Essay on John Maynard Keynes Versus Friederich A. Hayek

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Two major economic thinkers of the of the early twentieth century, John Maynard Keynes and Friedrich A. Hayek, hold very different economic viewpoints. Keynes is among the most famous economic philosophers. Keynes, who's theories gained a reputation during the Great Depression in the 1930s, focused mainly on an economy's bust. It is where the economy declines and finally bottoms-out, that Keynesian economics believes the answers lie for its eventual recovery. On the other hand, Hayek believed that in studying the boom answers would be provided to lead the economy out of the bust that was sure to follow. Hayek backed the Austrian school of economics. John Maynard Keynes fostered a school of thought that came to be known after him,…show more content…
This is almost the textbook definition of money illusion, which of course classical economics assumes people are not fooled by. Still, Keynes ideas gained popularity and President Franklin D. Roosevelt's New Deal was directly influenced by the Keynesian point of view. Keynes held that the way out of a depression was to increase an economy's aggregate demand(AD). Roosevelt's New Deal contained huge federal expenditures and government jobs programs, all designed to boost AD. These programs, including direct relief, were paid by taxpayers dollars and the tax rates rose dramatically multiple times during the Great Depression. F. A. Hayek, the "other" economic thinker of the twentieth century, believed that the way to stabilize a broken economy was to find solution from the boom that preceded the current bust. The Hayek-supported Austrian theory sought a connection among business cycles, capital theory, and monetary theory. Hayek believed an economy started going downhill when people did not coordinate their actions. The spontaneous order of the free market and price system usually does a fantastic job of coordinating people's actions. Hayek said that the credit market becomes distorted when the money supply increases, interest rates go down, and the credit becomes artificially cheap (Friedrich). This causes an artificially high rate of investment and malinvestment." [Malinvestment is ]...too much investment in long-term projects relative to short-term ones, and the
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