Macro-economic policy
The ideas presented by Keynes and Hayek have informed the landscape of global economy since the end of the World War II. These ideas were very distinct in regard to economic freedom as each one of them had different propositions on the manner in which management of macro economy should be managed. This includes the role of the government in the economy of a country. Keynes analysis was founded on treating the economy as a whole and involves the use of government’s fiscal policy, tax and deficits in the management of aggregate demand and therefore, ensuring full employment (Paul, 114). Keynes identified errors in the post war free market and hypothesized that government regulation can be used to regulate the economy. His idea emphasized the need for the government to control the ‘commanding heights’, and this is actually what many nations have been able to do after the war (Yergin, 1). In addition, Keynes held that full employment could not be attained by making wages to be low. The economies are formed of aggregate output quantities come from aggregate expenditure streams. In his view unemployment results from failure of people to spend money that is sufficient. Keynes was of the view that more government expenditures combined with low taxes can induce demand and thus help the global economy to recover from depression. Hence highest economic performance can be attained and any economic slump prevented through if aggregate demand is influenced government policies that aimed at economic intervention and stabilization. He refuted the classical theory which held that constant swings in economic output and employment would be self-adjusting and thus modest. Specific features of market economies and structural rigidities can weaken the economy and lead to lowering of aggregate demand (Paul, 114).
Hayek on the other hand opposed the Keynesian policies; especially on the view that unemployment would eventually lead to inflation and that to maintain low unemployment, the central bank would need to raise money supply faster leading to increased inflation. His view was that rather than government control, free market could provide the solution (Yergin, 1). As the idea presented by Keynes became accepted more, Hayek propositions become unaccepted and unpopular. After the Keynes’s theory on macro-economy led to the stagflation, the Keynesian system dominance was over. To Hayek reduced policy intervention by the government means that there will be more freedom in the economy. When people have freedom to chose, the efficiency of a running economy is high. Hayek shows a connection between capital theory, business cycles and the monetary theory. According to his argument, his main problem facing any economy is the way actions of people in the economy are coordinated. The free market played a critical role in coordination of these actions even though the coordination was not intentional. The market is a spontaneous order where it is not designed by anybody but came about due to these human actions (Sandra and Levy, 159). He asserted that what causes a failure in coordination of peoples plan is the increase in money supply through the central bank. The increase makes credit cheap artificially and thus driving down the interest rates. Interest rates that are artificially low make investments to be artificially high but also lead to malinvestment – where there is a lot of investment in the long-term projects as compared to short-term projects and this boom turns out to be a bust. Rather than government readjustments through controls, he saw these readjustments as being necessary and health to the economy. Avoiding the bust would be achieved through the prevention of the busts. Hayek believed that policies proposed by Keynes for the purpose of dealing with unemployment would lead to inflation. He also argued that socialist planning could not be applicable and that the reason for socialists’ economists to propose central planning was the thinking that central planners could consider economic data in the allocation of resources. In his view, such data is not available and cannot exist in a single mind but everyone has knowledge about specific resources and the available opportunities for using them which the central planner cannot have (Sandra and Levy, 159). The free market virtue is that it provides maximum liberty for individuals to use the only information they are having.
The US economic policies should lean more on the Hayek’s idea of market liberalism, where the economy is organized on individual lines so that most of the economic decisions are made by households or individuals and no the government institutions. This should offer more support for free market with little regulation by the government. The policies should not intervene in the free market if such policies prevent open competition and free trade. The policies should also focus on reducing the government spending and any regulations aimed at controlling the markets (Gwartney, Stroup, Russell Sobel & David 16). The U.S government should adopt a free and liberal trade policy where the trade barriers and other tariffs are reduced so that to induce high economic growth, especially through economic growth. Where government should consider market control should involve keeping monopoly under check.
Works cited
Yergin, Daniel (2016).Commanding Heights Episode 3- Rules of the Game (Official Video) 1.Available at: https://www.youtube.com/watch?v=bSGAJTJzgLA
Gwartney, James D, Richard L. Stroup, Russell S. Sobel, and David A. Macpherson. Macroeconomics: Private and Public Choice. Australia: South-Western Cengage Learning, 2013.16 Print.
Peart, Sandra J, and David M. Levy. F.a. Hayek and the Modern Economy: Economic Organization and Activity. , 2013.159 Print.
Davidson, Paul. Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-First Century. Cheltenham: Edward Elgar, 2011. 114
