Same economists. Same beliefs. New microphones. New Mustaches.
Amazingly these two economists are still going at it. With the Presidential Election coming up, the 2 schools of economic thought will be center stage during the debates. Who do you support? Should markets drive the economy, or should government drive the markets? What are the best reasons to support your side? In addition to posting your opinion, you will also be responding to one of your classmates' posts.
Check out the articles below as you develop your arguments.
http://welkerswikinomics.com/blog/2011/10/31/keynes-versus-hayek-101-the-debate-continues/
http://www.soundmoneyproject.org/?p=2085
And for your enjoyment...
Keynes vs. Hayek: Fear the Boom and Bust
Keynes vs. Hayek: Round 2... Fight of the Century
88 comments:
I support Hayek's theory that the economy should function without government intervention. Markets should drive the economy instead of government spending because having established prices and higher taxes to support government programs results in decreased consumer spending. With more disposable income and money in circulation, markets would bring about prosperity. Although Keynes policies are efficient in wartime, staglflation, high inflation and unemployment at the same time, is the loophole in his theory. As seen in the United Kingdom back in the late 1970's through the 1980's, prime minister Margaret Thatcher's economic policy that coincided with Hayek's theory pulled her country out of a recession into a prosperious period. In contrast of the UK, the United States did not prevail from their economic downturn as quickly because of the Keynesian minded presidents Nixon and Carter. Once Reagen came into the presidency and implemented policies to let the market work itself out, we saw a turn around. Overall, both policies must be put into use at different times in the economic cycle in accordance with what is happening in the world economy and status of peace or war time.
-Adam Minuto
It is my belief that the markets should steer the economy only because it is better than the keynesian theory of economics. I think that government controled pricing and state-controlled indusrtry is ludacris because it takes more money to support these industries. Take, for example, the British Coal industry before Marget Thatcher. The mines were quite literally a money pit and were bleeding money from Englands tax payers. Also, Keynesian theory has no solution to staglflation, a problem it clearly causes.
Christian G
I feel that unless it is war time, then Hayek's ideas are right and Keynes’ wont work. For example, in post WWII Europe, they were experiencing hyperinflation and regulation was only making things worst; once their governments deregulate the markets began to bounce back. Additionally, Hayek was right when influencing Regan and Margret Thatcher, who deregulated business during the 80's, which caused businesses to bounce back. While the only time Keynes’ ideas worked was during war time. Furthermore, running a deficit in government spending, like Keynes suggests, would result in a situation like we have today, in which there is high unemployment, and the government is in immense debt. The bail-outs and Stimulus package were rather unaffective. Therefore, if the government did nothing instead, maybe the economy would be growing quicker.
Erik H
I support Hayek. Markets should drive the economy. The more the government interferes with markets, the higher the national debt will climb. All Keynesian fiscal policy does is create debt and postpone problems instead of solving them. During depression or recession, government could reduce tax rates and also decrease spending to encourage private investors to invest in businesses. Lowering taxes and increasing government spending will create debt, and although rasing taxes and decreasing spending during booms is meant to decrease the budget deficiet it never works out this way. Our national debt continues to climb further into the trillions, and at every turn we seem to want to solve the problems of the economy by spending more money that we don't have. The only true sign of the "success" of Keynesian fiscal policy is the Great Depression; in nearly all other cases, the fical policy actions backfire in some way. Reagan and Thatcher used Hayek's policies to decrease the inflation rates and make more businesses more independent without increasing government spending. As history shows, any attempt to control the economy will always backfire in the long run.
Kelly F
I agree with Hayek’s viewpoint that markets should drive themselves and be influenced by the government as little as possible. I think that the best argument that Hayek proposes has to do with output and employment. During times of economic downturn the government should just lower taxes, and reduce spending. This will encourage the private sector to invest more to meet the demand. If the government is regulating the private sector regarding things such as minimum wage and specific benefits it will most likely reduce the incentive that people have to increase their output. Certain regulations may make it too difficult or expensive to hire workers. If employers can choose their own rates they can still hire workers even if it's at lower rates and reduce the price of their products in order to maintain output. I also think that with Hayekian view has a valid argument that wages and prices are perfectly flexible and that the government does not need to interfere. There will always be a supply and demand. The market system was built around the actions of the people. It should also adapt as a result of the actions of the people, not artificially be adapted by the government.
Brandon G.
I personally think that Keynes had the right idea with his ideas on government intervention, although I do not think deficit spending should occur except in times of deep recession or during war time. The fact is that without some regulation of the economy, busts may be much lower. I don't think any companies are not hiring today because the government gave too big of a stimulus package. The multiplier effect also shows the benefit that comes from the money that is pumped into the economy by the government, and how it may outweigh the cost of it, especially during poor economic times. From a humanistic standpoint Keynes has the stronger argument. Telling all the people who may have their income and living standards by a recession or a depression to "wait it out" is crazy, especially if you know you can do something about it while helping the economy. Also, you need to think about the costs that come from deregulation and nothing to help out poorer people. Since Reagan's presidency income inequality has increased an inordinate amount, and the market hasn't shown an sign of "working itself out" regarding that. Obviously, periods of stagflation require different policies (and Hayek's policies would probably work better there), however, in today's economic climate and in general, I think Keynes' policies are the best.
I support Hayek. I believe that markets drive the economy and government spending doesn't help much when it comes to things like a depression. Keynesian economics calls for increasing government spending during recession to raise aggregate demand and lower spending to lower aggregate demand to solve problems of recession and inflation. However, during the Great Depression it was war that truly got us out, not government spending. Keynesian economics might be more suitable during wartime than peacetime. Stimulus plans and bail-outs are also very ineffective as the printing of money would just raise prices and the government would borrow and increase its debt. One problem that it fails to resolve is stagflation where unemployment and inflation are high. Hayek's free market based economy is more efficient because it allows the people and the market to "sort itself out". An example of the success of Hayek's policies comes from Regan and Thatcher who both brought about deregulation and helped price levels shrink and the economy grow stronger.
Billy M
While I can identify with both sides of the argument, I find myself leaning more towards a more Keynesian approach to managing the economy. While excessive government intervention and regulation does stifle growth in the economy, in many cases regulation is a necessary evil. It primarily boils down to ethics and incentives. Since the law currently considers businesses to be people, it's time we do the same. Common sense tells us that people always look to better themselves. This can mean a number of things depending on the individual, but the goal is generally to attempt to maximize utility. With that in mind, it is important to understand that people are more likely to participate in activity that will increase utility at a lower opportunity cost than at a higher opportunity cost. Now when we apply this concept to businesses, we can equate utility with revenue(or growth). Businesses are always actively seeking to increase their own "utility". Thus, much like an individual, if presented with a situation in which the individual opportunity cost is low but the cost to others or society may be significantly higher, people will tend to partake in this behavior in the interests of increasing utility. Businesses are the same way. If given a scenario in which profits can be expanded at little opportunity cost to them personally, businesses how a strong incentive to partake in this behavior. While it may be ethically immoral, such as disposing of chemical waste in a fashion that is damaging to the ecosystem, when given the choice between behaving ethically and getting more money, you can safely bet that they will take the money every time. This is where government is needed. Without any incentive against these externalities, the harmful behavior wont stop. Thus regulation is needed from the government to combat these harmful practices. While it may come at the cost of growth to businesses, it is ultimately better for society. Does this mean that government should assume control over the entire economy? Absolutely not. It just means that if markets are left completely unregulated, there is nothing to stop any immoral and potentially catastrophic behaviors from continuing. History repeatedly shows that when left unregulated, terrible things can happen leading to steep recessions and the collapse of many industries. This can most recently be seen in the housing market crisis of 2008. The banks and Wall-street had no incentive to behave ethically and deny mortgages to those who clearly could not afford it, after all, they were fully insured for all their losses. I do not believe that government should be under control of the government, but it is the role of the government to look out for the best interests of its people and thus, it is obligated to step in when behavior that may be potentially harmful to society takes place.
Billy M (continued)
Comment was too long so here's the other half:
The other side of the debate is over fiscal policy. I am not going to pretend to know that I know what is best for our country or what does or does not work, but the concept of just waiting through every downturn in the economy without taking any action does not make sense to me personally. Should government sit idly by for an unforeseeable amount of time while it's people suffer? If it did, no president would ever be reelected during times when the economy is in a rut. The public would be outraged and complain that the government is doing nothing to pull the economy out of the recession. People complain saying that government spending in times of recession is just a short term fix, yet they fail to offer up any long run solutions themselves. Had FDR not enacted the New Deal and then the second New Deal after that, who knows how much longer the Great Depression would have lasted. It is easy to criticize proponents for Keynesian Economics by saying they will only reference one instance where it worked, but I have failed to see them offer up any of their own supporting their claims. As I said I do not know as much as I would like to about this topic and I doubt that I know what is best for the economy, this is just the opinion that I have formulated based on the information and observations I have made thus far.
Lauren K-
In my opinion Hayek had it right, free markets should be the only force that controls the economy, all other forces will simply make a mess of things. As we have seen in the past when economies are influenced by the government using the ideals of Keynes there has been high rates of inflation and unemployment, not just occurring separately but at the same time. At that time this became a huge issue, not because of what was happening, but because there was no kind of Keynesian fiscal or monetary policy that could fix it, so this is a important flaw in Keynesian economics that led people, including myself, to favor the ideas of Hayek. Also, Hayek’s approach to letting the people controlling the economy and having prices sort themselves out seems to be a better idea because in the past when Ronald Regan and Margaret Thatcher held their respective positions both had deregulated their economies, which put their countries back on track.
Thomas T.
I support Keynes idea's of government intervention. While I do agree that sometimes government spending can do more harm then good, I believe that in times of recession it is absolutely necessary. I believe that government regulation can keep the economy balanced out, and in the long run help reduce just how bad a recession may be. On the other side I also believe that during times of economic growth, government should reduce spending to help prevent too much inflation from occurring (although if unemployment begins to go up, obviously a different policy should be undertaken). I do not believe that it is right to have someone wait for a recession to end, and to have to live through the recession with potentially cut incomes, and job loss. I do not believe Hayek's policies are necessarily "fair" to the poor, and those that may have trouble living through a recession while the economy balances itself out. Government regulation reduces the time of a recession by a fair amount, and helps the poor to come out of a difficult situation and make something of themselves. I believe that during a recession, the benefit of government spending outweighs any potential cost or drawback. Now Keynes ideas are not perfect, and Stagflation is a good example of this. But government does not have to use one economic philosophy, as we have seen in the past, with different presidents upholding their own beliefs, and I believe that while Keynes ideas are best used during a recession, perhaps during periods of things such as stagflation, other methods may be used to attempt to combat that problem. However overall, I believe that Keynes philosophy does the most good.
I support Hayek because he believes that market should run themselves instead of governments running them. Keynes believes in changing interest rates. He believes in changing them whether the government spends or saves money. To counteract Keynes ideas, Hayek believes that making the government save is a recipe for disaster because if an increase in the demand for money is not met with an increase in the supply of money then there will be deflation. If markets run themselves then they get to decide what their interest rates are therefore creating their own outcome in business.
Kelly W
I support Hayek. I think that markets should drive the economy instead of the government regulating the market. If the government were to distribute resources to the production of certain products that are demanded by the public, the private sector would have difficulty correcting itself. Government regulation of the economy could slow down the process of economic recovery after a recession because there would be less incentive for people to work. Therefore, it would take longer for the economy to return to full employment. According to Hayek's theory, the only government action that should be taken during a recession is to lower taxes and reduce spending. Lower tax rates will give people a larger disposable income and allow them to spend more money. Reduced government spending will encourage investment in the private sector. Although Keynes's policies may be effective during wartime, Hayek's policies have proved to be more effective during recessions. Both Margaret Thatcher and Ronald Reagan used Hayek's policies of deregulation in order to reduce inflation rates and bring about economic recovery.
Tyler T.
I would have to agree with the policies supported by Keynes. Although many see that government intervention interferes with the idea of a democracy, sometimes the government needs to step into the picture in order to ensure the health of our economy. Keynesian policies can be seen all the way back to the presidency of FDR and the New Deal. This government policy of a large amount of deficit spending helped America rise out of the Great Depression. The many programs that were created under the New Deal, such as the FDIC and the SSA, are still in use today and have clearly had beneficial effects. Our government has a direct impact of the health of the economy because it can help alleviate the effects of depressions or recessions. Due to increased government spending under Obama, we are slowly rising out of the recession that arose in 2009. Without the government keeping a watch over the economy, who knows how long it would take to come out of these large dips? Does sitting back and letting it fix itself really have more of a healthy impact? It seems as if the government gets the job done better. Our economy still faces many problems that only the government can fix. People of different origins, sexes, etc. are being treated differently in businesses. This large degree of segregation can only be stopped by the influence of a higher power and would clearly only continue if left unchecked. Due to the problems that still exist today and the fixes that the government has made in the past, I must side with Keynes.
Gary K
I support Keynes's theory that the government should control the economy. I believe this because the government can do so much which impacts the economy. They can change demand, change interest rates, and so much more. This was seen during the Great Depression. F.D.R did relief, recovery, and reform. Through this the economy was positively impacted. People were given jobs which were created by the government. The free market did not bring us out of the worst economic time in history. The government stimulated the economy.
Justin L
I support keynes theory for the fact that an economy will take forever healing itself, if it even can. There always has to be someone guiding the economy to make it function, without it, the economy would be in chaos. If the U.S used Hayek's theory during the great depression, I think the depression would have dragged out longer than it did because no one was supporting the economy. With the Federal reserve and the government intervention, it can change up the economy and sway it in the beliefs of the government. The government can initiate higher interests rates, greater discount rates, raise the reserve requirement and buy and/or sell bonds. All these factors affect the market and it can change the demand of the market, which can prosper the economy. So this is why I believe that keynes idea is much better. After all it has still worked today, so it has been proven effective.
I truly believe in Hayek’s economic policy. His economic view point of a free market makes the logical standpoint that any government intervention, even if it helps in the short run, will always end up hurting the economy in the long run through an unnatural increased price level. Also, Keynesian economics cannot successfully battle stagflation where there is both unemployment and inflation. Keynesian economics can only tackle one at a time. Any policy the government would take would either increase the unemployment or increase inflation. The only true action the government should take is to lower taxes and reduce spending to allow the market to correct itself naturally. Any regulation of the private sector of the economy will only further handicap the markets long run potential. Keynesian economics is the outcome of the impatient, self-centered politicians whose only thought and want is to be re-elected. When equality or redistribution of wealth is initialized into an economy, incentives to work dramatically decrease and cause the market economy to not reach its full potential. In an economy with very limited government, a fall in aggregate demand will have little or no effect on output and employment. I think that this is a hard concept for citizens of a Keynesian economy to comprehend because in our Keynesian economy, controlled by the government, a fall in aggregate demand will decrease the output. Additionally there would be no government intervention with unemployment which would take away the incentive to stay unemployed. Before I looked further into Hayek’s economic policy, I was a firm believer in minimum wage, but I believe to the fullest extent that minimum wage would not have to exist in a Hayekian economy due to the fact that the wages would move naturally with the market.
Neema P
While the Keynesian approach to a market economy can stifle growth, Hayek’s approach can cause the economy to grow rampantly. The hands-off method to the economy has the ability to disadvantage the majority of the population. It pushes people into opposite sides of the income spectrum, with most of the money staying with large businesses and their heads. An example of this is the monopolies that formed in the late nineteenth century, where a lack of wage control and government ordained working conditions left workers in a rut with no way out. The free movement of capital that Hayek’s policies allow only allows for a gap between rich and poor that is nearly impossible to fill. Proponents of Hayek’s ideas also argue that deficit spending will only make readjusting the economy after recessions all the more difficult. However, allowing an economy to be led by a volatile market without inference during downturns can also lead to a similar, if not worse, effect. The Great Depression is an example of the effects of the laissez-faire policies of the government. Once that economic bubble collapsed, with the extremely small amounts of business investment and employment, it would take a very long time for the economy to recover on its own. In certain situations like that, fiscal spending is better for the economy in the long run, despite the increase in public debt. The problem with Keynesian economics is stagflation, which deficit spending will only make worse, as seen by Carter’s policies. In situations like this, a different approach must be taken. The key is to balance both approaches and lean towards the policies that fit better with the current economic situation, which I believe in relatively stable economic times, are always the Keynesian ones.
Nick Hoffmann
I think we all know that I am a supporter of F.A Hayek's economic policy. This is probably due to the fact I am not an idiot. Although, I might be wrong being that there are such a plethora of well functioning government bureaus (The DMV, Social Security, Pan-Am).. Even Mr. Karmin, yes Mr. Karmin, cannot even fathom in his economic mind any government bureau that runs efficiently. Even if I was to play devil’s advocate there are several unbiased and irreversible flaws. One, government institutions are created based on the needs of the economic predicament. However, when they become superfluous, it is almost impossible to get rid of them. For example, let’s talk about my favorite government institution: The Post Office. Yes, when it was instituted, it was necessary and made life easier for the average American. Now, through Competition companies like UPS and FEDEX have made more affordable options for consumer that the union centered Postal Service can’t compete with. Yet, its still around hoarding tax dollars because 574,000 workers are members of unions such as The American Postal Workers Union (APWU), National Association of Letter Carriers (NALC) and the National Postal Mail Handlers Union (NPMHU) would raise hell if even threatened with the idea of disbandment. So, to conclude, it isn’t a coincidence that there are no successful government bureaus. The problem with Socialism is that sooner or later you run out of spending other people’s money
I support Hayek, the free market must be left to operate on its own without destructive government interference. The argument that the second article makes, that the current economy does not adjust itself as Hayek predicted and thus Keynes was right is totally contrived and unsupported. Hayek knew that for the economy to respond, by lowering wages and maintaining full employment levels, there must be a minimum of regulation, the current economy is heavily regulated and wages are fairly Inelastic due to union contracts, and minimum wage laws. These prevent a decrease in wages during times do decreased demand, and thus force businesses to shut down. They remove a businesses ability to weather the economic storm by removing its ability to react appropriately. The governments role is only to give the economy room to act, and to protect it from attempts at regulation. In our case, the government is the waging war upon the economy, and a weak economy is the result.
Ladies and Gentlemen; Boys and Girls! Prepare…to be AMAZED! I am writing to all of you in good health and good will in order to inform you of the madness of which was JMK. Keynes was a utopianist whom believed that the free markets weren’t to be trusted. “HA!” I say to him, “HA!” Just from that, we can see that Keynes was a hater and he just wanted government to get involved to “even the playing ground.” Let me ask all my Keynesians this: Can you please, if you are ever so kind, name 3 government agencies that are functioning efficiently? I am not asking for government run entities that are profitable, I am solely asking for ones which are running efficiently. The DMV perhaps? Or do you prefer the Post Office? How about overseas in Italy where Alitalia is staying afloat through ever increasing government subsidies? You know Alitalia is poorly managed when they manage to lose your luggage in Milan, the transfer to Palermo then on the return route they lose your luggage in Paris and New York. At least they are consistent, right? NO, WRONG. THEY SU-…work inefficiently. How about the government run oil sectors in Iran? Iran has the third largest proven reserves of petrol in the World, and yet, Iran still has to import oil from Venezuela. Wonderful, is it not? Now to CUBA! Who wouldn’t mind living in Cuba—the land where the Invisible Hand has been replaced with the dirty hands of Fidel and Raul (not racist, fyi…). Do you think the average Cuban can get what they would like at reasonable prices? Nope, I don’t. 90 miles away however, in Little Havana, Miami, the average citizen has the opportunity to do as they please in order to ameliorate their life. They do not have to count on increased government to give them work and a living. I cannot even begin to highlight all the problems with Keynesianism and if I were to, how many of you are honestly still reading?....*cricket cricket*…GREAT! I’ll continue. Keynesianism economics of increased government and public spending as well as government control of the “Commanding Heights” has been widely sought after in places with extreme poverty (i.e, India, Sub-Saharan Africa, Latin America). These places have tried to usher in a government that is benevolent and helps the people prosper. LOLZ. That never happened in the Congo or Bolivia, did it? Now, let’s observe Hayek. The prime examples? China post-Deng and the Asian Tigers. South Korea vs. North Korea. Market Economy or Command Economy. Who is the better off today?... If you had to think, you probably must also have to be smacked in the face. SMACK. Okay, good. Now that that’s over with… More people have been brought out of poverty with free markets and less government run entities. To run these “Commanding Heights” nonprofit, the taxpayers must give them handouts to stay afloat. As we’ve seen in India with the Bengal Fertilizer Company and in Iran with the nationalized oil companies, these GRE’s produce goods that are not up to market standards and thus, they are left unsought after. What happens? Massive surpluses but in an effort to keep the economy limping on, the government allows more to be produced in an effort to keep the people employed. That works well, righhhhtttttttttt… Anyway, I am a staunch opponent of Keynes and I am Hayek’s leading groupie. END RANT.
The Honorable Giuseppe. C.
Ladies and Gentlemen; Boys and Girls! Prepare…to be AMAZED! I am writing to all of you in good health and good will in order to inform you of the madness of which was JMK. Keynes was a utopianist whom believed that the free markets weren’t to be trusted. “HA!” I say to him, “HA!” Just from that, we can see that Keynes was a hater and he just wanted government to get involved to “even the playing ground.” Let me ask all my Keynesians this: Can you please, if you are ever so kind, name 3 government agencies that are functioning efficiently? I am not asking for government run entities that are profitable, I am solely asking for ones which are running efficiently. The DMV perhaps? Or do you prefer the Post Office? How about overseas in Italy where Alitalia is staying afloat through ever increasing government subsidies? You know Alitalia is poorly managed when they manage to lose your luggage in Milan, the transfer to Palermo then on the return route they lose your luggage in Paris and New York. At least they are consistent, right? NO, WRONG. THEY SU-…work inefficiently. How about the government run oil sectors in Iran? Iran has the third largest proven reserves of petrol in the World, and yet, Iran still has to import oil from Venezuela. Wonderful, is it not? Now to CUBA! Who wouldn’t mind living in Cuba—the land where the Invisible Hand has been replaced with the dirty hands of Fidel and Raul (not racist, fyi…). Do you think the average Cuban can get what they would like at reasonable prices? Nope, I don’t. 90 miles away however, in Little Havana, Miami, the average citizen has the opportunity to do as they please in order to ameliorate their life. They do not have to count on increased government to give them work and a living. I cannot even begin to highlight all the problems with Keynesianism and if I were to, how many of you are honestly still reading?....*cricket cricket*…GREAT! I’ll continue. Keynesianism economics of increased government and public spending as well as government control of the “Commanding Heights” has been widely sought after in places with extreme poverty (i.e, India, Sub-Saharan Africa, Latin America). These places have tried to usher in a government that is benevolent and helps the people prosper. LOLZ. That never happened in the Congo or Bolivia, did it? Now, let’s observe Hayek. The prime examples? China post-Deng and the Asian Tigers. South Korea vs. North Korea. Market Economy or Command Economy. Who is the better off today?... If you had to think, you probably must also have to be smacked in the face. SMACK. Okay, good. Now that that’s over with… More people have been brought out of poverty with free markets and less government run entities. To run these “Commanding Heights” nonprofit, the taxpayers must give them handouts to stay afloat. As we’ve seen in India with the Bengal Fertilizer Company and in Iran with the nationalized oil companies, these GRE’s produce goods that are not up to market standards and thus, they are left unsought after. What happens? Massive surpluses but in an effort to keep the economy limping on, the government allows more to be produced in an effort to keep the people employed. That works well, righhhhtttttttttt… Anyway, I am a staunch opponent of Keynes and I am Hayek’s leading groupie. END RANT.
Amy S.
Personally, I support Keynesian ideas over those of Hayek. While there have been times in history where less government oversight of the economy was acceptable, in today’s world people are much too greedy, and it is becoming harder and harder for myself to trust these huge businesses to police themselves. Clearly the 2008 recession proved that a policy of deregulation of the economy only helps the top earners, as there is absolutely no accountability. While government intervention does hinder growth in some spots, such as much more red tape for small businesses, it is something that is completely necessary. Additionally, as one of the above articles suggests, Hayek believed that every single industry from education to infrastructure should be privatized, with the government only setting a few basic guidelines for allowing the economy to function. In my opinion, if this idea was enacted, things would literally fall apart for the everyday person. Prices would go up dramatically, as those who own the companies would be driven only by profit, not by providing a basic service to a citizen of the United States. Also, if the government was not providing these basic services, such as education, defense, and infrastructure, there is no telling that an outside company would actually provide it. For those who complain about paying taxes, call me crazy, but I actually like receiving these services for cheaper than they would be if private companies were in control of them.
Additionally, during a recession or even a depression, the idea that people should wait for the economy to correct itself is beyond ridiculous. One cannot expect that a family who has to put food on the table can just wait for things to get better without any help. While most people today criticize the fact that the government is too big, in my opinion, if you took away the social safety net we currently have, an unimaginable amount of suffering would go on, and people would probably beg for that system to be re-enacted. I think the best example of how this idea of waiting it out has failed would be the crushing defeat of Herbert Hoover by Franklin Roosevelt. While many things have changed since the 1930s, the one thing that has remained constant would be that when the economy is doing poorly, Americans want someone to swoop in and fix it. Furthermore, had FDR not enacted the New Deal, it is impossible to know where the economy would have been by the time World War II came around. If the progress that had been made economically under FDR’s policies had not happened, I think it would have been harder for the U.S. to unite together and focus on the war effort because they would be more concerned with the domestic problems of the time. Many Hayekian economists are quick to criticize the fact that there is only one data point to the Keynesian theory, but do little to offer anything else about what they feel should have been done.
To conclude, I would say that there are still many problems with the Keynesian theory, such as what happens during stagflation and the issue of running deficits, but a government following a Keynesian policy can accomplish more than a Hayekian style because everyone prospers, rather than just the top earners. As I said earlier, it is impossible for businesses to act morally without governments looking over their shoulder as they are so driven by profits, which was illustrated so blatantly before the last recession. I do not wish for the government to control every aspect of the economy, but oversight is desperately needed in the business world. It pains me to see that so much of the American public still continues to support a policy of decreased government regulation because there is no telling how much worse off we would be without it.
“The long-run is a misleading guide to current affairs. In the long run we are all dead.”
My esteemed colleague Billy M said it best when he stated that both sides of the argument have its fair assessment in how to manage fiscal policy (or not to manage). I believe, though, that the classical approach takes an unrealistic stance when they assert that the government shall have no influence over the economy. In history, governments, for better or worse, have intervened on an economy in some fashion. One of the biggest aspects of society is government; therefore it is inevitable that government play some type of influence over an economy.
Knowing that government will assert some type of influence over the economy (allocating tax dollars, building infrastructure, etc…), it is important to note that a classical model simply would not work. Any government intervention will result in inflation, argues classical economists; however, if government intervention is even needed in the first place, other indicators are in a dire situation. We have seen the evils of deregulation: profit-motivated corporations taking advantage of consumers in order to fatten their wallets at the end of the day. Government is needed to protect the consumer. If you listen to the right-wing, you would believe that government intervention in an economy means that the government makes the decisions for the consumer; however, government allows the consumer to make decisions thanks to sensible regulation. If corporations were to run ramped, in the long run, we will be dead.
Unlike the classical model, the Keynesian model can allow for unemployment pressure to be alleviated. Influences in aggregate demand due to an increase in government spending will bring the economy back to equilibrium at full-employment. Supply-siders assume (making an ass of you and me ha ha ha) do not take into account that at low levels of employment aggregate supply is more horizontal in slope. When employment is low and the government enacts expansionary fiscal policy to stimulate employment upward pressure on inflation is not apparent.
Contrary to popular belief, government intervention in an economy does not mean socialism! With this (bold) statement Rupert Murdoch may be turning in his (soon to be) grave. The role of government is to protect its citizens. State-run institutions are not meant to be profitable, they serve as competition for the private sector. Even the most hardcore right-winger would agree that competition allows for a free market to thrive, so why can’t state-run institutions serve as a form of competition. Keynes did not want to banish the free market, he wanted to ensure that the consumers were not abused by the free market.
In a vacuum some Hayekian ideals work; supply-siders have explicit and suggestive dreams about a society with low inflation and a completely hands off government that make them giggle and swoon in their slumber (that’s why I don’t have sleepovers with Joey anymore). In reality, something that right-wingers shy away from, a completely pure and free market will result in stagnation in spending at the detriment to the consumer.
Finally, I’d like to leave you with (a political attack) insightful information. How could you possibly side with supply-siders like CASTELLI when he derives maniacal humor from hitting his beautiful American Eskimo dog in the face with his long, salad fingers.
The White Arab Says…
I am a strong supporter of Hayek. I am in favor that free markets should be the driving force behind the economy instead of having a more socialist (Obama) government in charge of regulating the market. I believe that economist Adam Smith was perhaps more correct than he had thought at the time with his concept of saying that the invisible hand is regulating the markets, without government spending or intervention. This in my own personal opinion is the correct means for a country to take in regards to their economy. Furthermore, from history we can see that it is through government regulation of the economy and its intervention that a slowing down of economic recovery does occur. As in during the presidency of Nixon, through his spending (which he knew was wrong), he had to make it look as if he was attempting to fix the economy. The common man of the US is stupid. They wouldn’t understand the concept of the invisible hand, and that markets correct themselves faster without government intervention (Hayek). Also, according to Hayek's theory, the only government action that should be taken during a recession is to lower taxes and reduce spending. Lower tax rates will give people a larger disposable income and allow them to spend more money. Reduced government spending will encourage investment in the private sector. Although, Keynes's policies may be very effective during wartime, do we want a policy that only works sometimes? Hayek's policies overall have proved to be more effective overall by clear demonstration of historical success of its use.
…honestly this whole topic comes down to pick your poison. Would you like to fail now, or later?
Amanda C
Although many people believe that the only way to truly fix the economy is to “wait it out,” this idea is unrealistic. The economy is in a dire state. Some sort of stimulus is needed in order to climb out of the recession. While many believe that the government intervention will only make the economy worse, intervention is essential in controlling this economic catastrophe. There is no time to sit back and take such a huge chance in letting free markets work out the economy. Too many people are suffering. Government intervention is needed to make changes now. The government needs to ensure that businesses are not being greedy. If the government sits back and just watches the free markets regulate the economy, it is hurting the average man. The average man makes up a majority of the country’s population. How is the government supposed to consciously sit back and watch its people suffer when they know they can make a change? Sure Keynesian economics might not account for the long run, but in the long run who knows where the country will be. We need to better our economy right now. There are too many families devastated for us to wait for it to all work out.
Anthony A.
I would consider myself a Hayek supporter because there is significant evidence to prove that less really is more. While Keynesian theory can work, it requires too much action to produce such a delayed and ineffective result. A tax cut can take an extraordinarily long time to have any significant benefit on an economy, and it has the potential to bust altogether. During a massive recession, a tax rebate and/or decrease in tax rate does not necessarily entice consumers to go spend more. There are few consumers who have a desire to up their spending in response to poor economic conditions, no matter the incentive. Government handouts will not help stimulate spending because most consumers will merely hoard the money in a bank account or anywhere but in new products. Even in economic conditions in which there are incredibly low interest rates, this is still a better alternative to purchasing a good that will depreciate from the instant it is purchased. Since inflation rates are generally much lower during recession and often remain stagnant, there is less of a loss to be suffered due to the depreciation in the value of money over time if a consumer stashes his money in a savings account or even underneath his mattress as opposed to making an investment in a good that may be obsolete by the time the economy rebounds and the rapid decrease in value suffered when inflation returns to normal rates. The only way a consumer can accumulate wealth during a recession is through investment in conservative, liquid, and fixed-income accounts to combat any sort of inflation, however low it may be.
But what about during stagflation, when the inflation rate is too high while there is very high unemployment? Keynesian policy fails to stabilize the economy. Any attempt to return to full employment sends inflation through the roof, while policy implemented to curtail obscene price rises leaves more and more people out of jobs. The only way out is to allow the market to adjust naturally. There is no reason to believe that a lassiez-faire governmental policy that can correct the most damning economic plight, the conflation of both essential economic evils, can't correct less severe conditions like recessions. Businesses dictate economic peaks and troughs now; there is no reason to stand in their way. A business that sees an increase in demand for its product will of course raise its prices to match the demand rise or even supply more, keeping prices from reaching levels that are out of hand and able to produce a decrease in demand. If demand does decrease, businesses decrease their supply in a Keynesian model, which only increases prices and has the potential to further plunge demand downward. By letting businesses keep supply relatively similar to pre-recession levels, consumers have the potential to quickly stimulate spending without any government intervention, and businesses then have the ability to supply them with enough product to meet the growing demand. This is why Hayek is right: the fluctuations of the economy are referred to as the business cycle for a reason. In a free market system where businesses are already the driving economic force, adding the not-so-invisible hand of government into the mix convolutes the direction of the economy and ultimately sends us into a perpetual standstill with the possibility of a further decline. Economic stagnation is as good as socialism - and by association death - and the fall of the capitalist system to Keynesian over-regulation will make us all, in the long run, just that: dead.
I support Hayek's theory's regarding government influence on the economy. I don't think that a government can have a mindset needed to make money, because they always have money to use if a business is being run inefficiently. This gives them no incentive to streamline an organization. That is why industries should be left alone so they can make money and provide effective service. The only time a government should provide a service is if it is essential and a private company could abusive in providing the service. The government should also refrain from bailing out companies like it did in the recession. Bailing out companies only helps create an environment where companies may fail without consequences. It is almost the same as allowing the government run businesses, because the company will gain a similar mindset to a government run business. Keynes policies can work, but it must be in circumstances where peoples mindsets are "Get more efficient or be invaded" otherwise they wont have the incentive to improve a bussiness. The government should just stay out and allow the market to rise and fall naturally, because when it falls it will pick itself up and when it rises it will grow immensley.
Caitlin JS
How much am I supposed to be writing here? I see brief paragraphs and essays all on one post! Well, I'll write till I have nothing left.
I am a supporter of Hayek; a "supply-sider" if you will. Markets should drive the economy. It definitely isn't the "animal spirits" that drive the United States economy. The only thing that drives any economy is Supply and Demand; just as it has been for centuries.
Hayek believes that when government is not there to regulate people and businesses the economy will self-adjust to fit the needs of the people. For example if a Hayekian economy suffered from a recession, like that seen in the UK of the 1970's and 80's, the lack of a minimum wage would cause employers to lower wages without laying off workers. Employers would also reduce prices in order to keep their output levels. While workers might not like it it is more intelligent to allow wages to fall with the economy and not regulate wages. Allowing wages to fall with the economy will result in a swifter recovery.
Due to the recent "downturn in the economy" the US government has been employing Keynesian ideals by extending unemployment benefits and increasing government spending, et cetera. These policies are not working fast enough, if at all, and now the politicians are hoping to try Hayek on. Politicians and citizens are chanting Hayekian principles in lieu of the economy's state and the next election. "Cut taxes, Cut spending, Cut Government." And I will be right there chanting with them.
Alexis E
I agree with Hayek's point of view. I think that although it is obviously not the most attractive ideology for people who want a quick-fix for the government, in the end it is just the better way to go. Obviously it is hard to be a leader of a country and tell the people that they're just going to have to deal with bad times until the economy works itself out, and I think that is the main reason why Hayek's ideas are not more popular. What we saw with the deregulation of the airlines is most likely a microcosm of what we would see with the entire economy- things got pretty bad at first. Jobs were lost, wages were cut, and things seemed pretty miserable. Then shortly after, things picked right back up and airlines were doing great. If we gave the economy the time to work itself out, I think it would follow suit with the airlines. Although spending worked once to fix the economy during the Great Depression, that was just one example. The line in the Keynes vs Hayek rap when Hayek points out that Keynes is basing almost a whole argument off of one data point is completely correct. There are no other large scale examples that suggest Keynes' policies would fix an economy. Obviously spending can help to fix small problems, but in general I think it should be left up to the markets to drive the economy.
Matt M.
I support the ideas of Hayek. He believed that the government should not intervene in the economy letting there be a completly free market. The market will end up fixing any problems in the long run. Hayek's ideas are based on "supply-side" economics. Supply side economics is when something like taxes will be lowered giving a consumer more purchasing power. These lower tax rates will also encourage businesses to invest more of their money driving the economy forwards. Hayek's viewpoints seem to be more effective during a more harsh time economicly. Rather than the government stepping in to try to reduce problems with unemployment and infaltion, they step aside. When the government does take action, they end up spending more money than they have, leaving the country with a deficit. If the government does not need to spend money on monetary and fiscal policies than the government will not incure debt. Businesses will be better off with Hayek's economy because it gives them a larger margin to make profit without any need of aid from the government.
Anton R.
I consider myself a supporter of Hayek's classical economic policies. Throughout history, economies driven by free markets have fared better than those driven by governments. The airline industry in the United States serves as a microcosm of this idea. When the government was regulating every last aspect of the industry, right down to the size of sandwiches that could be served, competition was suppressed, and consumer spending fell. As soon as the industry was deregulated, competition drove down prices, demand increased, and consumer spending increased. On a larger scale, during the 1970's when Nixon put regulations on wages and prices, the issue of stagflation only got worse. As soon as the economy was deregulated, it was able to find its own new equilibrium point and prosperity followed. Unfortunately, I must concede that Hayek's ideas do not lend themselves to the competitive atmosphere of politics. People do not want to hear that there is nothing to do about the recession other than ride it out. They want to feel as if their political leaders are doing everything possible to fix the situation. This is what lead Nixon to control prices and wages during the 70's even when he knew doing nothing would be better for the economy. Although It has become apparent that these regulations were too strict, the United States still has a minimum wage, which, along with labor unions, reduce the elasticity of wages. Because wages cannot fall, businesses fail rather than paying employees less during economic downturns. This makes it more difficult for the economy to recover from a recession because business investments and consumer spending will not rise as quickly. Economies which are left to find their own equilibrium tend to be more successful than those that are regulated by governments. Therefore, in order for the economy to prosper, the government needs to be kept small.
Kelly Q
Although I can agree with both economists at times, I would have to side with Keynes. Keynes believed that during times of economic depression an economy would not return to full employment without the help of the government. I believe this to be true because during these periods of recession/depression people and businesses are more reluctant to spend their money and without consumption spending there is nothing to stimulate the economy. A controlled amount of government spending is necessary to start the economy back up. Without this, it could take an extremely long time for an economy to return back to full employment, if it returns at all.
Hayek believes that, “Any regulation of the private sector, including minimum wages, environmental regulations, workplace safety laws, government pensions, unemployment benefits, welfare payments, or any other measures by government to redistribute wealth or promote equality or social welfare would reduce incentives for individuals in society to achieve their full productivity and strive to maximize their potential output.” Workplace safety laws, environmental regulations, minimum wages, etc. should definitely be regulated! If there was a chance of getting hurt by dangerous equipment when I walked into work every day, why would I go? We currently live in a world with these regulations which definitely increases my incentive to work… being without them would only reduce my incentive.
Hayek also believes that without government intervention we would be able to recover “swiftly” from a 1930’s depression. If I do remember correctly, after the Great Depression the only thing that helped us recover was government intervention. Roosevelt’s New Deal created several new programs to help citizens and the economy recover from the depression.
Clearly government intervention is a must. Without some form of help from the government the economy would take an extremely long time to repair itself. Government intervention in the economy drastically speeds up recovery. This is why I believe that Keynes has the best approach to economic policy.
Ryan G
Although I understand how hard it is for a President to support Hayek and explain to his country that he will not help their recession, I believe that Hayek’s ideas are more beneficial to society. We are a capitalistic economy and this use of government intervention restricts the free market which we pride ourselves on. There are many reasons why Hayek’s system is more beneficial than the classic Keynesian economies. First, Keynes’ economy produces debt for the econmy. Although you are supposed to make back money spent in the bust cycle in the boom cycle, this is rarely successful as governments continue to spend in order to increase the public’s confidence and also because government spending acts as negative feedback. This means that as the government forces the economy into the boom phase of the cycle, it needs to spend more to keep the economy from collapse. This results in more spending, and a buildup of debt until the economy can no longer handle the pressure and a depression occurs. Second, the Keynes model has no answer to stagflation. If the government experiences stagflation, often times it will pump money in to the economy and send inflation spiraling out of control. Many Keynesians will not see inflation as a negative aspect of the economy; however, inflation is like a drug. When you have expected inflation, and you keep increasing that expectation, money becomes worthless. This was seen in Germany after WWI which led to the rise of Hitler and the Third Reich. Lastly, Hayek’s system will reduce the booms and busts of the cycle because government spending is primarily what leads to these economic highs and lows. With Hayek’s system the economy will automatically adjust itself, so as unemployment begins to increase positive supply shocks will return unemployment to a natural rate and lower inflation. This system leads to more steady growth in comparison to the Keynesian model and should be implemented for present and future economic stability.
Gary K
I disagree with what "thewhitearab" said. I think that Keynes's policies are better for the economy even if it is seen as somewhat socialist. I think that it is okay for the government to be seen this way as long as they are helping the economy. Additionally, I very much disagree with "They wouldn’t understand the concept of the invisible hand, and that markets correct themselves faster without government intervention" Would the Great Depression have been over faster if F.D.R did not pass his new dead to stimulate the economy? I do not believe so.
Keynes was an economic genius, a man whose ideas have revolutionized the world for the better. Without him, our otherwise-unregulated markets would --
Yeah, I can't keep that up for very long. I'm a firm believer in free markets and free people, which places me solidly in the Hayek camp. Left up to its own devices, the market provides for the most efficient system with the greatest possible benefit to all involved parties. Competition lowers prices and improves quality, benefiting consumers and those companies who satisfy their needs. The capitalist system is the most efficient, as companies aren't bound to inconvenient and restrictive regulations or price controls.
Brandon suggests that busts are relatively less damaging in a Keynesian system, but he fails to consider the fact that booms are also much lower in such an economy. A more highly regulated economy might be steadier over time, but its boom times won't be as frequent or as dramatic as in a free market. Additionally, the potential of a free market economy is much higher than that of its Keynesian equivalent, so its booms and busts alike are much higher. Here's what I mean on a graph I just drew really quickly in MS Paint.
He also complained that income inequality hasn't "worked itself out" in the past 30 years since we've swung more towards Hayek. It would appear, however, that the market has worked itself out; the natural state of the market seems to be a somewhat more unequal distribution of income than Brandon and other Keynesians would prefer.
Side note: I wasn't in class yesterday and didn't know that this assignment was due last night until someone told me today.
After close analysis of Alex's intregate, substantive graph, I have been swayed.
In Response to ABarnes94:
I think we will be learning a new graph on Monday. This will almost definitely be on the AP Exam!
They really should start reimbursing me some of my $87 - or at least take me to Cincinnati in June (for the AP grading conference).
I support Hayek’s ideas that the market should drive the economy. I believe that government regulation, though proven effective in wartime situations is not the best solution to solving the economy. Though some may argue that the economy needs to be fixed quickly, and therefore favor Keynes in the idea that government intervention is needed, is only an answer for the short run. The “stimulus packages” the government is using to bail out the economy and big businesses is not allowing the private sector an opportunity to fix itself. We are given these businesses no chance to solve our economy in a free market system. By allowing our government to intervene, we are decreasing the incentive an individual has to reach their full potential. Regulations in our work place, such as unemployment benefits decreases the total output our economy could generate if no such regulations were in place. Government regulation in our economy leads to unnatural rates in wages. By decreasing government interference, we are increasing competition. Competition is good for an economy and leads workers to strive for better success and higher wages. All these things will increase output which is increasing our GDP. These are views all may not agree with, but I believe that government regulations in an economy is not the correct approach. The public may want a Keynes approach because they want to see the government they believe in, to act at times of duress. Nixon said it best when he believed in a free market, but instead used a Keynes model only for a political edge to gain voters. Government regulations may seem to fix a solution quickly in theory, but over the long run we need to allow our economy to bounce back on its own and regenerate the economy. Less government equals economic success.
Max J
I am in favor of the theories of John Maynard Keynes. Though his ideas fell through in many “capitalist” nations in the 1980s, the virtue of his ideas were correct. In times of economic hardship, government intervention is a powerful tool in a country’s arsenal. For example, after the complete and utter ruin in the United States during the Great Depression, the adoption of Keynesian style economic intervention helped to propel the country of the depression and into a country geared for war and later, peacetime. The reason such policies were so effect was due to that of the response of the feelings of consumers: security of market. With a strict government overhead dictating the macro-economy’s every motion after such a such great instability, the true movement of the economy (the individual) is granted some peace of mind to a certain degree to consume and save at their comfortable leisure. This ultimately leads to a rebound and re-stabilization of the economy that otherwise could not be guaranteed if the markets were not regulated. In all, Keynes’ theories about the mechanical nature of the economy held. For example, if you compare the economy to a living human being, many parallels can be found. On the micro level, the markets and our bodies all self regulate themselves, adjusting to new stimuli when they are introduced and reaching new equilibriums from such. However, on the macro level, there are certain things, such as food consumed, are limited and controlled for the greater well being of the body. If on the macro level, the person was able to eat all the thin mint girl scout cookies they could consume, they would get sick and the entire system from top to bottom would suffer. The cookies may be incredibly delicious, but too much will cripple them, as the other sectors of the body would not get the required nutrients and minerals required to function. This is precisely what happens with an economy. As such, I reiterate that I support the theories of John Maynard Keynes and that his virtues that remain true to this day.
Adam M
I support the ideas of Hayek because I feel that out of the two theories, Hayek's is more sustainable and is more conducive to democracy than Keynes' theory. While neither economic theory is perfect, I think that Keynesian theory is much more flawed. Many supporters of Keynes, like Tyler Terbush, say that his theory worked to perfection in World War II and during the Great Depression. While this is true, I don't think any American would prefer living in a war-time economy where most people are employed as soldiers or factory workers. Another critique I have of Keynesian theory is that it creates a problem it cannot solve: stagflation. Hayeks theory allows for more economic and personal freedom than Keynes does. I also think that there is more proof to support the superiority of Hayek's ideas, like the success of Margaret Thatcher's success in England. In addition, when the government controls tax payer money, it is done with more waste because there is a lack of economic incentive. For example, the British coal mining industry was state-run. Prices were kept low because of government subsidies,. When Margaret Thatcher became Prime Minister, she cut coal mining jobs and was able to lower taxes. This was seen as one of the many reasons England returned to prosperity under her rule. When the free markets prevail, people enjoy an unprecedented quality of life as society and technology advance.
Kelly F responding to Neema P
I have to disagree with the position that the Hayek approach can cause the economy to grow rampantly. There are always going to be limitations to any kind of growth. I do not believe that the economy is going to keep growing to the point that it is going to be ineffective. The biggest fear of a growing economy is inflation. Wasn’t it Keynes who believed that a little inflation was a good thing? Hayek’s approach is actually aimed to prevent inflation. After all, he started forming his economic opinions after seeing the ridiculous levels of hyperinflation that occurred in Germany. I also don’t know if you can say that his policies result in an enormous gap between the rich and the poor. Granted Hayek is in favor of as little government intervention as possible, however Hayek also wrote that the state has a role to play in the economy, and specifically, in creating a "safety net". He wrote, "There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.” Basically what he is saying here is that there is going to be some sort of intervention that prevents this gap. He also may have been insinuating that the economy is not responsible for this gap and that this is where the government takes responsibility for the people.
Kelly F responding to Neema P
I have to disagree with the position that the Hayek approach can cause the economy to grow rampantly. There are always going to be limitations to any kind of growth. I do not believe that the economy is going to keep growing to the point that it is going to be ineffective. The biggest fear of a growing economy is inflation. Wasn’t it Keynes who believed that a little inflation was a good thing? Hayek’s approach is actually aimed to prevent inflation. After all, he started forming his economic opinions after seeing the ridiculous levels of hyperinflation that occurred in Germany. I also don’t know if you can say that his policies result in an enormous gap between the rich and the poor. Granted Hayek is in favor of as little government intervention as possible, however Hayek also wrote that the state has a role to play in the economy, and specifically, in creating a "safety net". He wrote, "There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.” Basically what he is saying here is that there is going to be some sort of intervention that prevents this gap. He also may have been insinuating that the economy is not responsible for this gap and that this is where the government takes responsibility for the people.
Ryan G.
First of all, Alex's graph is absolute genius... I love the time and effort put forth to create such an amazing display. I do, however, agree with Alex and his graph.
As much as I respect the opinion of Tyler T, I have to completely disagree with everything he said. He uses the Great Depression as one example, but if you would like another example, Reagan using Hayek’s ideas boasted the economy in 3 years which is much shorter than anything FDR did. However, I do not think a few examples make a difference in this argument. First, the Great Depression was caused my Keynesian economics in the first place. The government was pumping money into the economy and so the economy was built up until it was forced to collapse. Also, FDR’s policies, can be argued, did not end the depression as all Keynesians would base their whole system on. The start of World War II created a war time economy, which other either economic system would boast the economy greatly. Both supply and demand increased dramatically which ended high unemployment and still kept down inflation. This would have also occurred in Hayek’s model and possibly it would not have taken as long as it did and as much money as it did.
Matt M.
I do agree with some of the viewpoints presented by Tyler T, but not all of them. He talks about the great depression. He says how the government was pumping money into the economy which helped bring the country out of a recession. This would cause a rise out of a period of deflation and a rise in inflation. The addition of all this money in the economy is only a short term solution for a growing problem. He then goes in to talking about the polocies of FDR and his programs to help with the poor economic times. Although I am in favor of the ones like FDIC to reassure people the banks won't crash again, I feel that the economy would have readjusted itslef. When Regan took office and used some of Hayek's ideas of no governemnt intervention the problems were fixed much quicker than when FDR was in office. One other point Tyler mentioned was that people were not being treated fairly under Hayek's views of economics, but in a captitalistic society not everybody is going to have equal sucess.
Thomas T.
Much like KONY2012, I believe I must jump on the bandwagon that is responding to Tyler T's post. The fact that his Initials match mine is most likely the second reason for this, but I must also support Tyler T's response since no one else is seeming to do so. I believe that the Great Depression is in fact a great example of what Keynes viewpoint can do. Government Spending does in fact pull us out of recessions, and I don't believe that inflation could become bad enough that the entire system could be seen as flawed. As Adam M. said Stagflation is in fact a problem Keynes viewpoints cannot solve (at least right now). But Stagflation has not occurred often enough for us to see it as a major problem, and I believe that in different economic situations different policies should be taken that can confront different issues. In a recession like our most recent, Obama's increased government spending has done a great job of pulling us out, and decreasing unemployment, and I believe that Hayek's theory is unfair to those that cannot make it in the economic world. Obviously critics will claim that we live in a Capitalist world, and that there is not need to worry about the unemployed or those suffering, but despite how socialist this may make me look to conservatives, I believe that morality is important in a society, yes, even a capitalist one. I also agree with Tyler T's claim that government role is important in confronting inequality in business. The sad fact is that there is inequality, even today, in the business world and out of the business world, and I believe that without government intervention in some way, this inequality would go a lot further then where it is right now. Due to various events that have occurred over the past few decades, (Like Reagan's presidency for example) the gap between the rich and the poor is bigger then ever, and things like the occupy protests are a direct response to this. The fact is, the only way to keep the majority of this population employed and happy is through government regulation, and I could not imagine a world where the United States economy functioned solely through Hayek's theory.
Anthony A.
Part 1:
I’m deciding to have some mercy on Tyler T. by bucking the current trend and will instead unconventionally say that I am in strong disagreement with my future Binghamton colleague, Alec S.
He says that government is one of the biggest aspects of any society; while I can't argue against that, there is no reason why that fact begets requisite and often omniscient intervention in economic affairs by that sovereign body. The government exerts two tools in fiscal policy, those being spending and tax alterations, and neither is particularly effective. A tax increase takes money away from consumers, while a rebate puts extra money in the pockets of consumers. While this all seems good, when speaking in recessionary terms, either option does nothing but harm. A hike in tax rate during a boom artificially creates pre-recession conditions as consumers curtail personal spending to brace for an anticipated plunge. On the other hand, a rebate, which would only occur during a recession, will go straight into a fixed-income investment or under a mattress because no one wants to spend during poor economic conditions for fear of a double dip. As you can see, both tax-related courses of action foster a hoarding of money, thus causing the velocity of money to plummet and the rest of the economy then follows suit. This sort of stagnation is deadly for any free market economy.
On the opposite side of things, an increase in spending creates jobs through public works. And who could argue with that? Be wary; it's not as utopian as it seems. While there is no denying that employment increases through government spending, the increase is artificial, as when that big bridge in the middle of somewhere barren of people and industry, such as Wisconsin, is finished, everyone is out of work indefinitely and local GDP careens violently to the ground, especially if it's not college football season. If I had the graph-drawing skills of Alex, I would demonstrate what I mean by showing that such fluctuations are in fact much more volatile than the business cycle of Hayek, which makes the Keynesians cringe with its "instability." Conversely, a decrease in spending takes away jobs, and there's no positive spin on that from the pro-government side of the argument. In essence, the government does not create meaningful change, but instead creates temporary and artificial "change" that sends the economy hurtling down when the Keynesian euphoria wears off (essentially it's like raising the debt ceiling, which will eventually drag the economy into a black hole if not corrected).
Anthony A.
Part 2:
On that note, a lessened role of government in the economic climate leaves more money available for the government to actually run surpluses and start knocking down the national debt before it gets out of hand. Corporations can run the economy just fine. Now, you may be asking yourself, "Did he really just say that?" Believe it or not, it's actually true. The business cycle as Hayek saw it is very much a stable curve. Both Alec and Billy mentioned that corporations cannot be left to their own devices to run the economy because of innate corruption, but historically, this is also false. These big businesses aren't stupid; they realize there is a certain elasticity to all goods, an essential part of how they all rose to prominence. They will not continue to raise prices until no one will buy the product because they understand that there is a point where profits can be maximized and it isn't usually at the highest marketable price. Often, a price that cuts a little into the optimal profit margin more than makes up for the lesser profit per unit sold with much higher volume of sales. Besides, corporations do have to clear their inventory in order to make sure they aren't eating too much in production costs when things inevitably become obsolete, so the more they produce and sell, the better it is for everyone.
Unfortunately, Keynesians are unable to come to grips with the fact that an economy run with the forced aid of government's not-so-clean hands is actually less stable than when markets take care of it independently. In a search for stability, those who favor government intervention as a means of doing so may very well be on the wrong side altogether.
Okay I know this is really late but I thought I'd do it anyway....
I support Hayek's theories and ideas as oppose to those of Keynes. Whereas Hayek believed in free markets with no government intervention, Keynes believed in a sort of socialism where governments should intervene in the markets. To have a working and successful economy I believe it must be done without government intervention (for the most part). Of course there may be cases where government intervention is necessary (for example: during the recent housing market crisis; or times of depression or war). However as seen over time the market, for the most part, can heal itself as it moves in cycles and can somewhat be predicted. With government intervention comes a greater debt which consequently has a reverse effect, and although the gov't "trys" to better off the economy actually makes it worse by adding to the national debt. So, I support Hayek.
A++
Craig M
I would have to disagree with Gary K’s argument that Keynes theory is better. He states his case for Keynes, based solely on the Great Depression. He thinks that Keynes ideas fixed one economic problem in our history and that because of that, it is the best theory to use in economic struggles. I would have to disagree with him, and say that government stimulating the economy is not the answer. We need to allow the economy to run its course and go into its peaks and valleys. That is why I agree with Hayeks ideas. We can’t interfere with the economy by pouring all this money in without allowing the private sector to fix itself. The great depression was one encounter of economic turmoil in our history and though government did fix this problem I still think Hayeks theories are better to fix the economy. Like I said in my post, Keynes ideas are proven to be effective during wartime, but not all the time. Despite the strong arguments for Keynes, I was not persuaded enough to switch my beliefs Keynes ideas.
Comment:
I agree that it has been shown in the past that government intervention in the economy will help stabilize unemployment or inflation, as stated by Kelly. However, this policy only works to favor the political office and not the average person. Government intervention into the economy effects unemployment by providing unnatural incentives for people to stay unemployed and not to enter back into the workforce. If you are going to be paid to “look” for a job and receive aid from the government for a while wouldn’t you take the aid with open hands? In my own opinion I do see how “A controlled amount of government spending is necessary to start the economy back up,” could be implemented into sounding correct, but government spending is not necessary. The government could ease up on business regulations to allow the market to flow freer and possibly take an action as to lower minimum wage or remove minimum wage completely in order to establish an organic economy or a more organic economy that would naturally recover if given time. The basis behind workplace safety laws, environmental regulations, and minimum wage that Kelly makes shows how she believes in Hayek’s viewpoint more than Keynes’. She states that she would not want to go into work, “if there was a chance of getting hurt by dangerous equipment.” A free market under Hayek’s viewpoint would create an economy that would regulate workplace safety itself. If a person did not want to work for a company that has hazardous conditions, then they would not work for that company or in that occupational field. Kelly also asks why she would even go to work if there was a chance of getting hurt. The answer to that is to make a living or some form of salary to pay for life’s expenses: if not her someone else would be glad to have that job in order to provide a sustainable living for themselves. There is always going to be people who would fill certain positions in a free economy. If a person was concerned about the pollution levels a company was creating then they may make an effort to boycott or limit their consumptions of the goods produced by that company. If the market dictates itself then the environmental factors would be dealt with by creating economic hardship for companies that are known to pollute excessive amounts through the boycotting of goods by consumers. If the consumers are not concerned with the environmental pollution then the company will be able to succeed in a free market. If there was no minimum wages then the costs of production would significantly decrease which could cause employers to hire more and more people and prices to generally fall. As the economy starts to grow and hire more people, it will reach a natural levels at which there are many people employed and will increase wages in the long run through this model.
Max J
Responding to Ryan G
The concepts such as booms and busts wrought by government spending controls and a lack of answer for stagflation stated by Ryan against the the ideas of Keynesian economics are completely valid. In the past 50 years in particular, the mismanagement of spending and overall economic control by governments across the world lead to horrific cycles of deep recession and crippling inflation. And, when these nations’ spending on domestic and military spending increased exponentially, a period of stagflation arised in which inflation continued to increase while the economy ceased expansion. All of this eventually culminated in the popular dethroning of Keynesian ideals and the acceptance of the ideals of Friedrich von Hayek. After this, there was much success that can be noted in the growth of economies with Hayek’s ideas at the helm. Despite the success, there are quite a few shortcoming that simply cannot be ignored. When a nation follows Hayek’s virtues exactly as he intended, one very pertinent factor is absent from thought in the economic process: the human factor. Perhaps the simplest and most complex, basic human behavior is the reason why particular Keynesian principles must be followed for economic and ultimately social success. As stated in my previous post, the economy as a whole exists much like a human as whole. Derived of many small, simple processes, the many facets of the micro-economy converge into one whole, living economy that, if not given bounds to live within (as proposed by Hayek), it will fall and take a great deal of time to return prosperity, much to the dislike of the general masses. So for the sake of the nation’s economy, social stability and sanity of the masses, the following of the ideas of Keynes will be the most beneficial for society.
I have to say Barnes is a true art visionary, a real life Picasso. But I do strongly agree as stated with my comment.
To Gary,
But since there's no way to test what could of happened, and all politicians like Obama are more concerned with a reelection and because of this would rather show something being done as opposed to waiting around and having the invisible hand do the work even when it has been proven to be more successful as during the Nixon Administration.
Ryan T
This is the first blog post, I can only hope Mr. Karmin is a believer of better late than never.
I feel that Hayek is the better choice of the two. Keynes's model states that a government should spend their way out of trouble, but offers a solution to only the simplest problems of the economy, at least in comparison to recent problems. Through negative supply shocks, it is possible to create an economy in which inflation will rise at the same time as unemployment, known as stagflation. This is a situation in which Keynesian economics does not have the answer to. On the other hand, Hayek has offered a solution to stagflation. By desocializing industries and minimizing government regulation, the economies in both America and the U.K. were able to regain lost ground. Hayek simply offers solutions to a wider variety of problems, as opposed to Keynesianism. Stagflation is the economic plague that brought down the U.S.S.R., and if it were not for Hayekism, it may have brought down us too.
Ryan T in Response to Thomas T
I’d like to take a closer look at the Great Depression that is hailed as the high point of Keynesian economics. President Herbert Hoover is often seen as the villain of the Great Depression, whose laissez-faire approach doomed the American economy. However, Herbert Hoover did attempt to intervene in the economy, adopting labor policies that many look back and say may have caused the recession of the early 30s to spiral into a depression. The Depression itself can be looked at in two ways: FDR’s revolutionary (at the time) attempt to transform the economy, and the Second World War that ultimately signaled the end of the Depression. FDR is seen as the hero of the Depression, and I’m sure any survivors of the era have nothing to say about him but praises. FDR’s fireside chats helped connect the government to the people, and ultimately raise consumer confidence in the economy. This was, in my opinion, the pinnacle of FDR’s achievements at fighting the Depression. However, despite his best efforts, his labor policies did little to roll back the Depression itself. As for the Second World War, it can be argued that the increase in spending by the government on the war dragged America out of the Depression. However, from my viewpoint, it seems as if there may have been many reasons for the end of the Depression, such as the rise of nationalistic feelings. The War took America’s mind off their own economic problems, and were replaced by the desire to win the war. While it is of no doubt that Keynesian economics is anything but exceptional, I believe that Hayekism simply covers more issues than Keynesianism does.
Kelly F responding to Neema P
I have to disagree with the position that the Hayek approach can cause the economy to grow rampantly. There are always going to be limitations to any kind of growth. I do not believe that the economy is going to keep growing to the point that it is going to be ineffective. The biggest fear of a growing economy is inflation. Wasn’t it Keynes who believed that a little inflation was a good thing? Hayek’s approach is actually aimed to prevent inflation. After all, he started forming his economic opinions after seeing the ridiculous levels of hyperinflation that occurred in Germany. I also don’t know if you can say that his policies result in an enormous gap between the rich and the poor. Granted Hayek is in favor of as little government intervention as possible, however Hayek also wrote that the state has a role to play in the economy, and specifically, in creating a "safety net". He wrote, "There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.” Basically what he is saying here is that there is going to be some sort of intervention that prevents this gap. He also may have been insinuating that the economy is not responsible for this gap and that this is where the government takes responsibility for the people.
Lauren K responding to Adam M
I agree with Adam on the fact that neither theory is 100% indestructible and has its flaws, but when comparing Hayek and Keynes’s theories, Keynes’s theory is certainly more flawed because of its limited number of solutions, such as Adam pointed out, that there’s no real solution for stagflation. Actually there’s no solution at all. Furthermore, Adam had also pointed out that Hayek’s theory has been proven to work well in society (Great Britain during the reign of Margaret Thatcher). However, like most other posts, including my own, that preach the wonders of Hayek’s theory, there has been no real mention to the fact as to why Keynes’s theory is still in operation over Hayek’s, and you would think that since Hayek’s theory worked so well before, why is it that no one seems to be enforcing it now, especially since our economy is still in slump?? Personally I think that its because people are just afraid of a change to this caliber, especially since that Keynes’s theory can work, its just that is doesn’t work well enough since it can cause economic down turns (Great Depression).
In response to Alex B.
Although I respect Alex's opinion (and his excellent graph), I would have to disagree with his analysis. He says that booms would be restricted under a Keynesian system, yet the very economic growth that led to the United States becoming a world power occurred after World War II in the 1950's, where we had a Keynesian economy. If our "Keynesian" economy limited our growth, as shown in his graph, then why did we have so many economic booms after World War II under a Keynesian economy, and why weren't the booms during Reagan's and Bush's presidencies bigger by comparison?
Alex also said, "the natural state of the market seems to be a somewhat more unequal distribution of income than Brandon and other Keynesians would prefer." However, it is not a "somewhat more unequal distribution of income," as shown by this graph (http://i.imgur.com/ApbVn.png). Although it lacks the artistic merit of Alex's graph, it shows the price (no pun intended) that Hayek's unregulated market can have on all involved, and how it would be better for an economy to be more regulated in order to avoid these drastic income inequalities that I'm sure almost no one is in favor of (except maybe Alex and the people in the top 1%).
Also, in response to some other people in general: Under a true Keynesian economy there wouldn't be the debt problem that we have now, because there would be a budget surplus in boom times which would cancel any debt caused by deficit spending during recessions or depressions. In fact, Keynes would probably be horrified by the state of the deficit and the debt we see today.
In response to Brandon:
If you look to the periods during which our economy has been at its freest, it's clear that the market performs best when its participants are able to engage in business transactions with as little restriction and interference from the government as possible (while ensuring fairness and equality of opportunity). During the presidencies of both Reagan and Bush 43, we experienced some of our greatest booms in recent memory. Both administrations oversaw contemporary all-time highs for the Dow Jones Industrial Average, S&P 500, and other economic indicators. Here's the graph of the Dow during the Reagan presidency and during the Bush 43 presidency.
With respect to Brandon's second paragraph, I'm not quite sure what he's saying. When I said, "the natural state of the market seems to be a somewhat more unequal distribution of income than Brandon and other Keynesians would prefer", I simply meant that the natural equilibrium income distribution (without many of the artificial
stabilizers put in place by the government) is clearly trending towards a "somewhat more unequal distribution of income" (which Brandon clearly seems to disapprove of). Also, while I may not consider income inequality to be as significant of a problem as Brandon believes it to be (I think the market should be the primary determinant of salary), my reasoning has nothing to do with his (false) ad hominem attacks.
In response to Alex:
One thing that you omit in your interpretation of the graphs is that while they may see "booms", they are comparable to the booms that Clinton oversaw in office. However, one cannot ignore the crashes that occurred at the end of each presidency, which really highlight how volatile a deregulated marked can be, even over the course of 8 short years. Would it be worth the risk to be in such a system when the economic growth is comparable in a Keynesian economy? Also, both eras of deregulation set themselves up for failure that ruined many people. We all know how the deregulation of banks and the repeal of the Glass-Stengal act played a huge role in our current recession. Should we really allow improper transactions like those to occur in the name of a "free market?" when they end up destroying the lives and savings of so many people in the end?
As for my second paragraph, I was showing that the "somewhat more unequal distribution of income" is drastically more unequal than what most people would prefer, not just Keynesians, and is a huge problem in a supply side/Hayek style economy like the one that you advocate for.
Tyler T
:( Thanks everyone. Well, I have a lot of people to respond to, but I think I'll just focus on Ryan G's criticism of my amazing views. I think the reason that it took so long to fix the Great Depression using Keynes' policies is that...well, it was the Great Depression. I'm sure it would have taken just as long to fix the problems using Hayek's policies. I also don't think that the Great Depression was solely the result of Keynesian economics. It was also caused by the bank failures and the consumer's decrease in spending. You have acknowledged that Keynesian economics were in place when the economy was boosted during WWII, and I thank you for making me look better. But, when you say that it could have worked under Hayek's system, you're just basing your argument off of false hopes and dreams. Good day to you sir.
Jenna P.
I agree with Kelly F because she makes a good point to Hayek's argument. "There will always be supply and demand". No matter how high the interest rates are, there are still going to be a demand for that product or service. Government interference will only cause more trouble considering they don't know exactly what will happen in the market. People's demand changes based on their tastes...Not what the government wants. Letting markets rules themselves will create a stable economy in itself. For example, if a shoe company is not doing well then they can decide whether to take action or leave it be. While if the government stepped in, then the shoe company has no choice but to do what the government wants them to do. All in all, most people are happier if they can rule their life, or markets, on their own without having a bigger power tell them what they should and should not do.
In response to the 99% (the parallel universe in AP Economics where everyone is a Classical Economist).
I truly wish that the economy were a simple math equation, where simple algebra rules lead to finding X. The very nature of economic politics would subside if there were actual “solutions” to the economy. Keeping up with the math analogy, think of Keynesian and Classical economics in this perspective: each method can be used to solve for X in the equation, but using one method may be detrimental in the long-term. Everyone knows that there are always a million ways to solve math problems—think of the Keynesian method as the conventional, quick, and most useful scheme while the Classical method is the dragged out and tedious system to solving the problem.
Economics is still not that simple. Note the difference between politics and government and politics’ effect on government. Politics is an expensive game while government’s purpose is to protect its citizens. I wish there was a way to keep money out of politics so that the free market would thrive and the needs and wants of the consumer and worker are met. This is not the case. Something that Classical advocates do not understand is that when given tax breaks, in reality, corporations do not spend more. The extra “profit” in a tax break is exactly that, profit. Profit is put into the pockets of business owners where that money will be carried down through generations for the sole purpose of economic security, and not for spending. The only place this percentage of extra profit is going is back into the pockets of politics who devise corporation friendly legislation so that these big businesses can make more money and hire less workers.
Do not take me wrong, I love that corporations and businesses in the United States are making astronomical profits; however, I would love to see these extra profits being invested in new capital, rather than sit in the pockets of these business owners.
Its amazing how a 2 hour movie can completely warp everybody's economic beliefs. Over the break, I happened to catch Iron Lady, the academy award winning portrayal of Margaret Thatcher. I highly recommend it, as it pairs well with Commanding Heights. Actually, It visualizes the conversation Mr. Karmin and I were having before break. Regardless of the overall benefits of privatizing sectors of the economy, it is extremely difficult to sell that to the public. People don't want to hear that the economy will contract for 3 years, even if that will produce future prosperity. In response to Billy, the housing collapse of 2008 was not an effect of un-regulated capitalism. Yes, the banks were making a tidy profit and misleading borrowers; however, this was largely due to the Government passing legislation to force banks to approve mortgages for people with sub-prime credit. So, the 08' crisis was more a matter of superfluous government involvement, than an unregulated economy.
May I remind everyone that there was brasically no regulation towards the end of the Bush years...
Caitlin JS commenting on Amanda C.
By the way, I like how no one commented on mine :D Next time I will put in enough evidence to annoy someone. Which will make them comment MWAHAHAHA!!! :D
By today's standards it is completely irrational to try and use the government to speed economic recovery. A government stimulus package for the economy is like trying to sober up with a hot shower and coffee - it just doesn't work. Give it time and everything will work out. It might stink, but eventually the hangover, and the headaches that come with it will be gone. I also believe that it is not the government's job to try and upstart the economy to lift Americans out of bad times. Citizens would not be out of work if there was no minimum wage. If there was no minimum wage prospective employees would work for lower prices and the market would self-adjust. If the wages are lower eventually the price of living will decrease and the economy will begin to heal itself.
One of Hayek's main points is that the government cannot provide a band-aid for a "hurting economy". The only thing to cure a recession, or a hangover, is time.
basically*
I support a Hayek model because over time the market should adjust to fulfill the demands of the people. However, in a democracy such as that which exists in the United States it is unreasonable to expect a Hayek model to be implemented. People are self interested and will use their elected representatives to achieve whatever agenda they believe will help them and improve their fiscal situation. Additionally, so long as there are labor unions and fiscal liberals there will never be full deregulation of the economy. People will not want to lose their buying power. Therefore we must accept Keynsian economics by default and form a command economy which attempts to create the best situation for all.
Justin
In reply to erik H
Yes I do agree that he made, first of "The more the government interferes with markets, the higher the national debt will climb." This is very true but however, it can go both ways. It can make the national debt decrease as well by lessening the tax rate, less money in circulation, etc. Overall, they both have great theories but I still have to agree with Keynes because it does still work after all these years.
In response to Castelli
I’m going to surprise him and say I actually do agree with him. I believe he correct with his assessment that when the government runs something it tends to be inefficient. The government isn’t going to give people incentive to work hard, because they only give incentives to be corrupt. In addition his example of China after Deng reformed the economy is a great way to show how a free market economy works better then a command economy. After the reforms China’s GDP more than quadrupled while India’s GDP which had been on the same pace as China’s before the reforms has only now doubled after 30 years.
I am a strong supporter of Hayek because economy is fueled by the demand of the people. The government can pump money into corporations to try to create jobs, but ultimately, if the demand for the goods or services of these corporations isn’t there, you have a waste of money and a surplus of product. We saw this with Solyndra. The government gave money to this company to drive people to use solar energy. The company used this money to create a massive manufacturing plant to create more solar panels. What happened? No one wanted them. So Solyndra went bankrupt and laid off over a thousand employees. So much for creating jobs. We could make people build roads and bridges that we don’t need, but that won’t help our economy, just like it didn’t back in the 30’s (it was the war that got us out of the depression, not the government’s deficit spending).
What I mean to say is that demand must come from the bottom up. If the government gave tax cuts to the people instead of big businesses, people would have more money to spend and would create demand. More demand would require more supply, which would require more labor. When more people are employed, more people have more money, and the cycle continues. People drive the economy, so the government needs to back off a little bit and let the people do their thing.
I agree with Matt M. that cutting taxes is a strong solution.
Kelly Q, I agree that people will be reluctant to spend during a recession because they have less money, but that doesn’t mean that the government should step in. We need those people to spend money, so we address this problem by cutting taxes to give them more money to spend. Like I said before, the economy works from the bottom up, so when people spend more, the businesses must supply more and hire more people. Yes, workplaces should be safe and comfortable, but people aren’t unemployed because their machines are dangerous. They’re unemployed because the business can’t afford their labor. Once the economy picks up on its own, these companies will have the money to make whatever changes they want—especially because, with more available jobs, companies will have to try to avoid losing employees to other companies with better workplaces.
In response to Caitlin:
If people were in fact willing to adopt a neo-classical economic model then you're right--in the long run the economy would likely be more robust. People are more self interested than they are rational, and as long as Western society remains democratic, a command economy will prevail. Citizens want to see their government improve their economy in the short run so that they can maintain their standards of living. Therefore it is unreasonable to expect a Hayek economy to ever function properly. Unions would collectivize and challenge the new economic policies--as of right now only 11 percent of Americans belong to unions, this number will almost definitely rise as workers begin to feel helpless as their standards of living fall--politicians would quickly be forced to revert back to a Keynesian economic model. A neo-classical economic model would not survive in this country during this day in age. Hayek is right--the economy isn't a machine, it's organic. Therefore the government must utilize policies that help the most people maintain their standards of living.
Anthony A.
In response to Alec S:
I completely agree with you that there is no simple remedy for the economy, akin to a math problem, but the government policy that Keynes favored is the closest thing to this impossibility. Keynesians are proponents of a "quick fix" facilitated by the government, and often, in all aspects of life, the quickest way to an end isn't the best way. Taking action just for the sake of taking action, much like Nixon did during his presidency when stagflation hit, will backfire more often than not. He knew that the government has no place in economic affairs but had to take action for political reasons. Usually, a more prolonged method is needed to solve something, and Hayek's "dragged out and tedious" but ultimately successful system is just that.
I thank you for defeating your own argument in your second paragraph when you speak about how corporations pocket tax rebates given by the government. As I said in my previous posts, people do the exact same thing. When consumers receive a tax break, especially during recessions, they will just pocket the money the same way. Corporations hoarding money is not nearly as serious of a problem as when consumers do it. The business cycle starts with the consumer; more spending boosts the economy while less spending hurts it. The entire free market system relies on consumer spending. When consumers spend more, businesses profit more and demand increases as consumers want to buy more of everything. Corporations then have to meet this demand by increasing their production, which requires more factors of production, perhaps the most important being labor. To increase labor, more employees must be hired. In essence, corporations don't have to spend money from tax breaks to expand production and hire more workers because the market system naturally demands it of them. Whether they use revenue or tax rebates is their choice.
As Nick mentioned, in the example of the housing crisis, a government measure caused the downfall of the housing market. Although there may not have been much fiscal policy imposed during the Bush years, as you discussed, legislation requiring the approval of mortgages for people with sub-prime credit is most certainly a government action. This shows how long the arm of the law really has become from an economic perspective as the government itself goaded financial institutions into buying and selling defaulting loans that ultimately crashed the entire housing market and costs millions their jobs. The housing market still hasn't recovered and many are still jobless, electing to remain as such due to recent alterations to the unemployment benefits system that pays better and longer than any available job would. Keynesian economics do nothing more than knock down the economy and kick it while it's on the ground when the real solution is time.
Nick E
I support Hayek's theory of economics. Government intervention can often inhibit the growth of an economy. The market should be run by the demands of the people because it will change accordingly without having the government to try and influence it. Government intervention, such as controlled prices or wages, only leads to decreased consumer spending and can actually harm the economy more than it would help it. Also, government spending could potentially boost the economy but only for a limited time, as eventually it will begin to accumulate in deficit. Keynes' theory supports increasing aggregate demand through government spending, as in war time for example, but this will only lead to a huge deficit that the people of any economy would struggle to pay off. Deregulating businesses and the economy as a whole would allow for a freer market that would promote growth and prosperity.
I do have to agree with Kelly Q, however, that government programs and Keynes' ideas have helped failing economies through difficult times. FDR's New Deal is an excellent example of a government plan that helped boost an economy and get it back on its feet. I understand that this almost contradicts what I just said about government intervention being harmful, but when done right the increased government spending can do well. I think, however, that in the long-run an economy by Hayek's ideals would do better.
Billy M
In response to a lot of people...I don't see how naming various government agencies that you feel don't operate efficiently provides any support to your argument against Keynesian economics. While your intended point that you feel government sucks is clear, I fail to see the correlation between the efficiency of the postal service and the possible effectiveness of any legislative action taken by congress concerning the economy.
BillyGoatMcGrann,
While I don't appreciate the passive-aggresive, subversive, super secretive, submarine, U-Boat, swipe at me, I shall tell you what the Post Office tells us about government. Keynesians, in their traditional form, believed that government should have a large presence in the government. In India, for example, the Keynesians believed in taking the Commanding Heights and putting them under government control. The result? Ha ha ha... Keynesians, in the Classical Sense, believe in removing the Invisible Hand in order to save the consumer. Do you accept that? And when the government takes control of such enormous projects (like issuing 16 year old girls and boys driving permits), the bureaucratic red-tape leads to inefficiencies building up in the system. It stacks (on stacks on stacccckkkkss...) and eventually, you have an economy going down the government subsidized toilet.
And also, as we see with Nixon and fdr (purposely lower case...BOOM SHAKA LAKA), utilizing Keynesian economics is what the vast majority of Americans wanted at the time. What happened after Nixon? He set the stage for jimbo carter after Nixon's GF came in...(purposely lower cased...BOOM jimbo, BOOM). People in general are too fickle to wait the markets out and government seems to provide the answers while the market regulates itself.
Alecsander the Not-So-Great,
The Indian Keynesians actually did create an equation, not nearly as many pages as Obamacare though,and they thought they had the economy on its way to modernization. Needless to say, it did not work. They also tried Keynesian Economics in Africa, South America, and East/Southeast Asia. Tell me how your economist's "plan" worked out there...
Time and time again Hayek's ideas have advanced economies whereas Keynes' ideas are used to the justify fdr's (not going to capitalize him either, BOOM SHAKA LAKA) Alphabet Soup. Keynes was used to justify 15 years of hard times. Hayek? His policies are what have driven economies for "15's" of years!
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