Question

Discuss how Disagreement between Keynes and Hayek Affected Their Thought about the Relationship between Ethics and Economics ? Discuss their own views about ethics from their own point of view.

Answer 1

Hayek was the well-known advocate of Austrian Economics. He was a contemporary of Keynes. He shared the same views as Keynes on the possible short run expansionary effects of monetary policy that it leads to falling unemployment but this policy of rasing money supply and lowering interest rates is inflationary. It causes inflation to get higher and higher as money supply rises. However, Keynes in his General Theory of Employment, Interest and Money, suggested that monetary policy by the central bank and fiscal policy actions by the government can and do help to stabilize output and economy. According to Keynes, an expansionary monetary policy lowers interest rates making investment more profitable and stimulating aggregate demand. He does not consider the effect of rising demand on prices assuming that prices are sticky and economy operates well below full employment level. So, there is no pressure on prices. Hayek argued that Keynesian policies, fiscal as well as monetary, to maintain full employment, aiming to increase aggregate demand to achieve the maximum attainable level of employment would lead not only to chronic inflation, but also to a mismatch between the distribution of demand and the distribution of labor in the longer run. The unavoidable mismatch between the demand for and supply of labor would cause unemployment to rise in spite of inflation, inviting the imposition of direct controls by the authorities. This is what came to be known as the resultant vertical long run Philips curve.

Hayek acknowledges that monetary policy can be effective in times when widespread unemployment of all kinds prevails throughout the economy, when aggregate demand is deficient. He however outright rejects the Keynesian view that increasing aggregate demand is the panacea for all problems