Macroeconomics: Hayek vis-a-vis Keynes - Essay Example

Hayek believes that it is only a free market, in contrast to a socialist or mixed economy, that can coordinate an efficient allocation of resources.  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 (Hayek, 1982)”.

            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 believed that it is not only the market that can make an economy work at 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 the 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 markets the (free) market that can achieve utmost efficiency in an economy.

My Opinion

            Recent economic development, especially after the 2009 Financial Crisis made me more of a Keynesian than a Hayekian.  Without John Maynard Keynes's idea of a big government intervening in the market to bail out industries or assuage the recent financial crisis, the United States and many countries could have been in an economic depression for a very long time and may not even recover.  Recent experience also pointed out that the market, with its greedy executives, cannot be left alone to determine the greater good of society.  Had we followed Hayek’s prescription, industries might have closed and more jobs and houses could have been lost.  Life could have been miserable and the prospect that we can ever recover from the crisis would have been dimmer.  Government has to intervene.

            Keynes's economic prescription became more relevant with the recent adoption of governments as a response to the recent financial crisis.  It was not only the United States government that nationalized two government enterprises that supervised most of the U.S. subprime mortgage market-Fannie Mae and Freddie Mac.  The British Chancellor of the Exchequer also followed suit as he implemented fiscal stimulus to avert the worst effects of recession which is a Keynesian prescription.  The same policy prescription was also adopted by other governments as a response to the financial crisis.