Later in his life he moved to London to work at the School of Economics where he would later keep in regular contact with the Keynes. But the Keynesian and Hayekian schools of thought are generally polar opposites of one another. Keynes thought it essential for the government to play a significant role in curbing unemployment.
For him, deficit spending was the only way to bring the economy out of a depression and to a point of higher employment. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. Third party links are provided to you as a courtesy. Keynes's theory was forged in the Great Depression of - the biggest economic collapse of modern times.
As their economies contracted, governments responded to their mounting budget deficits by raising taxes and cutting spending. Keynes wrote the General Theory in to explain why the recovery was so feeble. His revolutionary proposition was that following a big shock - usually a collapse in investment - there were no automatic recovery forces in a market economy.
The economy would go on shrinking until it reached some sort of stability at a low level. Keynes called this position "under-employment equilibrium". The reason was that the level of activity - output and employment - depended on the level of aggregate demand or spending power.
In this situation it was the government's job to increase its own spending to offset the decline in public spending - that is by running a deficit to whatever extent necessary. To cut government spending was completely the wrong policy in a slump. When an economy is booming, a hair shirt at the Treasury is the right policy, when it is stagnating it is the wrong policy. Keynes's message was: you cannot cut your way out of a slump; you have to grow your way out.
Eighty years on we have still not fully learnt the lesson. Three years after the collapse of , our economy is flat: there are no signs of growth, nor can the Osborne policy of a thousand cuts produce any. It was Friedrich Hayek, who represented the orthodox theories which Keynes attacked. According to Hayek the main cause of slumps was excessive credit creation by the banks leading to overspending.
Chicago: University of Chicago Press, New York: W. Notes and references: J. All pictures are from Wikimedia Commons. This episode first aired on July 25,
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