Essay about Keynes And Hayek : Economy And The Reasons For The Business Cycles

Essay about Keynes And Hayek : Economy And The Reasons For The Business Cycles

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Keynes and Hayek has very different views on their opinions on the stability of the economy and the reasons for the business cycles. Keynes has a belief that the key to economy is consumption and that is drives the economy into different business cycles which are very much dependent on animal spirits. He also believes that the market is volatile and requires some discretion and needs to be steered by the government. In order to drive growth and employment to help with stimulus packages and interest rates, spending needs to be done. He believed in more government spending. In times of recession, he believes that interest rates should be lowered. In case lowering the interest rates is not enough, he suggest that the deficit financing be restored.
Hayek has a belief of self-corrections. He believes that the economy will fix itself. He also believes that the reason for various business cycles is driven by interest rates. Hayek is one who advocates for free market, but was opposed to government intervention. He also believed that is was counter-effective to human action & motivation. He says, that the bailouts & stimulus packages did nothing but to pay for the mistakes committed by few through public money. HE said that these things should not be controlled, but however would fix themselves. Low interest rates will create an unsustainable boom which will have a harmful effect in the long run. Deficit financing may keep the economy on track in the short run, but in the long run debt would be unsustainable. He also believe that a line should be drawn in financing.
Keynes suggest an increase in aggregated demand which consists of consumer spending, investments and government spending at times of recession. He believes that as long as t...


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I believe that the mainstream view in economics and the textbook supports the Keynesian school of thought. The Fed controls the monetary policy whereas the central government controls the fiscal policy. Also, as we saw in the past recession, many firms were bailed out and expansionary monetary policy & Quantitative easing were taken by the central bank to put the economy on track.
The IS-LM curve and fiscal & monetary policy are there in the textbooks which supports Keynesian view. Although the textbooks & mainstream view in economics supports Keynesian school of thought, the food for thought is that the 2008 recession showed the argument presented by the Hayek; expansionary monetary policy provides cheap credit which is the recipe for a boom and plants the seed for bust in the future. The question to ponder is “is deficit financing sustainable in long run?”

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