Business Cycles: Phases, Indicators, Measures, Economic Evolution, Outlooks

Business Cycles: Phases, Indicators, Measures, Economic Evolution, Outlooks

Q. 1 (a) - Economic Policies Advocated by Keynes and Hayek

In the view of Koehn (2011), Keynes was the advocate of communism; whereas, Hayek was the promoter of capitalism or laissez-faire. These are the two different schools of thought who presented two extreme approaches to foster modern economics. They differ in their perspective of the nature of equilibrium. On one hand, Keynes claimed that markets are unable to build and maintain the equilibrium automatically. On the other hand, Hayek identified free market operations as the tool to restore macro equilibrium (Rittenberg & Tregarthen, 2009).

Keynes held the government responsible for increasing the aggregate demand for goods and services in order to create employment opportunities for workers; whereas, Hayek opposed the idea of using inflation as a cure for kaput economy (Kohen, 2011). Nevertheless, Keynes proposed adoption of a central interventionist policy, which will allow the government to manage economic systems and market equilibrium via physical, monetary and fiscal mechanisms. Unlike Keynes, Hayek suggested governments to minimize their interventions in the smooth market operations in an attempt to foster natural markets (Nasar, 2011).

Q. 1 (b) - Agreed School of thought

In the light of above comparison, Keynes might propose a relatively applicable and more realistic economic approach. Unlike Hayek, Keynes argued that investment, being the component of aggregate demand will be exposed to market volatilities (Koehn, 2011). For example, investments will be more likely to reduce in a situation where expected returns fall below the interest rate. Hence, Keynes proposed an economic policy that would foster prosperity via deficit spending and lower rate of interest (Phelan, 2012). A scenario in which the government would be require to play its part by underwriting guarantees to purchase for the marginal productivity of capital. Besides this, government would need to keep the financing cost low in order to promote investment spending (Rittenberg & Tregarthen, 2009).

Unlike Keynes's mode of economics, Hayek alleged lower interest rates for causing credit expansion leading to bubble burst in either stock or the housing market (Phelan, 2012). Hayek's questions were well answered by Keynes's prescription of more borrowing and supply of cheap credit as the reasonable and relatively less painful way to ensure economic prosperity. In reality, American and British policy makers have followed Keynesian approach to stimulate economic prosperity by running a budget deficit and lower financing ...