Parts of economic theoriesseem to constantly change because there is no perfect economy; however, thereare two categories in which most economists fall under: Classical and Keynesian.Classical economists follow the theory described in Adam Smith’s Wealth of Nations regarding aLaissez-Faire policy with no government intervention. People who are consideredto follow the Keynesian economic theory generally favor government interventionin the economy during recessions in the business cycle (Colander p. 524). Threewell known economists fall into these categories: Milton Friedman and Friedrichvon Hayek were considered to be classical economists, while John MaynardKeynes, developed the Keynesian theory. Friedman was a firm believer in capitalism and that themarket’s guiding hand would help to regulate the economy. According to the Encyclopedia of World Biography,”Friedman was also a staunch defender of the free enterprise system and aproponent of individual responsibility and action” (2).
In other words, he didnot think the government should be involved in people’s everyday lives and thatthere should be a very minute amount of government regulation in the economy.Also, if the government would be less involved, it would hold individuals moreaccountable for their own living situations and actions. Friedman’s mostnotable idea was his “constant monetary rule” (1). Economist Sarwat Jahanexplained in his article “What is Monetarism?” Friedman’s idea that “the Fedshould be required to target the growth rate of money to equal the growthrate of real GDP, leaving the price level unchanged.” By increasing the moneysupply as GDP grows, it will help reduce inflation during times of recession,thus, keeping prices of good consistent.
One of Keynes’ most notable theories regarded spendinghabits during recessions. He argued that when people stop spending money ongoods due to a recession, demand goes down, which in turn, reduces productionand finally, people are out of a job (Colander 524); this is a vicious cyclethat will only continue unless people spend what little money they have onbuying products. As written in the biography, “John Maynard Keynes,” “.
..inmature economies, such as those in the United States and Western Europe, highlevels of income had led the public to save large proportions of their income,while the factors that had historically provided expanding investmentopportunities were disappearing” (530). This was an integral part of Keynestheory called “stagnation” which entails that people in developed countriessaved too much of their income instead of spending or investing it, notallowing the economy to grow. He promoted government involvement in the economy,whether it be through price regulations or investing, and thought that interestlevels should decrease during recessions so that people could have more money. Theonly way that an economy can grow is by developing new technology andproducing, which can only be done if there is money available to do so.
Hayek, an Austrian economist who was an advocate for thefree market, was an outspoken critic of Keynes and communism. Similar toFriedman, he promoted a Laissez-Faire style economy and figured that governmentintervention during recessions would only make problems worse (Encyclopedia of World Biography 222). He also believed that the moreregulations the government had on the economy, the less freedom consumers hadwhen making a purchase (223). During the Cold War, many economists though theSoviet Union’s economy would grow at such a high rate that it would be largerthan the United States’ economy; however, Hayek found holes in these argumentsand did not think this was true. According to economist David Peterson, Hayek’sargument was, “..
.prices that efficiently allocate resources cannot be set bygovernment fiat. When an economy lacks the daily input of the individualdecisions of millions of consumers…the result is colossal waste and inefficiency(86).
This contributes to Hayek’s free enterprise view on the economy, that itshould be consumers who determine the prices of goods based on their demand,not the government. Friedman,Keynes, and Hayek were all outspoken economists during the Great Depression andwith all the uncertainty during that time, each had their own theories as to howit should have been handled. Friedman and Hayek were both against the New Dealand felt as though government intervention made the depression last longer thanit had to. Hayek even warned the American government “against the dangersinherent to a growing welfare state” (Peterson 89).In closing, theseeconomists theories are still in debate today; however, aspects of each oftheir ideas are intertwined in many economies around the world.