Keynes v. Hayek

      During the time of Great Depression in 1929, the world suffered an enormous economic problem. Along with this historical event, two economists became popular: John Maynard Keynes and Friedrich von Hayek. Both significantly influenced and grabbed the limelight in the field of economics. But the most interesting part here is their ideas are opposite to each other.

        One of the principal reason of Hayek is in line with how financial crisis takes place. He disapprove of Keyne’s idea that financial crisis is caused by deregulation or little government interference, and free market. As for him, it results from too much regulation. He consider the primary instigators or causes of economic imbalance as excessive interventions in the “natural” market place. His argument is opposite to Keynes’ proposition that government must interfere strategically to economic activities, especially when it is experiencing a downturn. For Keynes, this action of the government will give assistance to those who are left behind of capitalism like the minorities and handicaps and provide a ‘safety net’ for the vulnerable through the creation of job opportunities. Hayek argued that government must not intervene in the economic so as to grant economic freedom. Therefore, people are free to choose and the economy would run effectively and efficiently. Even if the economy is on its trough condition, the government must do nothing. It must let the economy do its purging or get rid of the undesirable impurities it has acquired. This will enable the businesses to collapse and liquidate themselves. He believe that Keynesian policies gave too much power to the government and this could possibility give birth to socialism.

Hayek also considered that price is also of paramount importance in the factors of production. This acts as a signal that guide our economic behavior. He contrasted the effects brought if the price is set by voluntary market transaction and by the government. For him, if the former established the prices, they carry information of scarcity and demand. However, if it’s the latter who did it, then it is not about the underlying economic reality but of the preferences of politician resulting to ‘false signal.’

Both also have contradicting justification on why Great Depression came into existence. Hayek’s notion is anchored on the principle that it is the fault of the Central Banks, like the Federal Reserve in USA. These Central Banks lowered the interest rate than what it could have been thereby creating distortions in financial markets which induced ‘false signal’ and encouraging certain type of investments, particularly the real estate, at the expense of others.  There had been massive residential and commercial housing undertakings. On top of this, Hayek see this as a mal-investment dissuading private investors of more important type of investments. On the other hand, Keynes blame the excess and deficiency of confidence among consumers. He took into consideration that people might have a very precarious knowledge of future events, so they are subject to swings of sentiments which he termed as ‘animal spirits.’ When the economy is on boom, people became lifted by this pleasing circumstance allowing them to become overoptimistic. As a consequence, entrepreneurs overestimated the rate of return. But Hayek negate this perception asking, “How come so many people commit the same mistake at the same time?”

The two also had different prescriptions on how to address such problems. Keynes suggested the government to engage in deficit spending by injecting money, which is equal to revenue. The government must create job opportunities or even on senseless projects just to put money in people’s pocket allowing circulation. But, Hayek take this suggestion as outrageous. The government, therefore, must do nothing. He also proposed the dissolution of Central Banks. He refuted Keynes’ idea of deficit spending because it will just result, he said, to misallocation of funds, great inflation rate and debt, which will be passed onto the next generation in the form of paying high taxes.

The political importance of Hayek’s ideas to current policy making is that it makes the government aware of its role in the economy even if he does not approve of government intervention during economic because of the aforementioned reasons above. It made the government cautious when it comes to spending funds. The government recorded the expenses it has generated.