Economics HW: Friedrich Hayek VS John Maynard Keynes

Friedrich Hayek and John Maynard Keynes were both respected economists with opposing
economic beliefs.
Keynes Thought that “capitalism was brilliant but left to its own devices, it could go seriously
wrong. It was up to the government to step in and get the economy on track’. Whereas Hayek
believed “the free market should be freer than any government has dares to allowed it to be it to
be. And that politicians should step back from trying to manage capitalism ups and down, they
should simply set it free”.
An example of Keynes theory in practice was when America invested in a vast program of
government funded projects to put armies of jobless to work, with Hoover dam being the most
iconic of its era. This is because it was the biggest construction project of its time in the world. This
led to individual having more money to spend in their local market and the 165 million investments
produced billion in economic growth as it also served the purpose of providing electricity for huge
swathe of the country. This example shows oh during a recession, government spending can also
incentivise private spending and investment too, AKA the multiplier.
Another example as to when his theory was proves correct was Pirelli obtaining a 2-million-pound
grant by the government to use on research and development. This is important as it prevented the
firm to move out of the UK, to cut costs, allowing around 750 workers to still be employed today.
This has worked because the grant had helped increase the confidence to spend wages, thus
increasing individuals’ marginal propensity to consume. This was then further amplified by the
multiplier effect. Hence demonstrating how government spending could get economies back on
track as if they had not intervened, a direct 750 would be unemployed and more would be
indirectly. Which would in effect lower local’s animal spirits and overall decrease economic activity.
However, many critics of Keynes stated that it was mistakes by the government that really made
situations worse. However, many critics of Keynes stated that it was mistakes by the government
that really made situations worse and an example of when Keynes theory was not suitable, was
when he didn’t have an answer to the 1970s inflation.
This is where Hayek’s economic theory comes into play where he strongly believed that the
government should not intervene in the free market. An example of when hi model proved true,
was in January 2001 when the American federal bank cut interest rates to increase aggregate
demand as it made it cheaper for individuals and producers to borrow and incentivised them to
make larger purchase than they otherwise would have, such as a house. Many at the time,
including the president of America, thought this was logical and rational, however Hayek disagreed
and believed that the federal bank had severalty blundered. To which they had since it made the
housing market very volatile and unstable. Hence proving the notion that it was government
intervention that led to this to the not so socially optimal outcome. As, if interest rate were left to
the free market, they would be higher.
Another instance where his theory was proven true was during Austria’s time of hyperinflation,
where their government decided to print more money to reduces there mountain of debt. This was
a big maitake as by the summer of 1922, locals saw prices doubling every month. This happened
because printing more money degraded the value of existing money as it had become less scarce
and thus held less value.

Overall, both economists where well respected during their times and even today. With Keynes
believing that government spending in vital for a functioning economy as it incentives investment
from private firms as well and contributes to the multiplier effect. Whereas Hayek thought the
opposite, that a government should not intervene in a free market, as seen with the inflation in
Austria where government intervention wreaked absolute havoc on the price mechanism of their
market. However, both arguments are not perfect and have their shortcomings.