Econ Fight of the Century: Keynes vs. Hayek (video)

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What does it mean?

John Maynard Keynes

Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years.

Keynesians argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.  Basically, the government should have more power on what we spend things on.

Keynes argued that the solution to the Great Depression was to stimulate the economy (“inducement to invest”) through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth.

Free-Market Capitalism:

Free market is an array of exchanges that take place in society. Each exchange is a voluntary agreement between two people or between groups of people represented by agents. They exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a coke from a newsdealer for a dollar, the store owner and I exchange two commodities: I give up a dollar, and the newsdealer gives up the coke. Or if I work for a business, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire. Free Market: The Concise Encyclopedia of Economics | Library of Economics and Liberty

Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism (note how the word liberal has been tainted; the true meaning derives from liberty) and free-market capitalism against socialist and collectivist thought. He is considered to be one of the most important economists and political philosophers of the twentieth century, winning the Nobel Memorial Prize in Economic Sciences in 1974. Along with his mentor Ludwig von Mises, he was an important contributor to the Austrian school of economic thought.


The tragedy of this debate is that free-market capitalism has not been used for centuries.  The economic debates in the 70’s and 80’s were Keynesian vs Monetarism.  Who do you think is more efficient at spending money.  Somebody that received  money (Government), or somebody that earned money?  We’ve seen this many times with governments spending: bridge to no where, turtle road bypasses, solar panel companies, junk science, and electrical cars in Finland.  It’s easy to spend money on crap, when you didn’t earn it.

In my opinion, Keynesian theory relies too much on consumerism.  I could pay somebody 50K a year to rake leaves in the forest, but that wouldn’t benefit society to pay for a service that is not needed.  I would love for this country to give free-market capitalism a try.  It’s been a while since we have.



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