There’s a long, ongoing battle between so-called Keynesian economists, who follow the writings of John Maynard Keynes [1], and those of the Austrian school, which was exemplified by Friedrich von Hayek [2].
- Keynes believed Governments and central banks can and should intervene to stave off the worst excesses of the economic cycle [3] in capitalist societies
- Hayek wasn’t Keynes alter-ego exactly, but he was a full-on proponent of free markets and liberalism. Essentially he believed that meddling made things worse.
Over the past two years, what was a nerdy debate has taken center-stage, as Keynes and Hayek’s different theories have been put forward as the best guide to the financial crisis.
Overwhelmingly, the Keynesians have won the day – partly because his interventionist stance fits with a politician’s desire to be seen ‘doing something’.
But as this amusing Keynes Vs Hayek rap shows, there’s two sides to the story.
Only time will tell if the world has taken the right approach.
While I’m probably a Keynesian at heart, I’d be the first to point out that as well as supporting the economy through a downturn, his theory implies Government should make savings and cutbacks when business is booming [4].
That’s a far cry from the profligate spending we saw here in the UK in the recent good times – and Government borrowing [5] was creeping up for decades before then, too.
As for Hayek’s theories, this Wikipedia entry [2] gives a good idea of how far up the creek he’d think we were today, if you consider what’s happened over the past 18 months:
Hayek explained the origin of the business cycle in terms of central bank credit expansion and its transmission over time in terms of capital misallocation caused by artificially low interest rates.
Hayek claimed that: The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.
In accordance with arguments outlined in his essay The Use of Knowledge in Society, he argued that a monopolistic governmental agency like a central bank can neither possess the relevant information which should govern supply of money, nor have the ability to use it correctly.
He must be turning in his grave.
Trivia fans! Amaze your friends by letting them know that Keynes and Hayek were contemporaries at the London School of Economics!