Question

watch "Commanding Heights: The Battle of Ideas- Episode One (Official Video)"  and answer the following questions in-depth.

1. What did you think of the documentary overall? Did it deepen your understanding of the current debates regarding the level of government intervention in the US economy?
2. Which economists' views best represent your views, Keynes or Hayek? Why?
3. The comparison between Capitalism and Communism might cause one to think Keynes favored Communism/Socialism, but he favored a mixed economic system and "was trying to save Capitalism from itself". What do you think he meant by this?
4. Has our government been "spending against the wind" and handling the budget well (spending money to get the economy out of recession, but saving or raising taxes in good years to pay off the debt)?

Answer 1

•] With some very remarkable documentary footage and interviews, this video introduces the 20th century history of international trade and spending policy. Two strategies predominate: free markets and communism. In the 1930s Keynes developed a third way that used government spending during depressions, interest rate management, and improved trade ("Keynesian Economics"). Hayek wrote about free markets and argued that moderate government interventionism would be imperfect, and need even more tax and spending decisions until it arrived at socialism, or even communism. In the 1960s and 1970s communist economies had a degree of stability and free markets experienced several recessions. Later, in the 1980s communist economies faltered and free markets, combined with new technology and inexpensive natural resources, took off and gained popularity, culminating in the opening of China in the 1970s and, a decade later, the 1989-1991 fall of communism in Europe.

As the video expertly recounts the Third Age of Globalization is increasing opportunity in Europe and Asia, and bringing more wealth to the US, but also causing some older industries in the developed world are going into decline. The navigation through several crises in the 1990s was boding well for the future.

One of the assumptions around the late 1990s and early 2000s was that free trade would gradually strengthen democracy and limit authoritarian nations. The late 2010s and early 2020s are showing a somewhat different pattern. Also, the sustainability of both free market nations and state controlled economies is uncertain. Keynes and Von Hayek were completely free of these considerations, as their thinking, formulas, and writing in the 1930s to 1950s were unaware of and did not factor in global warming, the effects on agriculture, ocean acidification, and the shift in energy return on energy invested with lower grade fossil fuels. Thus, it could be asked whether Keynes theory, generally accepted in the US, needs to be substantially revised to include the economic services provided by natural systems. The type of government spending to minimize depressions (and not just the amount), and the imperative take in tax revenue during boom years is more critical. The US should avoid a mixed economy or quasi-socialism where only one or few economic priorities exist. The Federal budget can expand its variety, depth, and future-orientation -- raising funding levels for the Department of Energy, Department of Commerce, and foreign aid -- while still providing for the core role of government, which to guarantee the security and prosperity of the American people.

•]John Maynard Keynes, the elegant Englishman who supported the intervention of government to control the booms and busts of capitalist economies ideas dominated from 1945 to 1980 in the Commanding Heights Video.Keynes debates that government spending saves the economy. However Hayek stated that too much public debt creates friction and impacts the economy a great deal than private debt does. This increase in debt might spiral down to job losses. He further argued that the market would become distorted if this stimulus provided by government is removed as people would be making goods which didn't have any demand.

Keynes believed that government intervention is necessary for maintaining stability in the economy. During depression, government should increase its spending and decrease taxes to boost economic growth and pull the economy out of depression. Keynes economic theory focuses on demand side factors affecting the changes in economy the most.

Keynes economic theory shows relationship between total spending and output level. of the economy. Where total spending includes consumer spending , investment spending, government spending and net exports.

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Keynesian economics supports a mixed economy guided mainly by the private sector but partly operated by the government.Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries). Any increase in demand has to come from one of these four components. But during a recession, strong forces often dampen demand as spending goes down. For example, during economic downturns uncertainty often erodes consumer confidence, causing them to reduce their spending, especially on discretionary purchases like a house or a car. This reduction in spending by consumers can result in less investment spending by businesses, as firms respond to weakened demand for their products. This puts the task of increasing output on the shoulders of the government. According to Keynesian economics, state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle.

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While tax cuts in relatively good times may spur growth further, they pose a threat of increasing
deficits and debt over the longer term. The problem is that deficits have a cyclical component,
meaning that the deficit is likely to increase during the next recession. Cutting taxes at the top of
the business cycle ensures that deficits will be much deeper, and may limit the government’s ability
to respond to a recession with expansionary fiscal policy.