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


According to Keynes the capitalistic economy is prone to fluctuations and is unstable. The reason for it is the that the private sector decisions are constantly changing and therefore an economy has business cycles of boom and recession. However in such a situation the government can intervene and bring the economy back to equilibrium, by implementing a fiscal or a monetary policy. During times of recession the government should increase it spending , as it would lead to increase demand and there will be a rise in prices. The taxes should be reduced and the interest rates should also be reduced which will increase money supply and then demand as well. The increase in consumption will lead to increase in income, taking the economy out of the recession. Increase in demand will stimulate production and increase the incomes of all the factors of production involved in the production process. It will have a multiplying effect.

According to Keynes savings should not be more than planned investment because it will lead the economy to recession and also into depression. According to Keynes savings are more than planned investment because investment is less due decline in demand or more investment. This is not good for the economy. Savings will be worthwhile only if they are invested or else they are being wasted and of no use. Savings should equal planned investment. According to Hayek entrepreneurs continue to invest only when they are sure that there will be a consistent supply of capital over a long period of time and the rates of interest will rise. According to Hayek savings should be done to invest, in order to take the economy forward rather than print more currency. If the savings are not invested profitably it will lead the economy into a depression.

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