Question

Who are John Maynard Keynes and Friederich von Hayek and what are their economic theories? What economic events inspired these theorists to come up with their arguments and in what time periods did they come about? How does each relate their theory to the proper functions of government and what is their reasoning for doing so? How are these models used in the world today. Lastly, what are some pros and cons of each economic model? Be specific and provide examples.

Answer 1

John Maynard Keynes was a British economist who gave the macroeconomic theory of total spending in the economy and its effect on employment, inflation and output. It focuses on short term changes in economy. His theory showed that increase in government expenditure and lower taxes can stimulate demand and put the global economy out of depression.

Friedrich Hayek was a famous economist born in Austria in 1899. He is popular for his defense of free market capitalism. He won Nobel prize for economics in 1974 with Gunnar Myrdal "for pioneering work in theory of money and economic fluctuations and their penetrative analysis of interdependence of economic, social and institutional phenomena."

The Great Depression of 1930s inspired Keynes to think differently about the economy and its nature. He made some real world applications that could be used in economic crisis. He believed that when economic downturn starts, the businessmen will start to become self fulfilling. And for Heyak, his father who was a University professor, his life influenced his goals in life. He also admitted that Wittgenstein's philosophy and methods of analysis gave him a sense of inspiration in life.

Keynes stated that government should increase demand to boost growth. Government spending can increase the aggregate demand and resulting to increase in economic activities. His theory's main tools was government spending on infrastructure, education amd unemployment benefits. Hayek gave his view of proper role of government where he discussed principles of freedom and based his policy on those principles.

The aggregate equation of Keynes's general theory still are main topics in textbooks and they shape macroeconomic policies. Whereas, the underemployment equilibrium of Keynes is no longer used by policymakers. Hayek's views on rising expenditure and other topics are also referred by policymakers today.

The advantages of Keynesian theories is higher employment levels, stabilisation of banking sector, tools to monitor economic output, moderation of interest rates. One of the negative point to his theory is the inflation that can be caused. Few cons for Hayek's theory are that his theory about governments leaving the supply of money alone doesn't actually work well in depression as much as Keynes's theory works. And there is no reason why a cluster of failed investment would generate a recession in Hayek's theory.