Hayek vs Keynes
Hayek economic theory and Keynesian economic theory are both schools of thought that employ different approaches to defining economic concepts. Hayek economics was founded by famous economist Friedrich August von Hayek. Keynesian economics was founded by economist John Maynard Keynes. The two schools of economic theory are quite different to each other, and the following article provides a clear outline of what each school of thought is, and how they differ to each other.
What is Keynesian economics?
Keynesian economics was developed by British economist John Maynard Keynes. According to Keynes economic theory, higher government expenditure and low taxation result in increased demand for goods and services. This, in turn, can help the country achieve optimal economic performance, and help any economic recession. Keynesian economics harbors the thought that government intervention is essential for the economy to succeed, and it believes that the economic activity is influenced heavily by the decisions made by both the private and the public sector. Keynesian economics places government spending to be the most important in stimulating economic activity; so much so that, even if there was no public spending on goods and services or business investments, the theory states that government spending should be able to spur economic growth.
What is Hayek economics?
Hayek’s theory of economics evolved around Austrian theory of business cycles, capital and monetary theory. According to Hayek, the main concern for an economy is the manner in which human actions are coordinated. He argued that markets are unplanned and spontaneous in that markets evolved around human actions and reactions. Hayek’s theories considered the reasons as to why markets failed to coordinate human actions and plans thereby sometimes adversely affecting economic growth and people’s economic prosperity such as causing high levels of unemployment. One of the causes for this that Hayek brought to light was increase in the money supply by the central bank, which in turn increased prices and production levels that resulted in low interest rates. He argued that such artificially low interest rates could cause artificially high investment, resulting in high investment in long term projects in comparison to short term projects causing an economic boom to turn into a recession.
Keynes vs Hayek Economics
Hayek economics and Keynesian economics take very different approaches to explaining various economic concepts. Keynesian economics takes a short term perspective in bringing instant results during times of economic hardship. One of the reasons as to why government spending is so important in Keynesian economics is that it is treated as a quick fix to a situation that cannot be immediately corrected by consumer spending or investment by businesses. In addition, Keynes economics believes that the level of employment is determined by the aggregate demand in the economy and not by the price of labor and that government intervention can help overcome the lack of aggregate demand in the economy, thereby reducing unemployment. Hayek economics argued that this Keynesian policy to reduce unemployment would result in inflation and that money supply would have to be increased by the central bank to keep levels of unemployment low, which would in turn keep increasing inflation.
In Summary:
What is the difference between Hayek and Keynes?
• Hayek economic theory and Keynesian economic theory are both schools of thought that employ different approaches to defining economic concepts. Hayek economics was founded by famous economist Friedrich August von Hayek. Keynesian economics was founded by economist John Maynard Keynes.
• Keynes economics believes that level of employment is determined by aggregate demand in the economy and not by price of labor and that government intervention can help overcome the lack of aggregate demand in the economy thereby reducing unemployment.
• Hayek economics argued that this Keynesian policy to reduce unemployment would result in inflation and that money supply would have to be increased by the central bank to keep levels of unemployment low, which would in turn keep increasing inflation.