1- What are the basic differences between Hayek and Keynes and their economic ph
ID: 2693155 • Letter: 1
Question
1- What are the basic differences between Hayek and Keynes and their economic philosophy? 2- What are some ways that Keynes economic philosophy influenced the United States during the depression? 3- Give some examples of ways that both Hayek and Keynes are applicable to economies in developing countries. 4- How does sustainability relate to either or both of these economic theories? 5- Do you see how either Obama or Romney relate to the economic theories of Hayek or Keynes? Give some examples and express your own opinion on how well you think these theories apply to our economy today.Explanation / Answer
The fundamental difference between them lay in the nature of equilibrium that either could envisage. Hayek, as a founder of the Austrian School, believed that macro equilibrium would be restored through the free operations of markets. His was essentially a laissez faire approach to policy, influenced heavily by Adam Smith, Walras and Pigou. In this view of economic history, the main causes of imbalance were undesirable interventions in the "natural" market place. Policy for restoration and prosperity centred on eliminating imperfections in markets; especially state interference, monopoly power, oligopolistic markets in the factors of production (strong trade unions, for example, or over-concentated financial sectors), and in artificial controls on prices and output and technology. Keynes' view was almost the reverse, at least after about 1920. He postulated and modelled macro economic systems that may never attain equilibrium. In particular, he showed in principle that the various sectors of a macro economy need not all be in balance at the same time. Thus, there may be a shortage of demand for labour at the same time as excess demand for output; or an excess demand for borrowing at the same time as a shortage of liquidity in the banking sector. Keynes' policy view was based on central intervention to ensure a tendency towards balance by use of fiscal, monetary and physical mechanisms in a carefully orchestrated way. Hayek seemed to view economic systems as organic, rather like living organisms, in which there are stocks and flows that tend to produce good health, effective operation, healing processes; automatically seeking correction and resolution of imbalances and perturbations. Keynes seems to have viewed economic systems as machines that need starting and stopping, steering and controlling, speeding up and slowing down, balancing against other machines and other objectives; generally in need of management to correct imbalances and perturbations. These are quite fundamental differences in philosophy and in political outlook. Hayek felt that application of Keynes policies gives too much power to the state and leads to socialism. Keynes believed that Hayek's acceptance of "natural" market mechanisms was naive and failed to explain the major movements in the world economy and in national developments. In recent history, the period 1945-1980 saw mainly a Keynesian trend in economic policies throughout the "western" world, in which governments saw it as their responsiblity to intervene to maintain high employment, stable prices, acceptable exchange rates, balance of trade and so on. From 1980 to about 1998, Hayek's ideas and those of Milton Friedman were more influential so that governments were seeking to be less engaged in intervention and more concerned to improve the smooth, unimpeded operations of markets. Since about 2000, there has been an uneasy movement to use elements of both philosophies, and some economists have embarked on a re-evaluation of the "classical" and the "Keynesian" approaches to see if a synthesis exists at the various boundaries of understanding.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.