Hayek v.

Keynes

Dr. Robert Kovacev

 Friedrich August von Hayek
Born: 8 May 1899; Vienna
Died: 23 March 1992; Freiberg, Germany

University of Vienna
PhDs: Law and Political Science

Philosophy: Economic Liberalism

(Libertarian)

Austrian School of Economics and

Influenced the Chicago School of
Economics

Nobel Prize in Economic Sciences (1974)

Presidential Medal of Freedom (1991)

The Road to Serfdom (1944)

 Followers Hayek Influenced
 Milton Friedman *
 Ronald Reagan
 Margaret Thatcher
 Intellectuals behind the Iron Curtain
 Hayek’s books encouraged Soviet Union/Eastern Europe independence
 Henry Hazlitt *
 Ayn Rand *
 Republican Party conservative movement
 Tea Party

* In Recommended Reading List

 Hayek Philosophical Concepts
 The business cycle results from the central bank’s inflationary
credit expansion and its transmission over time, leading to a
capital misallocation caused by artificially low interest rates.
 A monopolistic governmental agency like a central bank can
neither possess the relevant information which should govern the
supply of money, nor have the ability to use it correctly.
 Unemployment and idle resources are the result of a previous,
unsustainable episode of easy money and artificially low interest
rates.
 Instability of the market economy is the consequence of the
exclusion of the most important regulator or the market
mechanism, money, from itself being regulated by the market
process.
 Hayek Philosophical Concepts (2)
 Rather than a government-mandated gold standard, a free market
economy should be allowed to develop with issuers of money
competing with each other to produce the best, most stable, and
healthy currency.
 The free price system is not a conscious invention intentionally
designed by man, but is a spontaneous order . . . the result of
human action but not of human design.
 Price signals are the only means enabling each economic decision
maker to communicate tacit knowledge or dispersed knowledge to
each other.
 The central role of the state should be to maintain the rule of law
with as little arbitrary intervention as possible. However the state
does have a role to play in the economy in creating a ‘safety net’.
 Hayek Philosophical Concepts (3)
 Socialism requires central economic planning and such planning
in turn leads towards totalitarianism. A central planning authority
would have to be endowed with powers that would impact and
ultimately control social life, because knowledge required for
central planning of an economy is inherently decentralized and
would need to be brought under control.
 In centrally planned economies, a select group of individuals must
determine the distribution of resources, and these planners will
never have enough information to carry out this allocation reliably.
The efficient exchange and use of resources can only be
maintained through the price mechanism in free markets.
 John Maynard Keynes
Born: 5 June 1883; Cambridge, England
Died: 21 April 1946; E. Sussex, England

Kings College, Cambridge

BA: Mathematics and some grad school

Philosophy: Modern Social Liberalism

Keynesian School of Economics

Companion Order of the Bath (1917)

Officer of the Belgian Order of
Leopold(1919)

General Theory of Employment, Interest,

and Money (1936)
 Followers Keynes Influenced
 Franklin D. Roosevelt
 Paul Samuelson
 Franco Modigliani
 John Galbraith *
 Paul Krugman
 Robert Reich
 Robert Shiller *
 Zhou Xiaochuan (Peoples Bank of China)
 Democratic Party liberal factions
 Barak Obama Administration?

* In Recommended Reading List

 Important Events
 Fought unsuccessfully against setting WWI reparation payments
extremely high because that would traumatize innocent German
people, damage Germany’s ability to pay and buy exports from
other countries, thus hurting not just the German economy but
that of the wider world.
 Led the British delegation to Bretton Woods (1944) and proposed
the Keynes Plan
 International Clearing Union for managing the world currency system
 World central bank
 Common world currency – the Bancor
 Keynes Philosophical Concepts
 Fought against setting WWI reparation payments extremely high
because that would traumatize innocent German people, damage
Germany’s ability to pay and buy exports from other countries, thus
hurting not just the German economy but that of the wider world.
 Countries should target stability of domestic prices, avoiding
deflation even at the cost of allowing the currency to depreciate.
 High unemployment should be countered by: Government
depreciating currency to boost jobs by making exports more
affordable, creating jobs by government spending on public
works(activist economic policy), and ending the gold standard.
 Price stickiness is caused by workers refusing to lower their wage
demands even in cases where it may be economically rational for
them to do so.
 Keynes Philosophical Concepts (2)
 Demand, not supply, is the key variable governing the overall
level of economic activity.
 Aggregate demand, the sum of consumption and investment, is
the total un-hoarded income in a society.
 Excessively high interest rates will cause the amount of money
being saved to exceed the amount being invested, which in turn
causes unemployment to rise. This results from people not
wanting to spend a high proportion of the money the employers
pay out (hoarding), thus making it difficult in aggregate for
employers to make a profit.
 Keynes Philosophical Concepts (3)
 In a state of unemployment and unused production capacity, one
can only enhance employment and total income by first
increasing expenditures for either consumption or investment.
 Without government intervention to increase expenditure , an
economy can remain trapped in a low employment equilibrium.
 Keynes v. Hayek
 1941 to 1979 – Keynes Ascendent
 WWII spending pulled the U.S. out of the Great Depression
 1979 to 1999 – Hayek: Monetarism and Neo Classical
 Hyper-inflation and Fed dominance
 1999 to 2007 – Keynesian Counter Currents
 Asian Financial Crisis, 9-11 Attacks, Mideast wars, and Dot Com Bust
 2008 to 2009 – Keynesian Revival

2012 Election
 Financial Melt-Down and Great Recession

2008 Crash
 2012 and Beyond
 2012 Election: The ultimate Keynes v. Hayek Battle

Keynes Hayek Tran K ???

FDR Truman Eisenhwr JFK/LBJ/RN/GF Carter GB/Clinton sition
Bush Obama
Reagan ???
1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s