumption to sustainable production era distortions due to easy money. To this end, it is critical to note that Hayek was negatively referred to as someone out to liquidate, farmers, labour, stocks and so on. Furthermore, Hayek believed that the primary cause of economic slumps was excessive credit generated by the banks which ultimately led to overspending.

Consequently, the slump represented the reality while the boom was majorly an illusion. Hayek equally contradicted Keynes economic views by placing blame on the central planning mechanisms. To this end, he noted that there lacked a mechanism of economic calculation which would influence rationality in decision making when deciding on where to put place resources or purchase a good from somewhere. This was due to a lack of a pricing system capable of weighing alternatives. Consequently, central planners were capable of making technical decision but incompetent at economic decisions.

Moreover, Hayek believed that minimal intervention by the government translated to increased economic freedom. Consequently, when people are in a capacity to choose freely, the economy functions more efficiently. It is critical to note that this differs from Keynes intervention which prescribed for intervention from the government. On the issue of monetary policy, Hayek is in total opposition to it since he believed that its implementation is what results to boom-bust cycle in the first place (Birner and Jack, 45).

In contrast, Keynes was of the opinion that monetary policy performs a minor role in stimulating aggregate demand and the economy. Consequently, Keynes notion suggested that the solution lay in government spending. On the matter of fiscal policy, Hayek was in opposition of such an intervention in economic recession. To this end, he believed that fiscal policy would interfere and interrupt the market process. On the other hand, Keynes believed that fiscal policy would assist in the recovery process following a recession.

This could be attained through stimulus packages by the government which would pull up the economy (Wapshott, 25). In general, the economic perceptions of Fredrich von Hayek and Maynard Keynes have defined the U.S economy after World War 2. In the period of 1950s-to 1970s, Keynes theory of the government as the dominant actor in the economy was significantly popular (White, 67). Most of the interventions undertaken by the American government in stimulating the economy have been aligned towards Keynesian economics.

This has been evident through the stimulus packages passed by the Congress that eventually leads to inflation of money supply by the Central bank. However, Hayek’s economic suggest that such stimulus packages and inflation lay the ground for the next bust. In the period after the 1970’s, Hayek’s theory that the government should have a minimal participation in the economy has gained acceptance. In conclusion, it is important to note that both Hayek and Keynes economics represented the ends of the continuum.

Furthermore, in practice, even a highly market oriented society exhibits an mixed economy in which the government has a minor but substantial role. References Arnon, Arie, J. Weinblatt, and Warren Young. Perspectives on keynesian economics. Berlin: Springer-Verlag, 2011. Print. Birner, Jack. F.A. Hayek as a political economist: economic analysis and values. London: Routledge, 2002. Print. Keynes, John Maynard. The general theory of employment, interest, and money. Amherst, N.Y.: Prometheus Books, 1997. Print. Wapshott, Nicholas.

 Keynes Hayek: the clash that defined modern economics. New York: W.W. Norton & Co., 2011. Print. White, Lawrence H.. The clash of economic ideas: the great policy debates and experiments of the last hundred years. New York: Cambridge University Press, 2012. Print.