Eonomic Theories: Keynes vs. Hayek Essay

392 WordsJun 14, 20142 Pages
Keynesian Theory Maynard’s theory is a combination of monetary policy of the central bank and the fiscal policy of the government. He believed that both policies, working in conjunction of each other, will help stimulate the economy during recessions (www.en.wikipedia.org/wiki/Keynesian_economics). For instance, if the central bank reduced the interest rate of the loans to commercial banks, the government in return signals the commercial banks to follow suit in reducing their interest rate. The government then begins to invest in the infrastructure, thus outputting income into the economy. This action then helps to create business opportunities, employments, and demands thus resulting in reversion of the initial imbalance (www.en.wikipedia.org/wiki/Keynesian_economics). However, the investment of the government causes a deficit. Government funding source is through borrowing from the economy (i.e. government bonds) and it’s spending exceeds the amount of tax income received (www.en.wikipedia.org/wiki/Keynesian_economics). Friedrich Hayek Hayek recognized connections between three theories thus influencing his perspective of the economy. These three theories are: The Business Cycle Theory, Capital Theory, and Monetary Theory (www.econlib.org/library/Enc/bios/Hayek.html). Hayek argued that “the major problem for any economy is how people’s actions are coordinated” ( www.econlib.org/library/Enc/bios/Hayek.html). The price system of the free market unintentionally coordinated action of the people and that it was a spontaneous order. In this instance, the word ‘spontaneous’, means that coordination was not by anyone’s design but through a slow evolution resulting from human actions (www.econlib.org/library/Enc/bios/Hayek.html). However, the workings of the market are not perfect in any way. It is believed various factors can cause the flaw in the

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