Keynes vs. Hayek

Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Hayek’s thought, which he expressed as early as 1958, is now accepted by mainstream economists

Hayek's beliefs about Keynes...

Keynes’s Early Life

•Born in Cambridge, England, 1883

•First of three children born to John Neville

Keynes, an economist, and Florence Ada

Keynes, a social reformer

•Originally wanted to go into philosophy but

later decided towards economics

•Received a BA in mathematics from King's

College, Cambridge in 1905

Views On...

Keynes's Theories

Keynes's Career

The New Deal

•Keynes provided the basis for Roosevelt's "New Deal"

The Treaty of Versailles

•Government spending to jump-start the economy (e.g. Hoover Dam)

•Peace treaty at the end of WWI that required Germany to accept responsibility for causing the war

•Keynes disagreed with the treaty and thought the most Germany should pay should be limited to £2,000 million otherwise hyperinflation would ensue

•Spending on projects that employed people, lowering unemployment and increasing consumer spending

•Resigned from the conference and consequently wrote The Economic Consequences of the Peace

•Free market will fail without intervention

•In the short run, economic output is strongly influenced by aggregate demand

•Underconsumption theory of unemployment: lack of demand

•Creation of demand through government stimulus and reduced interest rates

•Began work for the British treasury

when World War I started

•Appointed financial rep for Britain to

the 1919 Versailles peace conference

•Resigned because he did not agree

with the Treaty of Versailles

•Published many books, continued

to teach at Cambridge, and wrote for

various newspapers and magazines

•Many adopted his policies during The

Great Depression

•Led the British delegation in the Bretton Woods conference

•Compromise with Americans led to creation of World Bank and International Monetary Fund

•Lead the way to fixed exchange rate system

•Encouraged a world bank

•Proposed a world bank and currency

Bretton Woods

What causes the market to fail?

vs.

Sponatenous Order

• The market is was a spontaneous order

• By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions.

• But the market does not work perfectly. What causes the market, asked Hayek, to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?

Hayek

Keynes

Hayek Theories

• the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible

• In his popular book, The Road to Serfdom (1944) and in subsequent academic works, Hayek argued that socialism required central economic planning and that such planning in turn leads towards totalitarianism.

Top Ten Economists

10. John Locke 9. David Ricardo 8. Irving Fisher 7. Joseph Schumpeter

6. Friedrich A. Hayek 5. Alan Greenspan 4. Milton Friedman

3. Karl Marx 2. John M. Keynes

1. Adam Smith

David Cameron, Prime Minister

Sources

Current Politicians and Their Views

Barack Obama, US President

BBC. (2013). John Maynard Keynes (1883 - 1946). Retrieved from BBC: http://www.bbc.co.uk/history/historic_figures/keynes_john_maynard.shtml

Booth, A. (2012, December 3). Marx, Keynes, Hayek and the Crisis of Capitalism - Part two. Retrieved from In Defence of Marxism: http://www.marxist.com/marx-keynes-hayek-and-the-crisis-of-capitalism-part-two.htm

Flanders, S. (2012, September 17). Masters of money: John Maynard Keynes. Retrieved from BBC News: http://www.bbc.co.uk/news/business-19620971

Liberty Fund, Inc. (2008). John Maynard Keynes. Retrieved from The Concise Encyclopedia of Economics: http://www.econlib.org/library/Enc/bios/Keynes.html

Spartacus Educational Publishers Ltd. (2013). John Maynard Keynes. Retrieved from Spartacus Educational: http://www.spartacus.schoolnet.co.uk/TUkeynes.htm

Questions?

The General Theory of

Employment, Interest

and Money

Keynes

underconsumption

government

intervention

spontaneous order

Hayek

?

free market

The Road to Serfdom