1st August 2012
Keynes, known as a ‘social engineer', was behind lugging us out of the deep depression of the 1930s, believing that government spending could create employment and longer term growth. Meanwhile, Hayek believes that investments have to be based on real savings rather than increased public spending or artificially low interest rates.
These opposing views were broadcast in a debate on BBC Radio 4 here.
Meawhile, Philosopher John Gray ponders what Keynes would have made of the current economic situation in this BBC article. "The fashionable cult of austerity…has forgotten Keynes's most important insight – slashing government spending when credit is scarce only plunges the economy into deeper recession."
But is the solution now what Keynes argued for in the 30s?
After all, every recession and depression is different with various causes and consequences. These policies were formulated long ago in a different economic period – can they solve our problems now?
Nicholas Field, emerging markets specialist at asset manager Schroders, comments on the various depressions and recessions that the world has suffered: "Given the different structures of the economies we have looked at and the differing vested interests and distributions of power, we have seen that there is a huge variety of policy options that matter to outcomes and these extend beyond just monetary and fiscal policy."
Today we are not struggling with the aftermath of a devastating world war. We face the credit crisis, a fractured Eurozone and turbulent economic headwinds that are gathering force. A different solution is needed for a unique situation.
Together, these crises have created a global crisis that old-fashioned Keynesian policies cannot deal with.
Perhaps we should learn from Keynes' most important lesson – to let go of inherited ideas. "If we cling to the panaceas of earlier times, we risk losing the civilisation we have inherited."
However, the media is keen to perpetuate that we have the choice of only binary solutions – that of fiscal austerity versus economic growth, reflecting Keynes and Hayek's differing views.
This is a debate that's been going on ever since Keynes and Hayek sent dueling letters to the Times newspaper at the onset of the Great Depression. The debates raging over what policies will pull us out of recession replicates the one that occurred during the Great Depression.
But should the contrast be so stark?
There is a third way, says this feature on National Interest. "This approach would accept the need for overall austerity but would pursue growth regardless through structural reforms in labor markets, product regulation and the mix, not the overall level, of government spending. Remarkably, some in Europe's periphery already have begun to move down this path."
Perhaps there is no single-minded, individual approach.
Do we need to choose between such disruptive extremes?
Yet we continue to have politicians firmly on both sides of the fence. For example, Pierre Moscovici, the French minister of finance, was adamant that he'd reject austerity in this country, while Chancellor Merkel has been so firmly wedded to austerity.
The term "Age of austerity" was popularized by David Cameron in his keynote speech to the Conservative party forum in 2009, when he committed to put an end to what he called years of excessive government spending.
But the right answer depends on the economic particulars, argues the Washington Post. This takes into account the relative efficiency of a country's economy, the mood of the markets, what's going on in other countries at that moment in time. "It also depends on the particulars of the austerity or the stimulus – what spending is increased or decreased, what taxes are raised or lowered. Also important are what structural reforms are put in place to accompany the austerity or the stimulus."
With talk of a triple-dip recession and an ever-shrinking economy, we are desperate for a solution. But it seems this is beyond the stark choices presented in the media and by individual ideologies. So where do you think the answer lies?
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