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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