Friday, April 24, 2009

Keynes v Hayek

Roger Garrison of Auburn University has put together three fantastic PowerPoint presentations demonstrating Keynes' Circular Flow Theory and Hayek's Means-Ends Analysis and how they work together in a more sophisticated way than Keynes envisioned to explain Boom-Bust cycles and the dangers of monetary intervention.

In my opinion, Keynes was right to identify the Paradox of Thrift, but he was wrong to rule out possible mechanisms for undoing the paradox. Hayek showed clearly how to resolve the problem, but Keynes was dismissive. It seems that Hayek's explanation did not fit Keynes' world view.

Most of what economists do well is qualitative analysis. They generally disagree when numbers enter the picture, and you should be skeptical of any claim to forecast the economic future. But do learn economic principles and the qualitative effects that are described by these principles. Use your own experience and be your own judge as to the magnitude of each effect and whether they reinforce or cancel one another.

Doing so is another step on the road to living intelligently in a world of humans that does not always act or react rationally.

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