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Summary
Running head: DISCUSSION ON CASE 2 1
DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT
Barbara Tatum
University Of Arizona Global Campus
BUS 626 Global Economics & Political Influence
Instructor: Isabel Wan
May 15, 2023
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 2
Case 2: The Economics of Social Security
Read the Special Topic 2, pages 419 through 428 of Macroeconomics: Private and
Public Choice. Using the Economics of Social Security case, the knowledge you have gained
in this course, as well as at least three additional credible resources, analyze the case by
addressing the following:
Explain how the Social Security system’s basic principles are different from private
insurance.
The Social Security system is a type of public insurance, meaning that it is funded
through taxes and government-managed. It is a pay-as-you-go system, meaning that current
workers' taxes are used to pay out benefits to today's retirees. This contrasts with private
insurance, which is typically funded through premiums that are paid by the insured. Private
insurance offers the insured more flexibility in terms of investment options, the ability to make
lump-sum withdrawals, and the ability to receive higher returns (Festré, 2021). In addition,
Social Security is designed to provide a basic level of income for retirees and their survivors,
whereas private insurance is geared toward providing income protection against risks such as
death or disability. Private insurance is based on the concept of individual risk pooling and is
designed to provide financial protection against specific risks, whereas Social Security is
designed to provide a minimum level of financial security for the elderly (ZHU, 2021).
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
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VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 3
Social Security benefits are based on a person's wage history and contributions to the
system, whereas private insurance benefits are based on the premiums paid by the insured. Social
Security benefits are subject to various government regulations regarding eligibility, cost of
living adjustments, and taxation, whereas private insurance benefits are subject to the rules and
regulations set forth by the insurance (Richardson, 2021). Also, it has the retirement benefits
are available to individuals who have worked and paid Social Security taxes for a certain number
of years. The amount of the benefit is based on the individual's work history. Disability benefits
are available to individuals who are unable to work due to a physical or mental impairment. The
amount of the benefit is based on the individual's work history. Supplemental Security Income is
a need-based program for low-income individuals who are elderly, blind, or disabled. The
amount of the benefit is based on the individual's financial need (Tanzi, 2020).
Determine how Social Security affects the economic well-being of blacks, relative to
whites and Hispanics.
Social Security is an important social welfare program in the United States, providing a
safety net for retirees, the disabled, and their families. However, Social Security has had an
unequal impact on the economic well-being of blacks, compared to whites and Hispanics.
According to the Social Security Administration, blacks are significantly more likely than whites
or Hispanics to receive Social Security benefits, due to their disproportionate rates of poverty
and unemployment. In addition, Social Security benefits are often lower for blacks than for
whites and Hispanics, due to their lower incomes and shorter work histories. This means that
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
VIEWS ON SOUND ECONOMICS AND THE
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Social Security often does not provide the same level of economic security for blacks as it does
for whites and Hispanics. In addition, Social Security is structured in such a way that it
disproportionately benefits wealthier individuals. This means that, even though blacks are more
likely to receive Social Security benefits, they are less likely to benefit from the program than
whites and Hispanics (Söderström, 2018).
Furthermore, Social Security’s spousal benefits and survivor benefits are structured in
such a way that they disproportionately benefit married couples, meaning that unmarried blacks
are less likely to receive these benefits than unmarried whites and Hispanics. Finally, Social
Security’s retirement age of 67 disproportionately affects blacks, who are more likely to
experience health problems and other issues that can prevent them from working until the age of
67 (Richardson, 2021). This can lead to a significant reduction in Social Security benefits for
blacks who are unable to work until the age of 67. Social Security has had an unequal impact on
the economic well-being of blacks, relative to whites and Hispanics. Blacks are more likely to
receive Social Security benefits, but are also less likely to benefit from the program due to their
lower incomes, shorter work histories, and less access to spousal and survivor benefits.
Furthermore, Social Security’s retirement age of 67 disproportionately affects blacks, who are
more likely to experience health problems and other issues that can prevent them from working
until the age of 67 (Söderström, 2018).
Assess if the current Social Security system promotes income equality. Why or why
not?
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 5
The current Social Security system is designed to provide income security for retirees,
especially those who are low-income or have limited resources. However, the system does not
necessarily promote income equality. This is due to the fact that Social Security benefits are
based on an individual's earnings over the course of their lifetime (Richardson, 2021).
Therefore, those who have higher earnings throughout their working years tend to receive higher
benefits. This means that those who are in lower income brackets may not receive the same level
of benefits as those who are in higher income brackets. Additionally, the Social Security system
does not account for wage disparities among different demographic groups, such as gender or
race. This means that those from lower-income and minority backgrounds may receive fewer
benefits than those from higher-income and non-minority backgrounds. This contributes to
inequality in benefits, as those from disadvantaged backgrounds are less likely to benefit from
the Social Security system than those from more privileged backgrounds (Cosby & Berry-
Edwards, 2015).
Propose how the Social Security system could be modernized to ensure long-term
solvency and fairness in distribution. Be specific and support your proposal with research.
One probable way to modernize the Social Security system to ensure long-term solvency
and fairness in distribution is to increase the payroll tax rate. This would ensure that all workers,
regardless of income level, would contribute to the Social Security system. Additionally, the
eligibility age for Social Security benefits could be increased to 67, or even higher. This would
allow for the Social Security trust fund to build up reserves, and would also reduce the strain on
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 6
the system due to longer life expectancies. Another possible solution is to reduce the Social
Security benefit for those with higher incomes or wealth (Cosby & Berry-Edwards, 2015).
This would ensure that the benefits are more fairly distributed among those who need
them most, and would help to reduce the burden on the Social Security system. Additionally,
increasing the cost-of-living adjustment (COLA) for Social Security benefits would help to keep
up with inflation and ensure that beneficiaries are receiving a fair amount of benefits. Allowing
individuals to invest a portion of their Social Security contributions into private retirement
accounts could help to increase the amount of wealth they have at retirement, while also
providing an incentive to stay in the workforce longer. This would also help to reduce the strain
on the Social Security system, since individuals would be more likely to continue to contribute
(Feldstein & Ranguelova, 2017).
Case 3: Keynes and Hayek: Contrasting Views on Sound Economics and the Role of
Government (Case 4 in the text)
Read the Special Topic 2, pages 439 through 444. You may also want to review
Chapters 11 and 12 of Macroeconomics: Private and Public Choice as the role of
government and different views of government intervention were discussed.
Using the Keynes and Hayek: Contrasting Views on Sound Economics and the Role
of Government case, Chapters 11 and 12, the knowledge you have gained in this course, as
well as at least three additional credible resources, analyze the case by addressing the
following:
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Describe briefly how Keynes’s and Hayek’s economic theory and views differ.
Keynes and Hayek had two distinct and very different views on how the economy should
be managed and the role government should play in that management. Keynes believed that
government intervention was necessary to get the economy going and to maintain it at a stable
level. He advocated for government policies such as increased public spending and deficit
spending to stimulate the economy during a recession. He also believed in the importance of
government regulation of wages, prices, and production to maintain economic stability. Hayek,
on the other hand, was an advocate of free-market capitalism, which he believed would lead to
more efficient allocation of resources and better economic outcomes in the long-run
(Richardson, 2021).
He opposed government intervention, believing it would lead to a distortion of the
market, with inefficient production and allocation of resources. He argued that the government
should not intervene in the economy, but instead should leave it to the market forces and
individuals to decide how the economy should be managed. Both Keynes and Hayek had
different views on the role of the government in the economy, but both were influential in their
respective economic theories. Keynes's theory of macroeconomics is still widely used today and
Hayek's free-market capitalist philosophy continues to shape economic policy in many countries.
While Keynes and Hayek may have had different views on the role of government in the
economy, their ideas remain influential and relevant today (Festré, 2021).
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 8
Contrast the two views on how savings may be harmful or beneficial to the
economy.
John Maynard Keynes and Friedrich Hayek both have contrasting views on the role of
savings in the economy. Keynes believes that savings are detrimental to the economy, as it
reduces overall aggregate demand. The less money that is circulating through the economy, the
less demand there is for goods and services, which reduces economic growth. Hayek, on the
other hand, believes that savings are essential for economic growth. According to Hayek, savings
are essential for long-term economic growth, as it increases the capital stock, allowing for
improved productivity and technological advancement (Richardson, 2021). Keynes believes
that the government should intervene in the economy to increase aggregate demand. By
increasing government spending and lowering taxes, households will have more disposable
income, which will lead to increased consumption, thus stimulating the economy. On the other
hand, Hayek believes that government intervention should be minimal, as it is the role of the
markets to determine the optimal level of savings and investment. He believes that government
intervention can lead to misallocation of resources and inefficient outcomes (Festré, 2021).
Compare the two views on whether the economy would fluctuate more or less over
the business cycle without government intervention. Be sure to address both the inherent
stability of the market economy as well as the impact of government interventions to steer
the economy.
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DISCUSSION ON CASE 2 THE ECONOMICS OF SOCIAL SECURITY AND CASE 3
KEYNES AND HAYEK CONTRASTING
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ROLE OF THE GOVERNMENT 9
Keynesian economics and Hayekian economics are two different economic perspectives
that differ in their views on the role of government intervention in the economy and its impact on
economic fluctuations over the business cycle. Keynesian economics views government
intervention as necessary to stabilize and promote economic growth. Keynesians believe that
without government intervention, the economy would be more volatile, as market forces would
be insufficient to keep the economy stable. Thus, they believe in using fiscal and monetary
policy to manage aggregate demand and combat recessions. On the other hand, Hayekian
economics views government intervention as detrimental to the economy, as it disrupts the free
markets and causes more economic fluctuations (Cornish, 2017).
Hayekians believe that the economy is inherently stable and that government intervention
would only make it less stable. They believe that market forces are sufficient to promote growth
and should be allowed to do so without government intervention. Thus, Hayekians advocate for a
laissez-faire approach and oppose government interventions. Both views are supported by some
evidence. Studies have shown that in the absence of government intervention, the economy may
be more volatile and could be prone to greater recessions. However, government interventions
can also be disruptive to the market and cause more volatility. Ultimately, which view is more
accurate depends on the specific context of the economy, and the best approach will depend on
the specific situation (Backhouse, 2017).
Hypothesize on which economist theory, Keynes or Hayek, you believe is more
accurate and why. Be specific and support your hypothesis with research.
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I believe that Keynes’s economic theory is more accurate than Hayek’s. To begin with,
Keynes advocated for government intervention in the economy, which is often necessary to
prevent the short-term fluctuations associated with the business cycle. Keynes also believed in
the importance of fiscal policy, which can be used to stimulate economic growth through
government spending and taxation. Additionally, Keynes focused on the importance of aggregate
demand and the role it plays in economic growth and stability. Keynes’s focus on aggregate
demand has been demonstrated to be effective in many countries in times of crisis, such as the
2008 financial crisis (Backhouse, 2017).
On the other hand, Hayek’s economic theory focused on the idea of laissez-faire
economics and the importance of free markets. Hayek argued that the government should not
intervene in the economy and that the market should be allowed to function freely, without any
interference from the government. This type of economic system, however, has been criticized
for its inability to address economic inequality and for its lack of flexibility in times of crisis. In
conclusion, I believe that Keynes’s economic theory is more accurate than Hayek’s. Keynes’s
focus on government intervention, fiscal policy, and aggregate demand has been demonstrated to
be effective in times of crisis and has the potential to lead to greater economic stability and
growth. In comparison, Hayek’s theory of laissez-faire economics has been criticized for its
inability to address economic inequality and its lack of flexibility in times of crisis (Gwartney
et al., 2021).
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References
Backhouse, R. E. (2017). Hayek and Keynes. Elgar Companion to Hayekian
Economics. https://doi.org/10.4337/9780857931115.00011
Cornish, S. (2017). The Hayek literature: Nicholas Wapshott, Keynes Hayek: The clash that
defined modern economics. Hayek: A Collaborative Biography, 74-
79. https://doi.org/10.1057/9781137328564_5
Cosby, R., & Berry-Edwards, J. (2015). Economic security and family well-being. Encyclopedia
of Social Work. https://doi.org/10.1093/acrefore/9780199975839.013.1144
Feldstein, M., & Ranguelova, E. (2017). The economics of bequests in pensions and Social
Security. The Distributional Aspects of Social Security and Social Security Reform, 371-
394. https://doi.org/10.7208/chicago/9780226241890.003.0010
Festré, A. (2021). Michael Polanyi’s vision of government and economics: Spanning Hayek and
Keynes. Journal of Government and Economics, 4,
100026. https://doi.org/10.1016/j.jge.2021.100026
Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D. A. (2021). Microeconomics:
Private & public choice. Cengage Learning.
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VIEWS ON SOUND ECONOMICS AND THE
ROLE OF THE GOVERNMENT 12
Richardson, J. H. (2021). Basic policies and principles. Economic and Financial Aspects of
Social Security, 36-54. https://doi.org/10.4324/9781003254546-3
Söderström, L. (2018). The economics of social protection. Edward Elgar Publishing.
Tanzi, V. (2020). Hayek, Keynes, and the economic role of the state. The Economics of
Government, 32-50. https://doi.org/10.1093/oso/9780198866428.003.0003
ZHU, Y. (2021). Multi-tiered Social Security system in the new era: Basic principles and
practical approaches. DEStech Transactions on Economics, Business and Management,
(ahem). https://doi.org/10.12783/dtem/ahem2020/35313
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