Question

a) Explain in your own words the debate between Keynes and Hayek.

b) Explain how this debate might help you to understand differences of opinion or different approaches in other spheres of society.

Answer 1

a) John Maynard Keynes, a British Economist who lived from 1883 to 1946. He is most well known for his simple explanation for the cause of great depression. His economic theory was based on a circular flow of money. He was most favourable to Democrats.

Friedrich Hayek was loved by the Republicans . He is considered as a major social theorist. His theory on how changing price relays information that helps people determine their plans is widely regarded as an important milestone achievement in economics, this theory often lead to him Nobel prize.

• Hayek was most favourable to the Republicans whereas Keynes was loved by the Democrats. According to Hayek he warned the society about the hidden fear in the boom , it literally means that good times with low interest rates and cheap money should be matter of fear in future, he says ,stimulus and government spending causes bigger problems.
• In  the other hand Keynes warns about the fear in bust which means depression. He says that unemployment should be more feared than inflation or government spending. The extreme pain of high rate kn unemployment can be balanced by even spending of government.
• Hayek says that we must save overtime and be more Conservative with spending. In the other hand Keynes use keynesian economics theory to steer the country out of the great depression the argument of him against Hayek was 'spend or suffer'.
• Hayek says that economies will correct itself if it left alone. Keynes argued the statement that the economy doesnot fix itself quickly because the wages and prices are sticky also it takes time to get rid of the depression so the government must spend to avoid suffering.

b) According to Keynes, the government must stimulate the economy untill it can get back its own feet. So the input should be from the resources itself ,the great resources of the society is its own people wealth .He says about putting people to build public  roads ,bridges schools,dams etc. Hayek says that the the fundamental principle of classical economy is that itself regulating. Classical economists maintain that the economy is always capable of maintaining the real GDP s natural level. That is obtained when the economy's resources are fully employed.