John Maynard Keynes vs Friedrich Hayek - the century long battlecontinues

Two kings of economics...two different philosophies.  Since we have been going back and forth between stimulus and austerity - I figured that some people might be a tad confused....I know I was.  I am no economist - but was trying to wrap my arms around two diametrically opposed ideas.  I had been toying with a simple blog - but I saw no way to put one together.  This stuff just doesn't lend itself to sound bites or my usual sardonic humor.    Then I bumped into the two videos below.  The first is a rap video and the second helps put the video into perspective.

Keynes general theory  -  in a nutshell:

In short - Keynesian economics postulates the following:
1. Markets (particularly unregulated markets) are inherently unstable.
2. The result can be large scale unemployment.
3. Since unemployment causes a decrease in spending, business and banks pull in their horns and there are more layoffs and credit is unavailable - creating a vicious cycle.    (We are experiencing that now with tons of money sitting on the sidelines and no one spending it - banks refusing to lend etc.)
4. According to Keynes,  if banks won't lend and industry won't create jobs - the government must step in and pour money into the system to reignite the economy.

The Great Depression & Recovery was Keynesian:

The method by which we came out of the Great Depression was Keynesian.  However it was inadvertent.  World War II forced the government to increase spending dramatically.  Ironically, the tragedy of World War II brought about a sustained economic recovery because the money spent energized the private sector and created a sustainable boom that lasted through the 1950s.

Today - economist Paul Krugman would be your classic Keynesian.

The supply-siders cure for stagflation support Hayek:

Hayek also warned of the inflationary issues that stimulus could create. Certainly the stagflation of the 1970s supports Hayek's warnings to that effect.  Over stimulation into an inflationary environment can be disastrous and the supply-side cure for stagflation by tightening into the recession worked.  The cure was brutal - but at the time there were enough safety nets in place so that massive foreclosures and homelessness were not part of the "cure."

Alan Greenspan would be a classic proponent of Hayek's theories. Though he has backed off on the deregulatory dogma of the past and feels that he had too much faith in the ability of markets to self-regulate.

Who was right?

Keynes and Hayek were probably both right  and both wrong.  Who was right or wrong at any given moment depended on the circumstances at the time and the nature of the recession/depression.  Although I am no economist - the deflationary pressure and high pernicious unemployment and the inability for the vast majority to obtain loans imply a Keynesian solution this time around. Sadly, the Tea Party is clearly in Hayek's corner and the results could be disastrous if they are allowed to carry out all their plans.

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