510-sum19-may20

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CPOL 510:  Power and Money: Topics in Global Political Economy

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May 20 – Keynes and Hayek, Part 1

This week we introduce Keynes and Hayek.  Understanding their principles and their debates unlocks the debates that took place across the West (and in many parts of the world) in the last hundred years.

From Keynes arguments’ at the Treaty of Paris negotiations to the Great Depression and New Deal, from the new world order after World War II – IMF, World Bank, EU – to stagflation in the 1970s, Keynesian ideas dominated Western and international orgranizations.  It is an overstatement to say the Communist World was Keynesian ideas gone too far – in fact, they were of a different motivation and magnitude.  But Keynes (and Soviet and Chinese Communists) thought the Government was smart and could do good things and therefore ought to.

Hayek had different ideas.  He began his scholarship optimistic that socialism could do good things, but the math didn’t work.  Governments don’t know how much stuff should cost, and setting prices at the wrong level created inefficiencies, or worse.  Economies need to know price levels and only markets, Hayek decided, could do that.  But Hayek was also concerned at the more political level:  everything the government had the effect of taking away a person’s liberty; the more the govt does, the more liberty is lost.


We start with some background.  Debates over the question of How much should the government do?  or What is the proper role of the government in the economy? date back long before Keynes and Hayek.  We’ll go back about 150 years, to hear Adam Smith argue that the free market and free trade are the best approach, while Alexander Hamilton argues that in some cases (like in the case of the new United States), a strong government role in the economy is required.

If you took CPOL 500 with me, you may have seen different sections of these readings before.  They are worth revisiting.  The language is slow and difficult even for native English speakers.  Do your best to read for the main ideas; you do not need a detailed understanding of every paragraph.


Watch

A short introduction – four minutes – to our ideas for this week.  The video quality is low and ignore the “July 13” reference, but otherwise I think parts of it are useful


Read – it’s ok to read these quickly and for general understanding

Adam Smith, The Wealth of Nations (1776)
Book 1, Chapter 2: Of the Principle which gives Occasion to the Division of Labor https://www.econlib.org/library/Smith/smWN.html?chapter_num=5#book-reader 

Did you make the clothes you are wearing?  Did you grow the food you are eating?  Did you make the computer you are using?  No – you worked doing the things you are good at, traded that work for money, and traded that money for other things, like clothes and food and computers.  Smith says this is what countries should do too.

Alexander Hamilton, Report on Manufactures (1791) http://www.constitution.org/ah/rpt_manufactures.pdf

Reading the whole of this Report takes longer than seeing the show, but rhymes less.  You can get the gist from pages 14 and 15:  this new country needs to develop itself to defend its recently-won independence

Friedrich List, The National System of Political Economy (1841)

List says that what Smith says about free trade is true – if you are the advanced industrial nation of England.  But if you are the less-developed France or Spain or Germany, you will lose in a world of free trade – you instead must used protectionist policies to catch up first.  You can skip down to Chapter XI and then skip down to paragraph 15 – the big one beginning “History teaches….” and read the rest of chapter XI from there.  https://oll.libertyfund.org/titles/list-the-national-system-of-political-economy


Notes

You might review these notes as well

keyneshayek-part1

Keynes and Hayek in Yergin

Smith says less government restrictions on trade is good for creating the most wealth.  Hamilton argues that agricultural states need government and protectionist policies to develop industry.  List agrees with Hamilton.

The decades following List and especially following the American Civil War (1861-1865) are decades of great industrialization, and indeed an early modern version of globalization.  By 1909 (and 1912), British writer Norman Angell argues that this growth of trade and investment makes war among the advanced states of Europe completely illogical and therefore possible avoidable.  American naval historian A.T. Mahan is arguing the opposite. Angell and Mahan in three slides:  angell mahan ppt

By 1914, World War I is underway.

The horrors of World War I lead Europeans and many Americans to seek a new system of economics that will prevent war.  Some look at socialism.  But Keynes and Hayek have a more sophisticated argument, within the market-oriented philosophy but differing over the proper role of government.

We start with an introduction to the economists themselves, this short bio on Keynes and this short bio on Hayek

Next, we watch a series of short videos on the economic history of Europe in first half of the 20th century.  It’s actually much better than it sounds! It sets the stage for the Keynes-Hayek debates of the 1930s, but it also predicts the debates as they will play out in the U.S. and around the world for the next 100 years including still today.  Understanding Keynes and Hayek then helps us understand so much of the global political economy debates today.


Read – spend some quality time with these, reading them carefully

This short introductions give a decent peek into the greater substance of their work. Keynes can be tough, but it is only a few pages

Keynes, The General Theory (1935), a short selection – be sure to read at least 245-249

keynes – general theory – selections

Hayek, The Road to Serfdom (1944), the introduction, and a comic-book summary

The introduction is useful enough.  Chapters 1 and 2 evoke interesting comparisons to some on the American left today Hayek – road to serfdom – intro, ch1, ch2

Hayek – Road to Serfdom – cartoon only

 


Watch

Get comfortable, this is about 45 minutes (or two episodes of The Office, or one episode of The West Wing).  Begin with episode 1 chapter 1 – and it will play through the next several chapters.  You want to stop after episode 1 chapter 8.  The video has the option for captions.  You can also get the complete transcript here.

The history is useful enough, but the real value is in finding the key questions that we still ask today.


Ok, your turn

Two parts this week, and future weeks.

(1)  This is a tremendous amount of information. Much of it is history you may not be familiar with.  (But you should be glad – I used to require much longer readings of Keynes and Hayek!)

One good approach might be to think of one “big narrative” that you found especially interesting or important or challenging – one big idea that you had not heard of before, or that you thought of in a new way, or that you have changed your mind about, etc.  Reflect and write about this.

And also reflect and write about one smaller point – one detail, one piece of the story, one smaller item that has real meaning or importance larger than what we might think at first.

This should be done by Thursday night, totalling approximately 500 words

(2)  Reply to one or more of you classmates.  Engage them in their argument – how you agreed or disagreed; how they enlightened you by taking a perspective you had not considered; how they brought together ideas that you hadn’t thought of bringing together; how they used the same approach as you but came to different conclusions, or took a different approach than you did but came to similar conclusions; or any other reflections you have.

Your replies should be posted by Sunday night. You probably want to address at least two of your classmates.  Your replies (one or two or three or whatever) should combine to total approximately 400 words.

This is the first time we are replying to each other — you want to be sure to see/review https://govt396.com/links/what-makes-a-good-post/


 

20 Replies to “510-sum19-may20”

  1. The whole historical battle of ideas (over the realms dealing with power, economics, leadership, markets, societal structure, etc.) between the Keynes and Hayek viewpoints and thoughts is quite fascinating and has its ripple effects throughout history even until this day in the political tensions that face American politics and political relations internationally as well. Though I’ve learned about Keynes and Hayek before (in CPOL 500), it was good to brush up on the concepts and get a greater grasp on the whole historical development reflected in the times that these ideas were coming to the forefront. I see both political/economic philosophers’ thoughts and ideas as being tools for different circumstances that are obviously not going to work together simultaneously but will ebb and flow with the markets, economic fluctuations, political attitudes and other societal pressures or occurrences of the time. What’s interesting though is the big picture idea that both economic ideologies predicted different extreme triggers in society which we saw reflected in actual events that gave way to each one having its moment of strength to better the economy. Keynes (and present-day democratic ideas of government intervention, regulation, influence and involvement) was key at influencing the New Deal era response to the horrors and disastrous effects and impacts of the Great Depression. More regulation and introducing new programs and having a heavy hand allowed the government to work at its core more directly and is kind of a perpetual cycle of more government involvement and creation of programs, would create more prosperity and dictate more employment growth and success. This was also reflected in the World War Two efforts in the United States and other powers who naturally needed more of an active workforce at being able to serve the war effort and aid in the eventual win. This necessity was very much appropriate and naturally fit the Keynesian response and approach to economics. Hayek, seen as the more present-day republican ideas of smaller government intervention and involvement and more independent free market systems for the bettering of the lasting economy was the opposing view to Keynes in many ways. Hayek stipulated that government was not fit and could lead to dictatorship and too much control over the economy and the people within it that would end up defeating the purpose of a free and just society and economic control would arguably stifle any ability to freely grow the market independently and would intervene and suppress political rights and other freedoms associated with this. Hayek’s overall view that markets were smarter and more equipped to handle the economy than government actors was the key difference. Hayek’s famous prediction that markets would be better in the long run and Keynes’ retort that everyone is dead in the long run really reflects the contentious views of the two economic thinkers. Both though, on a smaller note, have influenced modern day American politics and economics as well as branching out to the overall competing economic or political systems in the world to this present day.

    1. Hi acatiggay,

      In laying out the juxtaposition between the two philosophies, it reminded me that human nature almost seems to compel us toward a tribal way of thinking, wherein an “all or nothing” mentality may develop in regards to ideas. We certainly see that played out daily in America’s two-party political system. I am left wondering what we are NOT considering. Does the whole of global economics have to fall along these two methods? And, if we are to consider these two methods alone, must they be mutually exclusive? In my opinion, no. One revelation that stood out to me this week was how different methods were applied at different times, such as FDR’s New Deal (Keynesian) and Erhard’s free market approach in hyper-inflated post WWII Germany.

      Also, this concept of government intervention leading to a totalitarian state strikes me as a rhetorical fear tactic, as if social principles are more dangerous than market principles. I can’t help but think that unfettered capitalism may perhaps lead to an oligarchy driven by greed and corruption.

      One last point, you mentioned Keynes’ remark that we’re all dead in the long run. When I first heard this, I found it insulting, because he’s referring to the world I now live in, him being dead and all. It was a shortsighted, selfish response, probably said with a healthy dose of sarcasm and frustration, but totally ignoring the relevant question of the long term effects of social economics.

  2. Big Narrative of Government Intervention
    Initially, the involvement of the government in running the economy was not making sense to me. I thought that the markets should be left alone to operate where the forces of demand and supply should determine the equilibrium levels. However, Keynes concept of government intervention has changed my view as I have understood the essence of government involvement in running the economy. According to Keynes, a free economy cannot provide full employment to the citizens. Therefore, the government intervenes to ensure that the jobless get meaningful opportunities to secure jobs. I now have the view that the government is like a national system that controls a smaller system called a market. The buyers and the suppliers form the market, and their interaction has to be regulated to give meaningful results in the economy.
    In the Keynes General Theory of Employment, Interest, and Money, Keynes lamented that the labor prices determine the employment levels, while investments emanate from savings (Keynes, 2018). However, the argument of labor prices and employment levels can instigate a lot of debate in terms of how they interact. High labor prices can attract more labor, but the employers cannot be willing to hire them hence leading to high levels of unemployment. Consequently, low labor prices can increase the motivation of employers to hire more laborers but decrease the morale of the citizens to seek jobs. Moreover, savings leads to investments as the investors have enough capital to invest in major projects. However, the citizens have to be employed to secure the savings. Therefore, different market factors must work in unison for the Keynes concept to work. For instance, the government must intervene through spending programs to create more employment opportunities that will further lead to savings that may further lead to investments.
    A smaller Point
    After World War 1, Hayek found his country in a devastating state where the citizens had lost confidence in the government, and their savings had been depleted. This founded the philosophy of Hayek, where he refuted the claim that inflation would be a cure for a depleted economy. According to Hayek, the intervention of the government to control inflation through public spending can lead to political tyranny (Koehn, 2011). The government can obtain excess powers that can make it oppress the people instead of helping them during hard times. For instance, the government can adopt policies of increasing the inflation levels as a way of punishing its critics. This view has changed my mind about how the government can sometimes affect the performance of an economy.
    The government should not entirely be trusted with the responsibility of regulating the economy. There should be room for self-regulation between the market forces to determine the employment levels in a country. According to Say’s law, every supply creates its own demand. Therefore, the market can create a performing economy where the suppliers locate their own demand. This can enhance the forces of demand and supply to work together and achieve an equilibrium that can create employment for most of the citizens. This creates a new perception that the government can leave the suppliers to venture in the market without regulations.

    1. Hi, Nourh. The Keynes and Hayek question is an important one. It’s important for us to be able to summarize them – but not to caricature them. Keynes believes that government can – and therefore must – intervene in the economy. He said the government can either fix inflation or unemployment – but not both. And while this was widely believed by policymakers for decades, it didn’t always work. In the 1970s, the West had high inflation and high unemployment, and Keynesian ideas couldn’t fix it.

      This is when people like Margaret Thatcher (UK) and Ronald Reagan (US) began to become influential, arguing that LESS government would help the economy – the ideas of Hayek – “Government As The Problem.” We’ll read more about this next week. But as economies around the world began pursuing ideas of less government, where the market had more freedom, lots of global economic growth for about 25 years, from 1982 to 2007. Big global financial crisis in 2008 — led people to think, “Wait – the answer to this problem is Keynesian” – people returned to “Government As The Answer”.

      An honest approach is that governments can sometimes do some things well but not all the time, and that the market can do great things when it is free but at the same time often needs some government guidance or regulation.

    2. Hi Nourh,

      I appreciate your post. I do believe that both the Hayek and Keynes find different strengths or weaknesses of the government involvement and a successful prosperous society and economy. I believe I’ve been more of a Keynesian-type thinker seeing the strength, value and positive outlook of having a government that regulates, has influence and intersects into the economic sphere of a successful and prosperous society. I think that the New Deal, the post 2008 crisis with the Obama presidency and other like times in the country show a greatness to involving government. I do think that I see the qualms of Hayek though coming from his time in the falling Austrian power and coming from the background that he came from. One’s background, life experiences and upbringing really impact one’s view on whether or not government is doing well or not in the economics of the day and age. I think that doses of both Hayek and Keynes are what make the cycles of economic fluctuation have its ups and downs and both approaches need to switch on and off to maintain that balance between government influence and intervention and restraint during market power taking an independent lead. Just like anything good, both views and approaches I believe are positive in moderation. Too much Keynes and extremes can occur where a society is oppressed and dictated by the very forces who found power in regulating every aspect of the market, while too much Hayek will be the opposite and chaos, instability and lack of organization/structure can literally collapse entire sectors of the economy and of society. I feel that it is inevitable to have both and both were influenced at different times in history from a different viewpoint of which both extreme polar viewpoints made sense given the context and circumstances. I think that in a global age, and more globalization, there is need for governments to regulate more sectors going in and out of borders and thus a more Keynesian approach seems to make sense. What would be interesting is what is the Keynesian and Hayek approaches on the international scale and in international sectors/trade/commerce?

      I will say that I agree with your sentiment that there should be some self-regulation before the government comes in because I do believe, especially in an American standpoint, that entrepreneurship and individual market contributions should be within the freedoms of the individual actors/citizens who conduct such projects or work. I do think that on a big level scale regulation to make sure there is no abuse in conduct/practice and dealings would be good but more freedom to actually conduct the ground work for each sector is necessary to maintain that separation of government and free citizen. Overall both Keynes and Hayek wanted to see a successful and prosperous free economy, in my view, it’s just both had different viewpoints on how that could be accomplished.

      1. Acatiggay – one particular aspect of your posts resonates with me: the ebb and flow of the popularity (and application of Hayek and Keynes). I wonder if the ebb and flow, or as I like to call it, the swing of the pendulum, is because one or the other becomes the fashionable theory to embrace, or whether it is because one or the other is the appropriate approach in a given place or time. Could both Hayek and Keynes be right? Could it be that, depending on the circumstances, including the maturity of the economy, one or the other might be the right prescription? And then at a different point in time the other would be right? Or is it that ideologues mess up their economies so badly by adhering to their ideologies instead of being intellectually flexible enough to take a practical approach?

        If you asked me whether I was a follower of Hayek or a Keynesian, I would be hard pressed to answer definitively. Is it possible to be both? At times, I believe that the right approach is to let the market have a free hand to do what it does best, constrained by an appropriate regulatory structure to avoid outcomes that society disfavors. At the same time, I do not believe that a free(ish) market can always serve society’s needs and there are times where we need to take a more Keynesian approach. Following on my post from this week, I guess that makes me a Hamiltonian?

    3. Nourh – do you think that Hayek’s fear of government intervention in the economy leading to tyranny and a loss of freedom was reasonable, or do you think he overreacted? While I agree that, taken to an extreme, government control can lead to authoritarianism, do you think that would always (or most often) be the result? I think that there are a lot of other factors that would affect a country’s path to authoritarianism. For example, a country’s legal system, established institutions, and culture could all work together or independently to prevent government intervention in the economy from resulting in authoritarianism.

      I have one counterpoint to your assessment that a free market can find the right equilibrium to achieve full employment. One reason that I think government spending is important is to ensure that marginalized or under-represented groups are able to participate in the economy. If people struggle to be successful in the economy (like people with limited access to education, women, or minorities), society demands that the government take some corrective action. Civil society, or at least American civil society, demands not just that we achieve economically efficient outcomes or full employment at the national level; it demands that individuals have the opportunity to pursue life, liberty and the pursuit of happiness. The free market system is not necessarily designed to achieve that outcome. Although I generally believe in Hayek’s approach to finding market solutions and limited government intervention, I still believe that there is a role for Keynesian intervention to make sure real people don’t get left behind, temporarily or permanently, while market forces struggle to find the right equilibrium.

    4. Hi,
      It was so nice reading your post. I like how you presented a clear picture of how you viewed the concept of government intervention in economies in accordance with Keynes’ view on the subject. I must say that I also thought that government should let market forces run the economy with government just standing by and providing regulatory support. The view of Keynes did a lot to change my position on this subject as his intervention after the great depression. I also agree with your new view on the subject that a free economy cannot provide full employment to all the citizens of the country, thereby needing the impact of the government to step in and close the gap on the remaining jobless people.
      ​I was particularly impressed with the presentation of facts that you made that low labor prices stimulate employment but lower the morale of the people seeking jobs. This is a very logical description because it is higher wages that will motivate people to get into the labor market to find work that can help them improve their lives and purchasing power. Keynes’ General Theory of Employment, Interest, and Money was an interesting addition that you had in your discussion. It presented the fact I just talked about and it also stated that labor prices determine the employment levels, while investments emanate from savings. This statement is logical in the sense that when potential workers sitting outside the labor force sense that they will be properly compensated for the job they do in the workplace, they would be more motivated to step out of the side lines and jump into the labor force to get work to do. With regards to the relationship between investment and savings presented by Keynes, it is only normal to expect a person to invest when their consumption is taken care of and they now have savings with which they can carry out investments with.
      ​Your discussion on Hayek was very interesting as well. I was impressed with how he was someone who served in the military and was motivated to make an impact in the economic structure and planning in Austria. It was interesting to see how his own views came in stark contrast with the opinions of Keynes, especially in their views of how much government intervention there should be. Hayek’s opposition of excessive government spending or inflation to cure a depleted economy was a view that was not initially accepted or respected by economies as that of Keynes was adopted for many decades. I agree with your conclusion that government must not be completely trusted with the responsibility of regulating the economy. It is a known fact that government does not operate as efficiently as the private sector (or market forces), and this fact makes a strong case for market forces to be given power in determining employment levels in an economy.

  3. “Hamilton in 3D” and “The relationship between globalization and global terrorism”

    To be honest, I did not really give Alexander Hamilton much thought before my daughter came home singing the catchy tunes. I mean, sure, I always knew that his skill with the quill was undeniable and that he was in the room where it happened back in 1793. But I suppose I always viewed him in two dimensions: the ten dollar founding father, a face on a bill, a name associated with the Federalist Papers, the unfortunate man on the receiving end of Aaron Burr’s bullet. (See, e.g., https://www.youtube.com/watch?v=0Gkqzxss8Ss). In that magical place along the time-space continuum where musical genius meets graduate school reading assignments, I am able to look around (look around!) and see for the first time the context of his approach to the American experiment and really appreciate how his genius was specific that particular time and place. And by that, I mean New York in waning years of the 18th century. Although I do take issue with his assertion that New York is the greatest city in the world. (Note to my dear readers: I understand that if you aren’t familiar with the lyrics to Hamilton the musical, you will surely think I’m stark raving mad. I accept that. For insight on my madness, see http://www.allmusicals.com/h/hamilton.htm)

    According to popular opinion, we live in one of the most polarized times in the history of our country, and political parties have never been as ideologically opposed and intolerant of different ideas as they are now. While I am ill-equipped to say whether 2019 is more or less ideologically polarized than other times during the history of our great Union, or whether today’s politicians are more or less tolerant of one another than previously, I can say with certainty that this country is no stranger to pitched ideological battles that, at times, turned quite violent. (See, e.g., War, Civil the; http://www.senate.gov/artandhistory/history/minute/The_Caning_of_Senator_Charles_Sumner.htm). Indeed, my interpretation of American history, thanks to Lin-Manuel Miranda and Ron Chernow (www.amazon.com/Alexander-Hamilton-Ron-Chernow/dp/0143034758) is that there was a pitched battle at the formation of our country over how to structure our financial system, including what role the government should play.

    What I failed to appreciate, until reading this week’s assignment, was that Hamilton’s impassioned advocacy for both protectionist trade policies and a national bank to foster a self-sufficient American economy reflected his own practicality, not his ideology. My takeaway is that Hamilton was not ideologically committed to a government-backed financial system or protectionist trade policy. Rather, he was in favor of doing whatever it took to get the fledgling country standing on its own two feet, to be independent of its former master, and not beholden to a foreign power. He understood that this meant that it had to be able to rely on its own industry to grow wealth and population, and that, in turn, depended on a government-run national bank to finance the nascent industry. Had he not become intimately acquainted with the business end of Aaron Burr’s pistol, I think we would have seen him advocate for changes to American trade and financial policy to adjust to the maturing nation’s needs. My newfound admiration for Hamilton lies in his practicality and unwillingness to be a slave to ideology.

    One other thing that really stood out to me this week was the following line from the introduction to the PBS video: “is global terrorism the dark side of the promise of globalization?” I spend a lot of time thinking about the root causes of terrorism and what, if anything, we can do on a national or international level to prevent or mitigate the spread of terrorist ideologies. In the end, I always come back to economics as both a cause and a potential solution. As a result, global terrorism as a consequence of globalization is an interesting concept for me. As we think about how globalization produces winners and losers and the resulting effect on domestic politics, it is interesting to consider how that same effect of creating winners and losers could be one of the sources of global terrorism. Could appropriate measures to address the failings of globalization become a potential solution? This is a line of thought I would like to pursue in the coming weeks. (Do I see a paper topic emerging?????)

    1. Genevieve, you tell his story

      A.Ham was not just another immigrant coming up from the bottom, he wrote thousands of pages (including the other 51) like he was running out of time, and maybe no one had more resilience or practical tactical brilliance. But regarding our reading for this week, you are right. His advocacy of protectionist trade policies was consistent with his promise that if the new nation assumed state debts it would get a new line of credit – a financial diuretic – a boost instead of a sedative – for which Madison eventually credits him. (And no, he did not like to take civics lessons from a slaver.)

      There’s a PBS thing of Thomas Friedman after 9-11 – https://www.amazon.com/Thomas-L-Friedman-Reporting-Searching/dp/B007QAFH9G – that is some really interesting time travel, if you are interested in globalization and terrorism

    2. Genevieve, I agree with your assessment in the last paragraph of economics as both a cause and solution to global terrorism. I don’t necessarily see this idea as separate from the question presented in the video. Modern history has painted of picture of European conquest and exploitation and many parallels exist now that fuel the perception that it continues today. In fact, this very nation, in defying a major European power, committed genocide, confiscated lands, and brutally enslaved others to build the nation we enjoy today, and we ourselves have military bases and/or personnel in all corners of the globe. Perhaps there is a credibility issue here? Nonetheless, America’s greatness lies in her capacity to change, and that has likewise been repeatedly demonstrated over the years. We need better PR!

    3. Genevieve,
      I do not think that terrorism represents the ‘dark side of the promise of globalization’ as the PBS video wondered. The statements of Vice President Dick Cheney and President Clinton are obviously true. The negative consequences of globalization are limited, and the vast majority of the world benefits from it. In contrast, when it comes to terrorism especially the terror of groups such as: Al-Qaeda, ISIS, etc., the tools of globalization helped them to grow rapidly in size. Moreover, without Twitter and Telegram ISIS and online propaganda videos, ISIS would not have been able to succeed in recruiting thousandths of fighter from tens of countries. Bill Clinton spoke in the video about a necessary balance. Platforms such as YouTube, Twitter, and Facebook worked and is still working hard to quickly remove any content in this context. Furthermore, one example of that when a few weeks ago the head of ISIS appeared in a new video published on YouTube it was removed very quickly from every YouTube channel that published it. The is diffidently an urgent need for more reformation and protection measures of the major tools of globalization. But, calling terrorism as the dark side of the promise of globalization might be an overstatement, as terrorism can function without it with defiantly less strength.

  4. The main ideas and narratives of this week’s discussion revolved around the debate about whether the state or government should have as much an impact as it does in managing the economies of the world. This debate was centered around the importance of market forces versus state planning having a key role in economic directions and management of nations. It was interesting to see how both John Maynard Keynes and Friedrich Hayek held strong beliefs that reportedly dominated the economic debate for over ten decades as to whether market forces should be allowed to take its course and determine prices (Hayek’s theory), or whether states should be involved and curtail the inevitable excesses that are related to allowing market forces run wild and rule (Keynes’ theory).

    Keynes and Hayek argued about the role of the state and if it should intervene in the economy, as well as if it is able to intervene effectively. Keynes said (due to him being older and being a British intellectual) that it is crucial for the state (or government) to intervene in the economy and manage it. The idea is that government can trade off inflation and unemployment and effectively manipulate these economic phenomena to manage the economy. Keynes’ view of the economy was largely adopted globally from 1930s to 1970s. Hayek was younger but had a different approach and he claimed that government encroachment is an encroachment on liberty. He claims government will make mistakes because it is not capable of being effective in managing the economy. Both of them shared same goal and wanted to avoid a social situation where society is vulnerable to a charismatic leader that could derail the economy. They feared chaos in the society that could create autocratic leaders and dictatorships. While Keynes fears this collapse of the economy happening instantly, Hayek fears it would happen gradually and incrementally if the government is allowed to rule economies. Hayek believes greatly in the market and its ability to correct things but Keynes fears that time is too short to play around that “in the long run we are all dead.”

    It was interesting to understand that Hayek was involved in the World War I as a soldier for Austria and that his experience (seeing all the destruction) then played a role in him concluding that civilization was very fragile. This propelled him to work hard (via training and knowledge of economics) to find ways to make the world a better place through the influence of government and economic policy. I did not know that World War I and its impact brought about more people clamoring for socialism and communism as a way to eradicate classes and make more people benefit from the resources of the nations. World War II was the same and this even showed with how Winston Churchill in Britain was voted out due to his support for Hayek’s view of opposing socialism and state planning.

    This exercise and the materials also exposed me to what was referred to as “war inflation” which was inflicted on Germany and Austria as they were forced to live with the consequences of the peace agreement reached needing them to pay high war reparations. Seeing how communism failed in Germany and Austria and brought upon hyperinflation, it was logical that Hayek took a strong stance against communism and socialism because of how the government seems to continuously show it cannot properly manage and control the economy unlike market forces. It was incredible to learn that people were walking around with baskets of money to buy loaves of bread and very little items due to the high inflation rates. The Wall Street Crash of 1929 coupled with the hyperinflation triggered the great depression that sent shock and despair around the world. Hayek’s point of view was right as government in the United States and around the world failed to correct the situation, rather they made it worse.

    It was nice to learn that Keynes came to the rescue of governments in 1936 by publishing the “general theory” which served to help governments understand how to manage spending (linked to creating employment through expenditures) and use it to navigate the great depression while purchasing power of the people are improved (Govt396, 2019, p.248). His idea helped government understand the idea of keeping inflation and unemployment at reasonable levels to better navigate the economy at all times. This idea of the “general theory” eventually became law during World War II in the United States as it was used to manage the economy during the war. I also learned that Keynes’ ideas helped bring about the creation of World Bank and International Monetary Fund.

    On another note, I also learned that globalization brought very diverse views with some embracing it while some detested it as the 20th century drew to a close. It was important to know that this led to a battle for the world’s economy with many nations finding ways to compete and cope with the interconnected world. The capitalist revolution became very common after the end of the 20th century with it being driven by changes in technological and political landscape. It was interesting to see how capitalism sprung to become the only kind of economy that was really practiced and adopted in many countries of the world, especially those actively engaged in the global markets. This development can be traced back to the ideas of Hayek who stressed the need for market forces as they brought about growth of science and technology which helped propel economies.

    1. Hi,
      You have made a very good analysis of Keynes and Hayek’s view of economic and governmental intervention. Both have been instrumental in developing effective markets. Keynes focuses more on governmental intervention while Hayek advocates for market freedom to protect people from dictatorship. Learning more about their approaches is important in understanding American politics and can also help improve a person’s knowledge of economics and how governments operate.

  5. EA,

    This is a thorough summary of lots of the main points about Keynes and Hayek. It needs a small fix here and there, but overall you id the main questions. As we move forward through the semester, we will see some Keynes-Hayek questions in more recent events.

    ALL,

    The message for EA and for all of us is that we don’t only need summaries here – we’ve all done the readings. When we are writing about the material we find most interesting, don’t be afraid to challenge to the authors, or to ask questions, or to bring together other material from inside or outside of this course. Let’s try to approach this as less of a “quiz” and more of a “conversation” –

    Great

  6. I found myself innately attempting to stereotype Keynes and Hayek according to modern political generalizations, which proved, as most stereotyping does, to be a foolhardy endeavor. Shattering my preconceived notions were the facts that Keynes, a proponent of regulation and intervention, was a British elite, while the Austrian Hayek, champion of the free market concept, had previously served as a foot soldier in World War I. Smith’s 1776 Wealth of Nations seemed a primer on the basic concept of an economic market, wherein we obtain what we want and need by treaty, barter, and purchase by emphasizing the self-interest of the other in the transaction. I was pleased to see his acknowledgment that natural talent mostly derives from habit, custom, and education, and is therefore not a cause, but an effect of the division of labor. This concept begs the question of how many potential world changers have been prematurely thwarted by lack of education and guidance. In his 1791 Report on Manufactures, Alexander Hamilton delineates the commonly perceived distinction between the northern industrial states and the southern agricultural states as two autonomous entities. His counterparts leading our nation into civil war 70 years later may have fared better by heeding his insight that the two sectors are mutually beneficial, notwithstanding the morally repugnant issue of chattel slavery at hand. The National System of Political Economy by Friedrich List portrays a sort of utopian world in which all countries are unified under global governance. It seems to ignore the necessity of external checks and balances required to prevent the occasionally sinister ambitions of humans from imposing oppressive conditions upon the populace. While mankind’s capacity for good is ever present, we should not underestimate the influence of greed, ambition, and power. Another point of his that stood out to me was his mention that Europe already possessed the embryo of a future congress of nations, an especially keen insight considering that the European Union would not be birthed for another 152 years. His concept that free trade and peace share a symbiotic relationship among developed nations seems largely true today. Amongst Keynes key arguments in The General Theory is that “changes in the rate of consumption are, in general, in the same direction as changes in the rate of income” (p. 248). We see later, in the videos, the danger of dealing in such generalities as the concept of stagflation is introduced, wherein economic stagnation and unemployment actually accompany rising prices and inflation. I found Hayek’s Road to Serfdom particularly wordy, which overcomplicated what I perceived to be a relatively simple message, however, I did draw parallel’s after reading through the cartoon version to the current state of American politics, which in my view, place us in the vicinity of step 10, though perhaps not quite as extreme. It was interesting to see the videos place the world economy of the 1900’s on a timeline bouncing from region to region and extrapolating the interrelationship among varying countries and ideals. Overall, what I gathered from watching is that there is no universal answer to global economic challenges. For example, in one situation, we see how FDR’s New Deal introducing economic regulations and federal intervention saved the American economy after the Great Depression, while on the other hand, we find that Ludwig Erhard’s move to a free market saved the German economy after World War II. Scenarios, therefore, must be considered on a case by case basis and have appropriate economic principles applied, be them Keynesian or conservative, tailored to meet the challenge at hand.

    1. Jeff,

      I totally agree with you that there is no universal solution, and policy should be taken case by case. In addition to your point that greed, power, and ambition should not be underestimated, especially as those elements are of huge relevance in the current status of the class gap in the US. It is also important as you mentioned to avoid accuracy of the General Theory of Keynes says ‘changes in the rate of consumption are, in general, in the same direction as changes in the rate of income’ it can be seen in almost all the major economies in the world as you said a direct link between the decline of employment and the rise of inflation.

  7. Hi Nourh
    It was so nice reading your post. I like how you presented a clear picture of how you viewed the concept of government intervention in economies in accordance with Keynes’ view on the subject. I must say that I also thought that government should let market forces run the economy with government just standing by and providing regulatory support. The view of Keynes did a lot to change my position on this subject as his intervention after the great depression. I also agree with your new view on the subject that a free economy cannot provide full employment to all the citizens of the country, thereby needing the impact of the government to step in and close the gap on the remaining jobless people.
    ​I was particularly impressed with the presentation of facts that you made that low labor prices stimulate employment but lower the morale of the people seeking jobs. This is a very logical description because it is higher wages that will motivate people to get into the labor market to find work that can help them improve their lives and purchasing power. Keynes’ General Theory of Employment, Interest, and Money was an interesting addition that you had in your discussion. It presented the fact I just talked about and it also stated that labor prices determine the employment levels, while investments emanate from savings. This statement is logical in the sense that when potential workers sitting outside the labor force sense that they will be properly compensated for the job they do in the workplace, they would be more motivated to step out of the side lines and jump into the labor force to get work to do. With regards to the relationship between investment and savings presented by Keynes, it is only normal to expect a person to invest when their consumption is taken care of and they now have savings with which they can carry out investments with.
    ​Your discussion on Hayek was very interesting as well. I was impressed with how he was someone who served in the military and was motivated to make an impact in the economic structure and planning in Austria. It was interesting to see how his own views came in stark contrast with the opinions of Keynes, especially in their views of how much government intervention there should be. Hayek’s opposition of excessive government spending or inflation to cure a depleted economy was a view that was not initially accepted or respected by economies as that of Keynes was adopted for many decades. I agree with your conclusion that government must not be completely trusted with the responsibility of regulating the economy. It is a known fact that government does not operate as efficiently as the private sector (or market forces), and this fact makes a strong case for market forces to be given power in determining employment levels in an economy.

  8. There is differently no perfect policy in this context of the proper rule of governments in its macro economies. Nevertheless, every era has a certain proper government approach. In the post-WWII, I believe that protectionism of national industries was necessary even though it protectionism has a negative effect on a micro level, making the prices of certain goods likely to be more expensive for local consumers. That policy leads and has led to economic growth in many countries. Furthermore, Keynes notion that ‘governments are smart and can do good things’. In cases of economic recession and depression, government intervention is very needed to avoid a total economic catastrophic outcome. If the US starting from president Franklin D Roosevelt did not adopt Keynesian economic policies for several decades it is very unlikely that the US would have overcome depression. When it comes to Hayek notion that a government economic intervention is a deprivation of personal liberty is an exaggeration. Communism that does not allow personal property is defiantly a deprivation of personal freedom. In today’s America, there is a huge economic class gap, where the top 10 percent of the people control most of the economy and the top one percent control half of the economy. In the current economic status of the US, government intervention is a must, an expansion of socialist programs such as Medicare, Medicate, and affordable health care is necessary. Excessive economic freedom creates a very high likelihood of economic injustices. A balance between economic liberty and government intervention is necessary. The Adam Smith notion ‘Invisible Hand’ is not totally and necessary the right answer. The is no doubt that most people economic behavior is driven by self-interest, and profit is one of the greatest incentives. In contrast, without constraints on peoples greed a high likelihood that negative effects on micro and macro levels will take places. A great economy is measured by the median income not its total GDP, nor its GDP per capita. If we look at the current state of the US economy it is clear that more just economic intervention by the government is necessary. The Smith concept of the ‘Invisible Hand’ works in certain cases but not a solution for every case.

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