Lessons in Economics: Keynes Vs. Hayek

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 31, 2014 9:00:00 AM

and tagged Economics Lessons

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lessons in economicsI shared this post in 2013, but it is still valid today.

As we close out 2014 and look ahead to a new beginning in 2015, I thought it would be fun to repost a couple of videos that offer some entertaining—and surprisingly accurate—lessons in economics. Even better, they do so à la rap! 

Intervention versus laissez-faire

From an economic perspective, policymakers are faced with the decision of whether to intervene in the economy during crisis periods (in John Maynard Keynes’s style of economics) or let the market heal itself (per F.A. Hayek’s more laissez-faire approach). The phrase “We’re all Keynesians now”—reportedly coined by Milton Friedman and often attributed to Richard Nixon—reflects the fact that the modern consensus around the world is for intervention, with governments spending in downturns to support demand.

The problem is that intervention is only half of Keynes’s prescription. The other half—to raise taxes and run a surplus in good times—is never implemented. You could therefore say that the full Keynesian program has never actually been tried. Hayek’s prescription—leave the economy alone—is never considered seriously nowadays and hasn’t been implemented in the West since the 1930s. In fact, the Great Depression is why Keynesianism became the default economic ideology.

As usual, both sides have merit. Government does have a role to play, as we saw in the Great Depression and Recession, yet, at some point, markets have to heal themselves, which the government now seems to recognize, since the Fed ended its multiyear bond-buying program in October.

Stay tuned to this blog for my continued look into the ever-changing markets and economy in 2015.

                                     

Upcoming Appearances

Tune into Cheddar TV on Thursday, June 20, at 9:30 A.M. ET to watch Brad talk about the market. Watch online at cheddar.com.

Tune into Fox Business' Countdown to the Closing Bell on Friday, July 12, at 3:45 P.M. ET to hear Brad talk about the market. Check your local listings for availability.

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