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John Maynard Keynes vs. Friedrich A. Hayek – Implementation of their theories in France and Germany

John Maynard Keynes vs. Friedrich A. Hayek – Implementation of their theories in France and Germany

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Published by André Feldhof
This paper gives an overview over the academic debate between John Maynard Keynes and Friedrich A. Hayek. It presents their main thoughts and then applies these thoughts to the development of economic policy in France and Germany between 1945 and 1992.
This paper gives an overview over the academic debate between John Maynard Keynes and Friedrich A. Hayek. It presents their main thoughts and then applies these thoughts to the development of economic policy in France and Germany between 1945 and 1992.

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Published by: André Feldhof on Mar 27, 2012
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John Maynard Keynes vs. Friedrich A. Hayek  – Implementation of their theories in France andGermany
André Feldhof State, Market and SocietyCourse Paper, Final DraftCourse Convenor: Dr. Albena AzmanovaDate: 6 December 2012
 
The clash of ideas between John Maynard Keynes and Friedrich A. Hayek canwithout doubt be called the economic struggle of the 20
th
century. Although botheconomists knew and appreciated each other, they were fierce in the way they soughtto invalidate each other’s economic theories. The “revolution” that Keynes unleashedin economic thinking in the 1930s has been implemented by many governmentsaround the world during the Great Depression of the 1930s and during and after thesecond World War (Fletcher, 1987, pp. XVIIf). In turn, after the collapse of theBretton Woods system of which Keynes was a founding father, Friedrich A. Hayek’sideas became prevalent in many governments. The British Prime Minister MargarethThatcher, in office from 1979-1990, is reputed to have banged Hayek’s publication“The Constitution of Liberty” on the table at a party meeting, saying “This is what we believe!” (Tebble, 2010, p. 131).The struggle of ideas between Keynesian and Hayekian has also divided political decision-making in the European Union. Differences are particularlynoticeable in the economic policy preferences of France and Germany, the two mostimportant economic actors in the European Union. To understand, how a commonEuropean monetary and fiscal policy can come about, it is first important tounderstand what reasons have led France and Germany to follow the Keynesian andthe Hayekian approach in their economic policies. This paper consequently discussesthe fundamental tenets of Keynes’s and Hayek’s economic theories, and analyzes towhat degree these policies have been implemented by France and Germany in the period from 1955 until the signature of the Maastricht treaty in 1992.To do so, the paper is structured in four parts. The first part presents the maintenets of the Keynesian revolution as far as they are relevant for the Europeaneconomy. The second part contrasts these findings with the tenets of the Hayekianschool of thought. In the third part, both economic models are applied to the exampleof French economic policy from 1955-1992 while the fourth part is devoted to ananalysis of German economic policy from 1955-1992. In following, the author concludes and gives a few remarks about the perspective for a common Europeanmonetary and fiscal policy.
 
1. The Keynesian RevolutionJohn Maynard Keynes wrote his Treatise on Money and his General Theory under theimpact of the Great Depression in Europe in 1936 (Skidelsky, 2009, pp. 64ff). Theworld economy had severely contracted; unemployment was sharply on the rise, notonly in the United States but also in Europe, and money supply had collapsed (p. 68).Hence, the fundamental question that Keynes sought to answer with his theory washow to lift an ailing economy out of a slump and back to full employment. Neo-classical economists before Keynes had turned to Say’s Law for aresponse. Jean-Baptiste Say had postulated that money did not have an intrinsic value;it was a means of exchange which, after an economic transaction, would beexchanged for a new good as soon as possible for fear of sudden depreciation (Grant& Brue, 2007, pp. 130f). In other words, every economic transaction and thereby, the production of every single good, would directly engender a corresponding demand for other goods (ibid.). Keynes (1936) inferred that, if this were to be true, there wouldalways be demand for products and therefore a demand for labour (p. 26). If it weretrue, involuntary unemployment could not occur (ibid.).Keynes refuted Say’s Law however on the premise that money was not only ameans of exchange but also a store of value (Fletcher, 1987, p. 18). The moreindividuals decided to hold money in cash (or in “liquidity”) for various reasons
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, theless money was available in the banks that could have been given out to entrepreneursas a loan to stimulate investment (Skidelsky, 2008, p. 94). At the same time,entrepreneurs could not be certain how much of their liquidity individuals would bewilling to spend on consumption goods, so that they had little indication of how muchto produce without losing money (ibid.). This is where Keynes’s model starts. Toreduce uncertainty, to boost investment and to achieve full employment, he noted, itshould be the government’s role to spur demand for consumption and investmentgoods (Skidelsky, 2008, pp. 166f; p. 176). This would prompt entrepreneurs to investmoney and to create jobs. Keynes (1936) identified the level of income as the primedeterminant for people’s propensity to consume (pp. 90f) and concluded that a policywhich increased people’s net income would also induce them to spend more and to
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Motives for holding liquidity can be to have a means of transaction for a purchase, to keep liquidity safe in theexpectancy of a bank run or to speculate (Fletcher, 1987, pp. 101ff; Grant & Brue, 2007, p. 436).

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