Keynes v. Hayek: Will Obama Leave a Legacy of Stagflation?

At some point in time President Obama is going to have a conference on jobs (or lack thereof) in this country. His supporters point to the importance of John Maynard Keynes to Obama’s job creation plans. I happen to believe in the Austrian School of economic theory, the theories espoused by Friedrich Hayek and his friends.

Just who is Keynes and why does his name pop up when the government wants to have a theory that points to how important big government is in our lives? And what don’t these folks understand about Keynesian economics? Let’s have a look.

Keynesian economics advocates a mixed economy - predominantly private sector, but with a large role of government and the public sector. It served as the economic model during the latter part of the Great Depression, World War II, and the post-war Golden Age of capitalism, 1945–1973, but lost a great deal of its luster, and some thought led to the stagflation of the 1970s. As a middle way between laissez-faire capitalism and socialism, it has been and continues to be attacked from both the right and the left. Keynesian economics has provided the basis for the plans of PresidentObama, Prime Minister Brown and other global leaders to rescue the world economy.

So what is wrong with Keynesian economics? Probably nothing if it is followed to the letter. The key to the theory is to curb government spending. CURB GOVERNMENT SPENDING! It is also important to prevent government from becoming too large a force in the lives of those in the private sector. BIG GOVERNMENT IS BAD!

I happen to believe in the Austrian School of economic theory, the theories of Friedrich Hakek and others. Austrian economist Friedrich Hayek criticized Keynesian economic policies for what he called their fundamentally collectivist approach, arguing that such theories require centralized planning, which leads to totalitarian abuses. Hayek also argued that Keynes' study of the aggregate relations* in an economy is misleading, as recessions are caused by micro-economic factors. Hayek claimed that what starts as temporary governmental fixes usually become permanent and expanding government programs, which stifle the private sector and civil society.

* Agregate Relations – The relationship between supply and demand in the marketplace, looking at what comprises what is considered ‘supply’ and what is considered ‘demand.’ For example, the supply consists of the price level and real production, and demand would include consumption expenditures by the household sector, investment sector, government purchases by the government sector and net exports by the foreign sector. In other words prople buy stuff and make stuff and sell it, and when governments get involved it mucks up the works.