Whose Ideas should we follow to get us out of the recession, Hayek or Keynes?

We are currently in one of the worst recessions which the current global financial system has ever endured. In such difficult economic times, we look to the ideas of the greatest economists to get us out of these troubles. Friedrich August von Hayek would vouch for a completely free market economy, free of any government intervention allowing the market to recover by itself. In contrast, John Maynard Keynes, who would also back a free market (although not completely free), would argue substantive government fiscal stimulus would stimulate an economic recovery. This article explores the advantages and disadvantages of these views.

John Maynard Keynes is publicly seen as one of the greatest economists of all time. His views on animal spirits and government intervention have shaped the economies we live in today. Keynes was alive during the ‘Great Depression’ in 1930, and he had an important say in matters involving economic recovery. He believed that the best way to get out of a recession was to increase government spending which, in turn, would create jobs for the unemployed. These new workers would have more disposable income which would then be spent on goods and services, which would then become part of another workers income. This cycle would continue around the economy creating more jobs and would get the economy’s engine running again. Consumer confidence would also gradually increase, leading to increased investment in firms. All this would gradually help build up the economy, and, although the government would have high levels of debt, they could balance the books once the economy had recovered and was healthy again.

This action plan has been deployed by many countries to help this recession, most notably the USA; Obama has spent around $884 billion on the economy. He spent this money on tax cuts, job creation and education, healthcare and unemployment benefits, all aiming to help kick start the economy. However, Friedrich Hayek would completely disagree with this spending.

Friedrich August von Hayek argues for a different type of free market, one which is left to its own devices and which is not being constantly tampered by the government. He felt that this would allow the economy to build itself back up again without needing any investment from the government. If they did attempt to stimulate the economy, it would only make things worse, especially if this meant that the government had to borrow some of this money. He blamed the recession of the 1930’s on the US Federal Reserve, who increased money supply, which led to artificially low interest rates allowing more people to borrow more money for investments. These people then made capital investments which they really couldn’t afford due to the fact that long term investments are more sensitive to interest rates. Hayek concluded that artificially low interest rates not only caused investment to be artificially high, but also caused malinvestment (too much investment in long term projects) which led to a bust, because once the interest rates rose, people and business’ were unable to pay back money to the bank and therefore, everyone had bad debt.

The problem with Hayek’s view is that although many politicians strongly agree with his beliefs, they are still unable to allow the economy to be left alone. They find it difficult to just ‘set-it-free’ and proof of this is the difficulties the current coalition government have had letting go of the day to day power over the NHS and the locals councils. This is why Hayek’s view has never been fully employed.

So these are the two main views that are being discussed at this current time, regarding how to recover the economy. The choice is a tough one, as it can affect almost everyone in the world. Which one would you choose?

Contributed by Alan Hutcheson

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