Keynes, Hayek, and Friedman

My attempt to overview these three in brief:
__________
John Maynard Keynes (1883-1946) was perhaps the most influential economist of the twentieth century, and his perspective was that the government frequently needs to intervene into economic matters in order to avert or alleviate financial crisis. [1] For example, Presidents George W. Bush and Barack Obama largely followed the advice of Keynesian economists when they spent massive amounts of money in the 2008 world economic crisis order to keep major banks and businesses from failing, while also pumping money into the system.   Although not all economists agree, most also believe that the New Deal projects of Franklin Roosevelt along similar lines helped speed the American recovery from the Great Depression.

Friedrich Hayek (1899-1992) is often placed at the other end of the economic spectrum, although Hayek and Keynes did not disagree on everything. [2] He and the “Austrian school” of economics reflect a minority position among economists, but nevertheless one that has had significant impact. While Keynes advocated intense involvement of government during times of economic crisis, Hayek was more to blame government involvement for economic crisis in the first place.  A key cause of the Great Depression for Hayek was the fact that the Federal Reserve Bank (in the 1920’s artificially allowed more money into the market than it should have, leading to an inevitable contraction later.

While Hayek’s theories have occasionally had great influence, the Austrian School is considered to be “heterodox” by most economic experts, outside the mainstream.  Along with Keynesian economics, the other main approach to economics is the monetary approach, with Milton Friedman as its best known proponent. [3] Monetarism can be seen both as a development and critique of the Keynesian approach.  For Keynes, the key factor in a stable economy was to make sure the total of government and private spending are in equilibrium with the total demand for goods and services at any particular time and price level.  When the private sector stops spending, the government has to pick up the slack, even when it causes deficit spending.

By contrast, Friedman (like Hayek) thought governments more often than not compounded problems when they intervened in economic crises.  He did believe in government involvement in the economy, but it was largely to make sure the money supply always kept in equilibrium with the Gross Domestic Product (GDP—the total value of the goods and services produced in a nation).  In his view, this policy would keep prices relatively stable.  Since this approach is purely mathematical, it requires no value judgments on the part of economic leaders.  Nothing special should be done in an economic crisis because he believed systems would eventually reach equilibrium on their own.

[1] Keynes’ key work was The General Theory of Employment, Interest and Money (1936).

[2] Hayek’s key work was The Road to Serfdom (Chicago: University of Chicago, 1944).

[3] Friedman’s key work here, which he co-wrote with Anna Schwartz, is A Monetary History of the United States 1867-1960 (Princeton: Princeton University, 1963).