Tuesday, August 23, 2011

Why Keynes Wins Rematch With Hayec Only In Theory

link here to article

Lord Skidelsky wrote a biography of Keynes. It included the contest between the competing views of each during the Great Depression. Keynes won that debate but Hayec outlived him by 50 years. Hayec's views gained credibility during the Thatcher regime in the UK, and also in the US where his free market ideology was repackaged by Milton Friedman and sold it to the public during the Cold War, and to Reagan in the 1980's.

The Great Recession has revived the debate between Keynes and Hayec. They both trace the economic problem to debt induced overspending by business and consumers. The remedy proposed by Hayec is austerity. Savings need to increase, and debt should be liquidated. Keynes used the "paradox of thrift" argument to rebut that approach. He argued that if all agents decided to save at the same time, savings would actually decline. The fall in spending would cause national income to decline, and there would be less income available for savings.

It appears that Hayec has won the debate in Europe and austerity has become the favored solution to the current crisis. Skidelsky believes that Hayec provides no solution to our current economic problems, and he hopes the Keynes can prevail in the US.

Since the GOP has proposed austerity as the solution in the US, and the Obama administration seems to favor debt reduction over a Keynesian stimulus, largely for political reasons, it is unlikely that Skidelsky's wish will be realized.

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