Keynes VS Hayek

Topics: Economics, Macroeconomics, Great Depression Pages: 5 (1594 words) Published: November 13, 2014
Keynes VS Hayek
Book Review
Ermal Leci

How people use their money tells if they are good money managers or not, and the same is considered about countries too. How citizens operate with their money will affect the macroeconomics of it, do they tend to save more, do they like to be big spenders, they prefer investing, are the key factors on what pace the countries economy will go through. Regarding the issue of the economic growth there are two schools, Keynesian school that want to steer markets and the Hayek’s Austrian school that wants to keep the markets free. John Maynard Keynes was an English economist, part of the Bloomsbury group who represented the Kings College in London, while Friedrich August von Hayek was an Austrian economist who represented the Austrian School, even though the vast amount of work he had done while he was lecturer in London School of Economics. The two schools opposed each other, and even today there are two types of economists who stand by one of the schools. The book “Keynes Hayek: The Clash that Defined Modern Economics” by Nicholas Wapshott, gives a clear and detailed insight of the schools on economic growth and key determinants on it. Furthermore the book illustrates in details the clash between these two schools, which gives us the idea that sometimes the clash was becoming personal. For the Keynesian school the main factor that indicates the economic growth is the demand, therefore they encourage the government intervention in order to generate the demand and be matched by supply with employment of resources. Keynes promotes stimuli from the government interventions in times when country is facing economic difficulties and citizens are afraid of spending their savings, instead they gather cash and cause unemployment of the resources. Once in a radio broadcast he urged the housewives who were listening to him to go out and spend, because with that action they will help decrease state unemployment, he added that “ Many millions of pounds’ worth of goods could be produced each day by the workers and the plants which stand idle”1. Keynes suggests capital investments by the government in order to create employment and create demand. Than he mentions the multiplier effect and the chain reactions, by illustrating that whenever governments spends money on a new capital investment, create supply of jobs, people get employed and thus they spend the money they earned by creating demand for goods, thus suppliers of those goods employ more in order to fulfill the demand and the flow goes on further with the chain effect. The multiplier effect will always be above 0, and usually be more than 1.5. Another topic that Keynes touched was interest rates, and his thought was that the government should lower interest rates toward the commercial banks in return that they will lower their interest rate for their customers. This action will take the money stuck inside banks vaults into the economy, and citizens will be more appealed to investments. Keynes was the one who always stayed loyal to the equation C (Consumption) + I (Investment) + G (Government Spending)= Y (GDP), and always raised his voice that the government should intervene when the economy is bust since the opportunity cost of waiting for the economy to sort itself is really big. Actually during the great depreciation his theory was right. Keynes was always called when the economy was facing problems in England and US, but he found it difficult to communicate with politicians and thus sometimes the governments didn’t followed his advises. One of the Keynes most wise and popular quotes was “The ideas of economists and political philosophers, 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 slaves of some defunct economist.”2 Austrian School...
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