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Special Topic 4
Great Debates in Economics: Keynes Versus Hayek
OUTLINE
I. Keynes and Hayek
A. Keynes and Hayek
1. John Maynard Keynes and Friedrich Hayek are giants in the economics profession.
Their theories and ideas represent contrasting alternative views on several of the
central issues of economics.
B. Keynes
1. Keynes believed that market economies were inherently unstable and government
intervention in the form of fiscal and monetary stimulus could be used effectively
to promote economic stability.
C. Hayek
1. Hayek believed that economic instability was primarily the result of malinvestment
generated by monetary and credit expansion and that government stimulus would
slow market adjustments and the recovery process.
2. Hayek believed that policy-makers simply do not have the information or
incentives to plan the economy effectively and that their efforts to do so would be
II. Keynes Hayek, and Great Debates in Economics
A. What is the cause and cure for the business cycle?
B. Should an economy be directed by government central planning or decentralizes
individual planning and the invisible hand of market prices?
C. Can democratic decision-making be counted on to allocate resources efficiently?
OBJECTIVES
In this feature, we focus on the views of John Maynard Keynes and Friedrich Hayek with regards
to the business cycle, in the context of two videos.
282 Special Topic 4/ Great Debates in Economics: Keynes versus Hayek
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
2. Keynes argues that increased saving will decrease aggregate demand and thus lead to economic