10. Schools of Thought

Question 1

Keynes Brief Outline?

Answer 1

Keynes believes in free-market capitalism as the best way to manage the economy. However, he believes that the free market is flawed and the government plays a key role, intervening in the economy to protect businesses and households.

Question 2

Friedman Brief Outline?

Answer 2

Milton Friedman was the twentieth century’s most prominent advocate of free markets. He is also popularly associated with monetarism, presenting evidence to resurrect the quantity theory of money

—the idea that the price level totally depends on the money supply.

Question 3

Hayek Brief Outline?

Answer 3

Hayek viewed the market as capable to correct itself, when facing shocks, by taking advantage of competitive forces.

regarded government and central bankers’ policy efforts to restore growth as causes of more instability.

Question 4

What are the 3’s policies on Markets?

Answer 4

K- Keynes suggests interventionism from the government.

F + H - usually suggest free markets with little, if any government involvement.

(F- Friedman is OK with central banks intervening to affect money supply.)

(H- Does not think this will help.)

Question 5

What are the 3’s policies on Monetary Policy?

Answer 5

F- Friedman suggests that monetary policy, controlling the money supply, can help smooth out recessions.

K- Keynes suggests monetary policy plays little role in stimulating the economy and aggregate demand. Rather, Keynes’ solution is spending by government.

H- Hayek is adamantly opposed to monetary policy, as he thinks its implementation is what causes boom-bust cycles in the first place.

Question 6

What are the 3’s policies of Fiscal Policy?

Answer 6

K- Keynes suggests fiscal policy to help prime the pump to recovery after a recession, where government stimulus packages prop up the economy.

F+H- Friedman and Hayek oppose such intervention on the basis of interfering with the market process. Hayek takes a stronger stance against any such intervention.

Question 7

Similarities between F + K?

Answer 7

• Keynes and Friedman are both believers in Macroeconomics as the key to resolving economic problems like unemployment and inflation.
• It also goes together with strict budgetary management and generally a belief in laissez faire – free market supply side policies.

Question 8

Differences between F + K?

Answer 8

Keynes is more of a believer in Fiscal Policy but many of his opponents thinks that Fiscal policy produces far too much waste and inefficiencies.

Friedman (his school are called Monetarists) place great emphasis on controlling the money supply in order to control inflation.

Question 9

Why is Hayek different?

Answer 9

• Hayek believes that Macroeconomic (top down) solutions and approaches (Fiscal and Monetary policy) are pointless and that microeconomics (bottom up) is the key to achieving economic growth.
• The market should be left alone- it will do its job.
• Hayek also believes that economics is not about numbers and mathematical equations- it is a behavioural science, all based on differing reactions and responses of individuals.

Negative:
The problem with the Hayekian position is that it’s relentlessly negative: spending doesn’t work, stimulus doesn’t work, all we can do is suffer a nasty bout of deflation and trust in the invisible hand to eventually get us back to work again.