Macroeconomics

· John Maynard Keynes and Friedrich Hayek are giants in the economics profession. Their theories and ideas represent contrasting views on several of the central issues of economics.

· Although there are many different schools of thought in economics, they can be grouped roughly into (1) those that view market outcomes as often problematic and government interventions as effective and (2) those that alternatively view market outcomes as generally efficient and government interventions as suffering from various shortcomings.

· Keynes believed that market economies were inherently unstable and government intervention in the form of fiscal and monetary stimulus could be used effectively to promote economic stability. Hayek believed that economic instability was primarily the result of malinvestment generated by monetary and credit expansion and that government stimulus would slow market adjustments and the recovery process.

· Keynesians stress the role of aggregate demand and spending in the macroeconomy and view savings as a leakage detrimental to the economy. In contrast, Hayekians have a more favorable view of the role of savings in providing the funds necessary for investment and growth in productivity and output.

· Keynesians believe that government intervention can generally improve market outcomes. Hayekians believe that policy-makers simply do not have the information or incentives to plan the economy effectively and that their efforts to do so would be far less efficient than allocation through markets.

· Keynesians believe that the job of the economist is to develop policies that will reduce economic instability and correct market failures. Keynesian analysis largely ignores how economic incentives influence the operation of the political process. Hayekians recognize that the political incentive structure often caters to well-organized interest groups and results in the adoption of shortsighted policies. Thus, they stress the importance of legal and political institutions that will provide both market participants and political decision-makers with incentives to engage in productive rather than counterproductive actions.