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Hayek vs. Keynes

Updated on March 27, 2017

As described in the two rap videos “Fear the Boom and Bust” and “Fight of the Century: Keynes vs. Hayek Round Two”, John Maynard Keynes has drawn much more attention over the past century or more for his contributions to economics than his counterpart Friedrich A. Hayek. In fact, an article from Mises Daily states that numerous economics students have discovered these rap videos and displayed them to their economics professors. Those professors were then not able to confirm Friedrich A. Hayek or his work in economics. The ideas of Hayek and his Austrian peers have been overlooked. In the 1930’s Keynes took the spotlight during the great depression by offering a resolution and he was praised unquestionably in his efforts. However with the implementation of these two rap videos, Hayek comes to light and helps us to compare and contrast his ideals versus Keynes’. We can then derive our own perceptions in regards what theories have and have not been accurate. Comparing the two perspectives should also aid us in deciding which theories could be useful in the future, and which should be challenged and progressed.

One significance of these videos lie in the arguments used by left-wing and right-wing economists, politicians, government officials, and numerous different committees throughout our economy. It would be safe to say that in today’s political spectrum one could connect Keynes to liberal values and Hayek to conservative values. It is ironic however, how pragmatic Keynes was and how dogmatic Hayek was. These two different characteristics situate themselves outside of the political parties that each Keynes and Hayek have fused with, leaving some questioning over the potential role-reversal between the two. Yet the difference between Keynes and Hayek seems not to lie in their pragmatic or dogmatic characteristics (which seem to characterize their personal standards of living), but rather in their views of the boom and bust.

According to the Keynesians, society needs management and direction. The only way to boost the economy is through stimulus, or government spending and printing more money to increase aggregate demand. Once aggregate demand has increased because people have more money to spend, combined with low interest rates, unemployment goes down. Keynes based his overall perspective around the theory of sticky wages. Wages are said to be “sticky” when the unemployment rate goes up. This happens because firms tend to cut employees and keep wages the same rather than cut wages for all employees in the event of an economic downturn. This has proven to be effective, but only in the short run. Eventually unemployment creeps back upward and firms cut prices to be able to compete. Keynes argues that more spending is needed because the future is uncertain and we should be more concerned with fighting the “bust”, or a depression.

Hayek on the other hand advocates saving and investment to provide longer patterns of growth in the future. He says that low interest rates and an increase in the money supply through credit markets yields artificial loanable funds that confuse the market. This turns out to be inflation that drives the economy in the short run. People in the economy begin making mal-investments and consuming more while saving less. The increase in consumption soon proves that the economy has been falsely driven when goods become scarce and projects that have been invested in come to a halt. In the long run unemployment tends to go back up and the cycle repeats itself with no significant gains in economic growth. Leaving the market to correct its own mistakes provides a better outcome in the future, because people save more in the present to be able to support real growth patterns in the future. According to Hayek the increase in saving and investment provides longer and more sustainable growth over time.

The significance of this video is lie in the fact that Hayek and his views had been shunned until recently. Mr. Hayek expanded on a foundation laid to the Austrian school by Ludwig Von Mises. Ludwig advocated that central banking caused more business cycles not fewer. This central idea is what influenced Hayek, Roger Garrison, and Jesus Huerta De Soto, to begin developing Austrian economics as we see it today. Hayek was perceived as a quiet and studious person, and only those who were willing to question the theories of the Keynesians and search for alternatives were aware of Hayek and the Austrian school’s theories. Keynes was more about living for the moment and not worrying about the future. His outgoing personality and the time frame in which his perspective came into economics (great depression) are credited to his success. Perhaps this is why Hayek and the Austrians were pushed aside while Keynes’ ideas were praised and accepted. Even more, perhaps this is why “We’re all Keynesians now!”

Who do you think has the better economic outlook? Hayek or Keynes?

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    • jsthomas profile image

      Jonathan Thomas 4 months ago from Virginia

      Great insight MariRogers! I just looked the book up and read a little on what it's about. Looks like a great read, I'll have to check it out. Thanks!

    • profile image

      MariRogers 4 months ago

      I'm an econ and applied math double major at Cal.

      Frankly, I find both strengths and weaknesses in the thinking of these two prominent economists.

      True to fashion for most trend-setting intellectuals, each man's a priori values and perceptions have led them to gravitate towards their existing thought.

      For a truly interesting analysis of why we think the way we do about politics, economics, and social philosophy, read Professor Jonathan Haidt's book, The Righteous Mind.