The Independent Market Observer

Lessons in Economics: Keynes Vs. Hayek

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Aug 19, 2021 10:52:32 AM

and tagged Economics Lessons

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inthenews-cI originally shared this post back in 2014, but I think you will find it still offers some valuable lessons for today. — Brad

I thought it would be fun to share 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.

                                     

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