Hayek's Conception of the Market - Essay Example

 Perhaps two of the most opposing economists whose economic theories are in almost diametric opposition against each other are Friedrich August Hayek (1899-1992) and John Maynard Keynes (1883-1946). Hayek was a stout defender of free market and classical liberal idea of economy and against centralized planning and socialist economies while Keynes was for modern liberalism and espoused government intervention in a given economy to lift it from economic depression. In simpler terms, Hayek was for pure capitalism where government should not meddle with the market while Keynes called for government intervention in the market to achieve certain economic ends such as deflecting a crisis, pump priming the economy, achieving equilibrium and full employment. Hayek totally rejected the idea of collectivism believing that such structure can only be maintained by a centralized authority which could subsequently lead into totalitarianism. He believes that it is only free market, in contrast to a socialist or mixed economy, can coordinate an efficient allocation of resources and thus generate more economic activity than any form of government intervention. According to Hayek, “the price mechanism of the free market serves to convey information about supply and demand that is dispersed among many consumers and producers and which cannot be assembled or coordinated efficiently in any other way”. And seriously “doubts whether a socialist economy is capable of solving the problems of rational allocation of its resources” (Kelly 2004). In Hayek’s book Road to Serfdom, he articulated his rejection on the centralized planning of economies. He argued that public ownership of industries that is a characteristic of centralized economies would make the production of goods and services inefficient because of the absence of market dynamics such as competition that would “perfect” the production of goods and services that would eliminate waste. Hayek also cautioned that centralized planning of an economy is destructive to liberty because the planner would inadvertently tend to extend his or her control to other aspects in society thus becoming more comprehensive to the detriment of liberty (Hayek 1944). Keynes on the other hand favored government intervention through its fiscal and monetary policy to assuage the impact of recession and depression or financial crisis like the one the United States recently had in 2009. Keynes believe that it is not only the market that can make an economy work at a maximum efficiency but such can also be raised to that level by the intervention of the government. In contrast to Hayek, Keynes advocated collectivism through international coordination of fiscal and monetary stimulus to deflect and mitigate any downturn in economic cycle. He is also the sponsor of deficit spending to lift an economy from depression in contrast to Hayek’s proposal that it solely the market (free) that can achieve utmost efficiency in an economy. The classic example of this is Obama’s stimulus spending to bail the US economy out of the financial crisis (Censky and Riley 2011). Unlike Hayek who asserted that the market dynamics or its “invisible hand” will make the necessary corrections in the market to make it more efficient, Keynes believed otherwise. Keynes articulated his disagreement with Hayek in his book The General Theory of Employment, Interest and Money that market dynamics do not always correct itself. Hayek posited that market oriented economies are not always good in achieving efficiency that would lead to full employment equilibrium and thus, government must at times should intervene for the failure of the market. This failure of the market and the government’s necessity to intervene made Keynes to assert that equilibrium and full employment in a market driven economy is more of an exemption rather than the norm (1936). In short, Keynes meant that equilibrium and full employment or a situation where everybody or the majority has gainful employment is very hard to achieve that government has to step in and help. If these two economists were in the government and task to relive the current recessionary position of the UK and other economies, they would have analyse and solved the problem differently. Hayek will surely deny that the root cause of the recession was corporate greed and sub-prime mortgage crisis. He will stoutly defend that unfettered capitalism will perfect the market and will put the blame of the recession to something else such as too much government regulation of business. In solving the current crisis, Hayek’s prescription would be scary because that would mean everybody will be left on his or her own because Hayekian economics prescribes that the market when left on its own will correct itself. It is short of saying that the recession will be over by itself and it will be better if government will not intervene. Never mind the people who lost their jobs and homes for they will eventually find a job and buy new house, at least that is how Hayek would solve the current problem. Keynes on the other hand would be a relief. He would realistically asses the crisis as a failure of the market precipitated by greed. Keynes prescription was already done in the US in the form of Obama’s Stimulus Package to save the economy and prevent people from losing their jobs and homes. In UK, Keynes would have asked the government to assume supervision if not take over industries which would be in the brink of collapse to save the company and jobs of the employees. Most of the government’s around the world including UK actually followed Keynesian economics in relieving their respective economies from the financial crisis. With regard to the current recessionary position of the UK in dealing with the crisis, Keynes would surely raise hell in his opposition to that policy because that policy is diametrically opposed to his brand of economics. Instead, Keynes will encourage government spending to stimulate the economy. Of these two economic theorists, Keynes is more relevant than Hayek in today’s economy. If we are going to cite an example, Hayek was like presupposing the economic system of Wall Street and US economy in general before its collapse in the last quarter of 2008 that they would be better off if they are left on their own. Of course everybody knows that it is not the case because greed took over which precipitated the recent financial crisis. To bail out the economy, the government initiated a Keynesian rescue package in the form of Obama’s Stimulus Package to save the economy and prevent people from losing their jobs and homes (Censky and Riley 2011). This only illustrates that Hayek’s faith in the market’s ability to generate economic activity was wrong because greed will only take over instead of market efficiency if the market will be left on its own. And had governments followed Hayek’s prescription in solving the crisis, industries might have closed and more jobs and houses would have been lost. Life could have been miserable and the prospect that we can ever recover from the crisis would have been impossible Bibliography Censky, Annalysn and Riley Charles (September 8, 2011). What's in Obama's stimulus plan. http://money.cnn.com/2011/09/08/news/economy/obama_stimulus_plan/index.htm [accessed April 28, 2012]. Hayek, Friedrich A. (1944). The Road to Serfdom. Routledge Press (UK), ISBN 0-226-32061-8. Keynes, John Maynard (1936). The General Theory of Employment, Interest and Money  Palgrave Macmillan, UK. ISBN 978-0-230-00476-4. Ross, Kelley L. (2004). Friedrich A. Hayek (1899-1992). http://www.friesian.com/hayek.htm [accessed April 28, 2012]. Read More