Sunday, February 07, 2010

Hayek vs Keynes rap throwdown

LOLness. A great video from the guys at EconStories. 

Keynes has been the dominant force in world economy since the 1930s with his General Theory and his legacy is deeply felt today: the Bangko Sentral, NEDA, and various government economic institutions and regulations. Hayek on the other hand believes you can't plan an economy. Information is dispersed thoughout society; millions of people making individual decisions on what theyre going to do next. As we can see, Keynes has won the debate by acclamation and very few people know who Hayek and Mises are. For Keynes, the boom-bust cycle is caused by 'animal spirits' (which is academic-speak for 'I dont have a clue'). Hayek on the other hand says it's caused by artificial low interest rates caused by government manipulation. The cure for the boom-bust cycle? Keynes: increase aggregate demand -- if consumers stop spending, the government should pick up the slack. Stimulus packages and bailouts are Keynesian solutions. Hayek's solution is to prevent the boom in the first place by letting interest rates go to their natural levels: what each individual making individual decisions determine the price of credit to be with no intervention from the State. No stimulus packages, no bailouts. If a company can't survive in the free market without government help, the government should not use public money to save it as this creates a moral hazard. Anyway, enough of that. Here's the video.

See also an earlier blog post: Boom!


R.O. said...

Because of this, I reread your Boom! post, and you know what, I still couldn't wrap my brain around the issue. Why is Economics so hard to get? If only it were so simple.

Jego said...

It doesnt need to be. You only have to remember two things:

1) People act for their own subjective purposes.
2) You can't make something out of nothing.

Any theory that doesnt take those into consideration, I tend to view with suspicion.