Keynes and Hayek were two academic economists who had two differing views about what economic policies would pull the U.S. economy out of the Great Depression. What I find interesting is that these two views still have importance today because we’re in a pretty similar situation right now, the only difference is that this time it’s a recession instead of a depression.
Keynesian economics says that economic output is strongly influenced by aggregate demand. Keynes thought that the private economy was the thing that was preventing a return to prosperity. When people save their money he says that there’s no guarantee that the money “will find their way into investment in new capital construction.” They say that a lack of confidence is the reason they don’t invest. So Keynes claims that “the public interest in present conditions doesn’t point towards private economy”; they then conclude that we should endorse public spending in order to offset unwise private thrift. Because of this, Keynesian economics promotes a mixed economy. Keynes also that economic output is strongly influenced by aggregate demand. Keynes solution to stimulate the economy was a combination of two approaches; one reduce interest rates, and two have the government invest in infrastructure. By reducing the interest rates that the central banks lends money to commercial bank, this will encourage these banks to do the same for their customers, which would then encourage the customers to take out more money and put it back into the economy. He wanted the government to invest infrastructure because if they did it would create business opportunities.
Hayek found a few faults with Keynesian Economics. First off he pointed out that Keynes’s argument about savings is actually an argument about the dangers of hoarding. “It’s agreed that hoarding money is deflationary in its effects. No one thinks that deflation is in itself desirable.” So...
Cited: Hayek, Friedrich A. Von, and Bruce Caldwell. The Market and Other Orders. N.p.: n.p., n.d. Print.
Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Amherst, NY: Prometheus, 1997. Print.
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