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Free «Keynesian Theory versus the Hayek Views» Essay Sample


The Keynesian theory on the economy focuses on expenditure on the economy referred to as the aggregate demand and its impact on output and inflation. The theory asserts that demand is influenced by various factors including government intervention through monetary and fiscal policies. Moreover, the theory stipulates that changes whether unexpected or planned for have an influence on productivity and employment in the short term without affecting the prices. The perspective also states that the rigidity of prices implies that changes in the elements of spending such as government expenditure can result into fluctuations in output. Therefore, the Keynesian theory is based on the premise that the government participation is important in the creation of a stable economy (Blinder, para 12).

This is made possible through drastic fluctuations in the macroeconomic environment to minimize economic welfare. In addition, the government is viewed as capable of enhancing the free market.  However, the tenets of this theory are opposed by a philosophy advanced by Hayek that views government intervention as inefficient and totally uncalled for. Hayek comes across as a major critic of the Keynesian theory, and in an elaborate manner examines its potential weak link as a base for repudiation the same government it seeks to integrate in the economic arena.   The objective of this research is to argue against the Keynesian theory and show that collectivism results in disorder and tyranny.


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Hayek View

Hayek advanced his views on the basis of the relationship between the capital and monetary theory as well as the business cycle theory. He argued that economic problems were as a result of challenges in coordination of their activities. In addition he stated that the market does not operate perfectly. This view also stated that a rise in money supply would result in decreased interest rates so that obtaining credit would become inexpensive. It also noted that investments made to last for the long-term were more easily affected by changes in interest rates when compared to short-term investments. This view was informed by the candid examination of the investment sector whose eventual aim is not to lose but to gain drastically. Long term investments were identified by Hayek as equally vulnerable and economic instability as affecting not only the market segment but also the investment and purchasing sectors.

Socialist planning

The perspective further postulates that planning is supported by consumers and specialist as they are exhausted. It argues in favor of central planning but notes that disputes may arise during the process of setting goals and objectives. The view propounded by Hayek further states that conflict during planning result in failure to achieve the set goals. Eventually, the planners get frustrated and may end up trusting anyone that is ready to devise a way of carrying out the set activities, irrespective of it being time tested and without gauging the expected levels of success.  Hayek examined the concept of social planning to conclude that it was ineffective. This was attributed to the fact that social economists emphasized that central planning was preferred as it assigned resources on the basis of gathered data and information (Friedrich August Hayek, para, 6). The planning is propagated to the public through rallies with villains being made up of people trying to encourage unity and common goals. The concept advanced by socialists also advocates for "economic freedom". It further views the planning process as a cause of Utopia.


The Hayek view also opposes the Keynesian theory through the element of liberty. It states that liberty results in great wealth as there is freedom of ideals. The ideals ensure that the public realizes that it living in poverty is not an option. The perspective values liberty as it allows the public to realize their capabilities and potential in terms of intelligence and other competencies. It states that liberty of the individual is sustained by the market process although development in the person is not representative of benefit or merit. It also considers the role of the environment whereby the individual utilizes their competence and skills to control the environment to their advantage (Steele, pp 17).

The free society in this context is viewed as an environment in which barriers to particular positions in society are removed. The free society allows for distribution of income and wealth on the basis of activities of self interest. Based on the stringent controls of the government on the monetary policies, Hayek argues that the liberty and free society have one of their economic rights usurped by the government. Thus, he discards the view of the necessity of the government interference; this time arguing that it's free society interference should be informative enough of the dangers of such associations.

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Government control is established through pricing and economy regulation. The improper pricing signals and unpredictability in the pricing trends reduce the reliability and efficiency of the market. But the far cry from the losing side means that they will need to attract the attention of the government and ensure that it tightens the regulations in a bid to recoup the wealth and ensure the even distribution of wealth. The process of regulations ends up being cyclic in that if it hurts the corporations, the consumers benefit and if it does hurt the consumers, the corporations and their employees are hardly hit. Hayek questions the plausibility of such antics with the option of letting the market segment remain independent and dictate the trends taken by the products from the corporations, the employees who benefit from booming business and consumers who are at liberty and can decide whether to purchase, what to purchase and when to do the purchases.

Economic strategy and strategists

Though Keynisians appreciate the role of economic strategists, they seem less wary of the potent misfiring of the strategies adopted by the macroeconomics. Being an opinion based approach with the majority likely to have their way; it is prudent to discredit the election of planners. The criterion is always questionable, and so is the option based on the attitudes and interests of all stakeholders. In most cases, such forums are prone to conflicts over goals and eventually no solution is agreed upon. This leads to frustration and thus planners resort to mitigation attempts, crediting anyone who is willing to get things done.

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Hayek is also critical of the influence of politics in the economy. Governments are political entities. Depending on agreed plans, one entity pushes for the recognition of their policy as the best, irrespective of the other even better choices, and campaigns to rally the public support behind the policy (Hayek, 256). The campaigns are characterized by propaganda and lack of insight. Eventually, a group of villains is established and viewed as threat to people trying to promote a unifying goal. This marks the repudiation of the rule of law and judgmental cases on merit. It marks the destruction of democracy.

Economic planning to a large extent is incomplete without implementation. Implementation calls for strict adherence to set routes and avoidance of diversions. Hayek eventually nails down Keynesians by exploring the consequences of deviating from a government's directive. It results in economic coercion, imprisonment, death in the family as well as the persons life might be in danger, moral bankruptcy due to lack of liberal choices and total corruption of liberal ideals with chances of return to moral consciousness grounded to zero. This is the economy strategy informed by 'the end justifies the means' doctrine and implies as well as involves total destruction of individual freedom.


Finally, the last straw of Hayek critique explored the employment (or it's opposite; unemployment) as an indicator of economic prosperity.  Hayek points out that Keynes was solely guided by a generality view that asserted the postulated the employment and demand for consumer goods as positively correlated (Pg 249). Hayek pointed out that there are other determinants of employment other than final demand, which Keynesians fatally neglected. The volumes of investments might not reflect the final demand, so does the interest rates. The final demand is in fact affected by the different production factors as well as the kind of labor employed. Thus, Keynesians failed to acknowledge that though demand could influence the labor patterns in does not totally dictate the employment levels and trends. Thus, the examination of the employment section as a crucial component of the economy indicate a failure in the Keynesians as they overlooked such a component in pursuit of the doctrine that economy is dependent on investment and final demand.

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To conclude, Hayek attributes the attractiveness of Keynes 'underconsumptionist' approach to radicals. He argues that the adoption of the traditional theory of price determination and distribution are unorthodox claims and its proponents as lacking in basic economic perception.


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