Keynes vs. Hayek: The debate rages on
The recent financial crisis, and the persistent economic problems that currently plague the vast majority of developed economies has given the decades old debate between Sir John Manyard Keynes and Freidrich Hayek. The better part of a century later, this debate is far from settled. Respected economists fall into both camps, and the debate has only gained more attention as economic woes become the focal point of political discussion. This increasing interest is manifested in things like the BBC hosting a radio debate featuring economists from both sides of the debate, which can be found here: http://www.bbc.co.uk/programmes/b012wxyg
The last instance of such prolonged economic malaise, the global Great Depression, served as the inspiration for both economists. Although the two economists sought solutions and explanations to the same economic problems, they came to very different conclusions.
After observing prolonged nature of the British depression of the 1920s, Hayek promoted the idea that private investment, rather than government spending, would promote sustainable growth. He believed that most policy measures designed to avoid the economic pain of the market righting itself only served to prolong the duration and severity of economic pain later. Keynes wrote his ‘General Theory of Employment, Interest and Money’ in response to the feeble recovery from the Great Depression. His proposition was that following a big shock, such as a depression, there were no automatic recovery forces in a market economy.The economy would go on shrinking until it reached some sort of stability at a low level.The reason was that the level of activity depended on the level of aggregate demand or spending power. He then drew the conclusion that In this situation it was the government’s job to increase its own spending to offset the decline in public spending, by running a deficit if necessary.
It is not only economists who are gravitating back towards the great economic debate of the 20th, and appartently 21st, centuries. One of the most viewed internet videos of the past year, with over 2.5 million hits, was a rap that described this debate. While I can’t speak to the technical ability of the participants of the video, it is entertaining and surprisingly informative, making it well worth watching. Regardless of which side of the debate you fall on, Keynesian or free-market, it is refreshing to see a return to the fundamental debate, to the underlying economic theories beneath the two schools.