Keynesian vs. Monetarism vs. Austrian
John Maynard Keynes was born in Cambridge, where he went to King’s College and earned a degree in mathematics, in the year 1905. He stayed for another year, studying under Alfred Marshall, influencing him to write “Tract in Monetary Reform”. For two years he joined the civil service and returned in 1908 to work as a lecturer in Cambridge. He proceeded to work and in 1919 was the British Treasury’s representative at the conference in Versailles, following World War 1. He left because he disagreed with the conclusion of blaming Germany for WW1, inspiring him to write his book on economics “The Economic Consequences of Peace”. Keynes was for the idea that Governments should step in to fix short run macroeconomic problems, challenging ideas of the classical economists who believed that the market corrects itself. In recession times the government should increase their spending to increase the GDP, and keep the income flow flowing, and in good times were GDP is at its maximum level governments should cut back on spending and reduce the GDP, to prevent price levels to shoot up past what is a good level for the majority. Keynesian Economics is a demand focused economics, and focus on solving the short-term problems. A well-known example of this is the actions taken to solve the problem of the Great Depression, where Governments used a “stimulus package” to increase Aggregate Demand and increase the flow of economy, so it wouldn’t be stuck in a recession. Keynes believed that wages were “sticky”, resistant to change, which is why AD must shift, because employment won’t change over time.
Frederick August Hayek was one of the more important figures of the school of Austrian Economics, a school of tho...
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... support economic growth, where “x” is between 3 and 5.
Although I agree with Hayek, in that over time the market should correct itself due to Aggregate Supply shift, I don’t feel his solution to the problem is the best. A benefit of the Keynesian solution is that it does in fact counter short term problems in a more controlled sense; it doesn’t leave the economy to nature. If we look at the Great Depression, Monetarists and Austrians would let the problem sort itself, but we have no way of knowing how long this would take. People may end up working for lower wages in a month, or in a decade, and we would have to sit through it waiting for people to start. Although this doesn’t mean that Keynes if fully correct, because their method to deal with the unemployed influences more unemployment (income without work is a big incentive), causing a decrease in production.
Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles and capital and monetary theory.... ... middle of paper ... ... Now, whether they would revert to a gold standard or not was a question that Hayek was too much of a believer in spontaneous order to predict.
Keynes ideas were very radical at the time, and Keynes was called a socialist in disguise. Keynes was not a socialist, he just wanted to make sure that the people had enough money to invest and help the economy along. As far as stressing extremes, Keynesian economics pushed for a “happy medium” where output and prices are constant, and there is no surplus in supply, but also no deficit. Supply Side economics emphasized the supply of goods and services. Supply Side economics supports higher taxes and less government spending to help economy.
In order to better explain his beliefs, Hayek first presents a problem. This problem is that society has a common misconception of there being a single economy with a unified hierarchy of ends determined by that economy (Hayek 1976, 108). This implies that markets within the economy have a single end in the context of that unified hierarchy. This view, however, is in error because markets, in actuality, serve not one end, but the interests of all members in the market (Hayek 1976, 108). In order to compensate for the misconception and assumed meaning of “economy,” Hayek developed a new term, “catallaxy.” Catallaxy is a concept that describes numerous interrelated economies rather than just one whole. “It is the special kind of spontaneous order produced by the market through people acting within the rules of law of property, tort, and contract (Hayek 1976, 109). This is what makes up the...
The main ideas in Krugman’s book revolve around the “Keynesian Compact” or the “neoclassical consensus”. Krugman suggests five general solutions based on the economist, John Maynard Keynes’ theories: put more capital into the banking system to unfreeze the markets, make a program for the government to lend money, work hand-in-hand with other countries, use government stimulus plans, reform and regulate the capitalistic market system.
In the book “The General Theory of Employment, Interest and Money” from 1936 John Maynard Keynes says that capitalism was unstable and would rarely provide full employment. the government would need to spend giant amounts of money on public works, which would create new jobs, expand demand, and rebuild consumer confidence. He also says ...
Keynes and Hayek represent different options. Should we steer markets or set them free? “Which way should we choose, More bottom up or more top down?” (Fight of the Century). These questions reflect the opposite ways Keynes and Hayek address the economy. Keynes wants to “steer” the economy from the “top down.” From his understanding of the economy, Keynes theorizes that the market can be directed by those with the power to do so to accomplish goals leading to a prosperous economy. This is the basis in his approach to dealing with recessions where the government or central bank manipulates the economy. The other side is a free market from the “bottom up” on which Hayek stakes his claim. Instead of steering the economy, Hayek proposes to leave it alone. Do not try to control it, but let the market determine the interest rate and price level, as it eventually will, through supply and demand. In this way, control is not exerted downward, but reality is expressed from basic economic forces. Fundamentally, Keynes’s model focuses more on the spending and consumption aspects of GDP, and Hayek’s approach focuses more on the investing aspect which flows from saving. These are the options from which to choose. Keynes vs. Hayek, Short run vs. long run, controlled vs. free, top down vs. bottom up, each possibility has its negatives and positives. This debate is not wrapped up
middle of paper ... ... In summation, I am more of a Keynesian thinker than a classical thinker. Although it might be true that having a free market is the right way of having a stable economy, unemployment will still be high and might be increasing which is still one of the problems that governments face today. Plus, what happens if recession hits or even worse we go back to 1930’s where there was the great depression, it was proved then and will be proved again if it happens that the only way to solve a sort of crisis is by government intervention (basically spending).
I believe that it's’ important to use our constitution as a guiding tool to help appoint the correct people for the job.John Maynard Keynes was a British economist where he fundamentally changed the theory and practices of macroeconomics and economic policies of government. Although he was revolutionary most of his policies were controversial and used Keynesianism economic to get people to stay away from them . His approach to macroeconomic management was different since the previous traditional laissez-faire economists believed that an economy would automatically correct its imbalances and move toward a state of equilibrium, They expected the dynamics of supply and demand to help the economy adjust to recession and inflation without government action. Laissez-faire economics thus regarded layoffs, bankruptcies and downturns in the economy not as something to be avoided but as elements of a natural process that would eventually improve. However that was not the case for the great depression. Keynes also believed that a given level of demand in an economy would produce employment however he insisted that low employment during the depression resulted from inadequate
Regardless, in regards to applying Keynesian economic policies toward the Great Depression, Former Federal Reserve Governor Ben S. Bernanke said “You 're right, we did it. We 're very sorry. … we won 't do it again” (Federal Reserve Board, 2002). Other economic theory must be developed to address some of the shortcomings of the Keynesian economic
The current issues that have been created by the market have trapped our political system in a never-ending cycle that has no solution but remains salient. There is constant argument as to the right way to handle the market, the appropriate regulatory measures, and what steps should be taken to protect those that fail to be competitive in the market. As the ideological spectrum splits on the issue and refuses to come to a meaningful compromise, it gets trapped in the policy cycle and in turn traps the cycle. Other issues fail to be handled as officials drag the market into every issue area and forum as a tool to direct and control the discussion. Charles Lindblom sees this as an issue that any society that allows the market to control government will face from the outset of his work.
Hayek properly lays out the foundation to support his reasoning for supporting capitalism. He points out that capitalism cannot succeed without a proper legal framework. With legal laws and enforcement in force, classical liberalism believes that capitalism and its forces of competition will coordinate human efforts best rather than relying on a total laissez fare policy (Hayek 41). Other factors needed for capitalism to succeed are the organization of ¡§money, markets, and channels of information¡¨ (43). Those three factors are the basis for competition which is most effective in determining allocation of resources and generating the maximum amount of marginal utility. When prices and/or output are controlled, the central planners are interfering with free markets which distort the true view of the marketplace.
My research in Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic to great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests that by leaving the free market alone without human intervention equilibrium will be obtained. This theory was the first school of thought for economists, and one of the major theorists and founders of Classical Economics was Adam Smith.
The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)
The disparities between the two views of the economy lead to very different policies that have produced contradictory results. The Keynesian theory presents the rational of structuralism as the basis of economic decisions and provides support for government involvement to maintain high levels of employment. The argument runs that people make decisions based on their environments and when investment falls due to structural change, the economy suffers from a recession. The government must act against this movement and increase the level of employment by fiscal injections and training of the labour force. In fact, the government should itself increase hiring in crown corporations. In contrast the Neoliberal theory attributes the self-interest of individuals as the determinant of the level of employment.
In 1929, he became the chair of the London School of Economics. During that time, one of his first appointements was Friedrich Hayek. Friedrich Hayek was considered a twentieth-century Renaissance man in the world of economics. Hayek was the best-known advocate of what is now called Austrian economics. (The Concise Encyclopedia of Economics 2007) Robbins early essays were quite controversial and combative in nature towards Anglo-Saxon economics. He stressed the ideas of subjectivist theory of value beyond what Anglo-Saxon economics were used to.