Hayek vs. Keynes: The Century-Long Battle of Ideas - Essay Example

Introduction

According to Steele (2002), the economists Friedrich Hayek and John Maynard Keynes inspired the twentieth-century economic controversy. The basis of their ideas is on the interest rates, money, and the role of the state in the mature capitalist business economy. Nonetheless, their views differed greatly in their responses to the interwar world, which they inhabited. Keynes, in his work, argues that the principle cause of a slump involves a negative wealth effect, low asset values, and high-interest rates. Meanwhile, Hayek focuses on high investment yields and low-interest rates in establishing a system extended beyond its replete capacity. In comparison to Hayek economic position, this paper will argue that the model of Keynes is flawed. Subsequently, the paper will highlight the flaws of the theory, which include first the failure to consider incentives. Another flaw shown is that the theory is not an evidenced-model of how the economy functions, and it primarily focuses on the short-run since it has no concern for implications the current events holds for the future.

The arguments of the two economists in the 1930s have been revitalized in the latest global financial crisis. Unlike Keynes, Hayek judged that indisputable resurgence from a post-boom crash requires a return to a sustainable production and not just for adequate spending. For this reason, Hayek was perceived as an economist who intended to liquidate the farmers, the stock, as well as the labor. In contrast, Keynes established theories, which had need of a great function of the government in the economy. To that end, the government would increase purchasing power and create jobs by borrowing money to use up on such things such as public works. During a slump, striving to set of scales to the budget of the government would not make things better but worse. Subsequently, Hayek challenged those economics views by Keynes by arguing that the central planning would result in problems. To illustrate, Hayek pointed out that the central planners could not come up with the economic decision; they can only make technical ones. The criticism by Hayek proved to be extraordinary prescient over the rest of the century. He stated that "Socialism shocked our generation." "Socialism made us aware that we seek improvement in the wrong direction. I know since I was one of them" (Stanislaw & Yergin, 2008).

Even more, there is the absence of a price system, which would weigh an alternative in Keynes theory. For instances, there was no way to establish an underlying principle decision to buy goods and put resources in various places. The macroeconomic policy by the Keynesian is frequently pointless, and it can destabilize the economy if applied consistently (Cochran, 2012). To illustrate, during the world war, the spending of the government goes solitary to the national defense, hence, increasing the aggregate demand. Nonetheless, the economy heads into a little recession after the expansion of the economy, and the government cuts its spending and reduce the interest rate. Besides, the citizens struggled in buying food while the government spent the money on war. Also, the government spent money in areas such as political campaign and bureaucracy.

Notably, the analysis by Keynes put down the foundation for the field of macroeconomics. For this reason, his idea treats the economy as a whole, and its center of attention is the use of fiscal policies including tax, deficits, and spending by the government. According to Keynes, these tools would ensure full employment as a consequence of using them to manage aggregate demand. However, this is not true because the theory leads to political costs. It results in the growth of the state as well as corrupt, higher inefficient spending. Consequently, during the times of expansion and recovery, the government would cut back the spending. The idea also highlights that in the situation of the "under-employment equilibrium," it was the job of the government to offset the public expenditure decline by increasing its spending. The government would do so by running a deficit to whatever extent necessary. The message by Keynes was that one could not cut their way out of a slump; people have to grow their way out. Therefore, Hayek economics offers a better guidance on the recovery, causes, and more significantly, prevention (Cochran, 2012).

In regards to Hayek, less intervention by the government meant more freedom economically. He believed that the economy runs more efficiently when people are free to choose. Keynes, on one hand, pointed out that the underused capacity is symptomatic of the deficient aggregate demand. The capacity includes the high investment yields and low-interest rates. On the contrary, Hayek is of the view that the under-used capacity is indicative of a demand for consumption of goods and it is an inappropriate investment that is too pressing to permit the current gestation completion of investment (Steele, 2002). A conflicting view on that point is that Keynes arguments are considered somewhat heretical in comparison to the ideas of Hayek. Unlike Keynes, one significant theme that Hayek argued is that the business cycle is an unavoidable and necessary concomitant of a free-market money-using-economy. Following his theory, Hayek pointed out that the economic problems begin when the government holds the interest rate of the market for too long and too flat. Hence, he generated the polar opposite of the principle holding that capitalism is ineffective for the reason that it is not planned (Friedman, 2016). He argues that this policy, which is at all times politically attractive leads to malinvestments. For instance, numerous projects are established that ultimately cannot be sustained.

Evidently, the Keynes theory pointed out that a country should pump enough money into programs and projects run by the government. It highlighted that these projects would benefit the people who receive them and, subsequently, they would use the wealth and the economy would be rejuvenated. Meanwhile, according to Hayek, economics have a duty of indicating to people on how little they are aware concerning what they envision they can devise. The central planners cannot make the economy work in an accurate manner even if they work day and night for the reason that they lack the perfect information, which would yield the results expected. Hayek was aware that increasing the spending by the government only diverge resources from their most useful outlets. For this reason, the conception of capital by Hayek provides a vision of the very much disaggregated and different market procedure, and which assists in identifying the flaws in Keynesian policy and theory (Horwitz, 2011).

Moreover, Hayek ideas believe that only markets comprised of willing buyers and sellers with no barriers to exit and entry and free of the involvement of the government would succeed. It would succeed because the market could figure out the most efficient techniques for the allocation of the resources. For this reason, Hayek argues that the central planners, as well as the politicians, do not possess the knowledge of the best uses of resources. That is to say, the politicians and the government employees would be paid more from the spending by the government because government spending is in their favor. Also, the government expenditure in the course of the world war makes a more overall demand, but the citizens will not have enough money to spend on food (Bitely, 2011). By all means, the Keynes idea ignores motivation and the human action. The central planners and the politicians do not pay attention to the work of many. Alternatively, they struggle to dictate what the communities should be doing. Unlike the politicians in a far away city such as Washington, people have the knowledge on how best to use their resources. Evidently, throughout the Great Depression, the government planners unsuccessfully tried out their best to establish the most efficient uses of the resources of many. Keynes idea was also not satisfactory for the reason that it encourages big government. States increase spending in a recession. However, the government spending remains after the recession, which leads to spends and tax regimes. Hayek pointed out that people will not be capable of understanding why an economy goes into recession without first being aware of how the economies function when they are healthy (Horwitz, 2011).

Steele (2002) implied that Keynes is first linked to the chronic unemployment problem. In the 1920s, the problem was the characteristic feature of the UK economy and in the 1930s; it was most in the western world. Unfortunately, economists who support the Keynes theory perceive the entire economy from the side of demand instead of the supply. Demand is an inherent element of the human majority way of life. It is a manifestation of the human desire for comfort both mental and physical. The idea failed to see that it is the supply side that has need of real human intelligence, natural effort, and resources. Even more, the supporters of Keynes economic ideas see the economy as something to be controlled and designed. Apparently, diverse economies, made up of millions of people, and comprising millions of services and products cannot be monitored and planned by even the ten smartest brains on earth. Conversely, Hayek endeavored to build on the economic theory that was present so as to show that there can be an extension of the theoretical framework to make extreme precise events such as the Great Depression. On his side, he supports the increase in the supply of money. Hence, the commercial banks and central banks are required to raise credit to the entrepreneurs, while there should be no change of the underlying real factors of the economy.

Horwitz (2011) stated that the vision of the element of the Keynesian assists in recognizing why Hayek pointed out that Keynes did not have the knowledge of what Hayek referred to as the "Mill's Fourth Postulate." The basis was that the demand for goods consumption should not enhance the application for investment products. Evidently, on a macroeconomic level, the design that the needs for an explicit utilization of a good will improve the need for the precise capital merchandise that is necessary to be produced, is right enough. For this reason, it comes right out of Hayek's economic ideas. In the Hayekian view, people are without a doubt in the situation of relying on profit and losses as well as entrepreneurship to direct the establishment of the capital combination. It is created for the production of the consumer goods of the future. Subsequently, when combined with the failure of Keynes to comprehend the Mill's Fourth Postulate. This point of aggregation results in the typical Keynesian outcome that saving will cause a reduction in total income and employment. As far as Keynes is concerned, the intertemporal market management is more the exception than a rule. He argues that it will only be by luck that investments and savings would be the same at full employment. Hence, Keynes is unable to perceive the other side of conservation.

Furthermore, in regards to the Keynes theory, the increase in the government debts causes the collapse of the economy as evident by the case of Greece. The scenario captured the world's attention and prolonged to warn states regarding public finance and the system of the government. Therefore, the crisis in Greek is a vital instance of how central planning results to bad management of the public finances, which can cause an economic catastrophe. The financial crisis in Greek is a consequence of the insufficient bureaucracy, the corruption in the public and government spending, and mass tax evasion. Even more, there was a rise in a major fraction in the expenditure of the government, which was allocated to the increasing public benefits and wages. Traditionally, the politicians in Greece have perceived that the provision of public sector benefits and jobs is a significant way to grant favors. To fulfill this, the country persisted in borrowing profoundly from the international capital market to invest in social benefits, pensions, and public sector jobs. The primary cause of the debt crisis in the country rests on the existence of the weak political system and the Greek government, which caused the domestic economy mismanagement. Hence, it added the debt of the government at a much higher rate compared to the rest of the euro zone when the public debt level had surpassed 100% of the GDP (Kouretas & Vlamis, 2010).

Conclusion

Keynes observes saving, which is the lack of spending, as an activity that dampens the movement of the economy. On the contrary, for Hayek, saving is a qualification to economic development for the reason that it can serve to financial investments. Notably, Keynes is considered as the mastermind behind the failed programs of the new deal period because unfortunately the idea pushed by Hayek was given little attention. Therefore, in regards to Keynes ideas, the government central planning as resulted to a cycle of busts and booms such as the case of Greek. For this reason, the ideas of Keynes have proved inherently inflationary. Therefore, more attention should be turned towards Hayek criticism of Keynes monetarism and macroeconomics theory. According to him, the approach comprises common errors when it comes to scrutinizing economic forces at a level that is aggregative and which matches to no decision-making agency (Steele, 2005).