Transcript Economic Depression Keynes vs Hayek

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How can it be fixed, and by what or whom?
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What is the government’s role during times of
economic downturn?
* Two opposing theories existed on the causes of and
remedies for economic depression that affected
governments’ behaviours during and after the Great
Depression:
* The theories of John Maynard Keynes (canes) and
Friedrich August Hayek (hi-ek)
* They recently worked through their differences in a
rap battle!
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Keynes
Hayek
* Make a t-chart to compare the theories of Keynes and
Hayek
* Read the curriculum handout about economic theories and
principles surrounding the Great Depression in Canada and
answer the following:
*Which economic school of thought would
each economist belong to?
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*Theories are reform liberal
*Economy driven by aggregate demand (total
demand for goods and services in the economy at a
given time and price level)
*Government should intervene when the economy is
in a downturn, taking actions such as cutting taxes,
subsidizing housing, or lowering interest rates so
people can have access to spending money. SPEND,
SPEND, SPEND! It’s the only way to increase
demand!
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* Giving people the power to buy will multiply that
invested money in the economy (multiplier effect)
* WARNING from Keynes: If money being saved is greater
than what is being invested – which happens when
interest rates are too high – unemployment will rise
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* Theories are classical liberal
* The “invisible hand” (coined by Adam Smith) of the free
market will prevent and cure economic cycles
* This is called “laissez-faire” economics (“let it be”)
* Government should not control the money supply
* Unnatural adjustments of interest rates artificially
displace capital (money)
* “easy money” causes people to change their normal
spending habits, and leads to inflation
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*WARNING from Hayek: Socialism (what he believed to
Keynesian economics) requires central economic planning
and that will lead to totalitarianism
*The government will control our social lives!
*Despite his laissez-faire beliefs, Hayek did believe that
wealthy nations should provide a safety net without
endangering freedom – basic food/shelter/clothing
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* Because provincial and municipal gov’ts were
already in debt from expanding infrastructure
and education during the 1920s, economic
improvement became the responsibility of the
feds
Relieve
yourselves,
you bums!
* Mackenzie King was PM when the depression
began, and he refused to provide aid to the
provinces, and only made minor relief efforts
(classical liberalism)
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* R.B. Bennett’s Conservatives won the 1930 election, and Bennett also
initially refused to offer large-scale relief to the provinces
* Bennett advocated for high import tariffs and large-scale gov’t
spending as remedies
* He eventually was forced to offer some relief to the unemployed
* His make-work programs and system of unemployment aid got too
large and he had to severely cut back federal spending – this
deepened the depression because gov’t employees were laid off and
make-work projects stopped
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* It wasn’t until Bennett was in danger of losing the 1935 election that he
came up with a “new deal,” based on US president Roosevelt’s “New
Deal”
* Bennett did a series of radio announcements promising the following
changes:
Woah! Please don’t fire me!
I’m sorry for not helping you
out. Let’s make a new deal. I
was going to propose this
earlier. Seriously!
* Minimum wage
* Fair treatment for employees
* Marketing boards for farm products
* Trade commission to stop price-fixing by businesses
* Unemployment insurance
* Limited working hours
* Health insurance
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* Despite the “new deal,” Bennett was defeated in
the 1935 election by his predecessor, Mackenzie
King.
* King lowered tariffs and signed a new trade
agreement with the US, but largely believed in
laissez-faire economics
* His main goal was to balance the budget but cutting
gov’t spending
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* To save $, King closed down relief camps and cut aid to the
provinces
* After studying economics, however, King decided to become
more interventionist and spend more $ to get the economy
going
* Regardless, King pretty much just waited the depression out
* The depression officially ended with the start of WWII in 1939
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