Special Topic 4. Great Debates in Economics: Keynes versus Hayek.


With the increase in housing prices lot of housing projects will be underway hence demand for plumbers, electrician etc will increase. As a result their wages would increase.

Keynes and Hayek have opposite views with regards to role of savings in the economy. Keynes considered savings bad for the economy and points towards the paradox of thrift. Paradox of thrift brings out the adverse impact of savings on economy. As we know that one person's consumption spending is income of another person. If each person out of income received saves a portion and spends rest, consumption at each stage will goes on declining and with that income will also decline. Pointing to similar scenario, Keynes argued that savings adversely impact the aggregate demand and thus the economic growth and if a society wants economic growth all income should be spend. Moreover, this view of Keynes was also due to his pre-occupation with only short-run as he believes there is no such thing like long-run. On the other hand, Hayek considered saving good for the economy and points towards the fact if solely wants to invest it needs savings to finance it. He argued that in short-run, if country focuses solely on consumption and does not undertake ample savings then in that case in long-run required level of savings to fiancé investment in new productive capital as well as replacement of assets does not materialize prompting a society or country to finance such investment through printing of more currency which will only adversely impact the economy and is sure shot invite to depression. Thus, saving is important for rapid and stable economic growth.

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