INT 200: Global Capitalism and its Discontents Keynes, Hayek, Friedman

John Maynard Keynes if investment exceeds saving, there will be inflation If saving exceeds investment, there will be recession – in the midst of an economic depression, the correct course of action should be to encourage spending & discourage saving – “For the engine which drives Enterprise is not Thrift, but Profit.” Keynesian economics – Markets are inherently unstable – Can result in large scale unemployment – Unemployment causes a decrease in spending, which then affects businesses and banks, which then leads to more layoffs – creating a vicious cycle – So, if banks won’t lend and industry won’t create jobs – the government must

John Maynard Keynes In other words: – Unemployment is the result of insufficient spending by consumers and firms – a government can increase overall demand and thus decrease unemployment by spending not only the revenue it receives from taxes but also what can be raised by borrowing from the public or printing money (hence, “demand-side economics”) – Deficit spending and fiscal policy

John Maynard Keynes Interest rates matter too: – investment spending was reduced when their expected payoff dips below the cost of financing them, the interest rate – Financing costs must be held down with low interest rates – discourages saving and encourages investing Low interest rates and deficit spending is the Keynesian prescription for prosperity – Economically and socially successful economies have significant contributions from both the government and the private sectors – marked a break with laissez-faire economics

Friedrich von Hayek Low interest rates cause an expansion of credit, so this credit flows into some parts of the economy before others – Creates boom or bubbles, and then busts – the inflationary effect of this credit expansion overwhelms any wealth effect and interest rates begin to rise – no further credit available to purchase the bubble assets, so the prices of these assets and their attendant industries collapse Preventing a future bust is as important as fighting a current one – Non-intervention in the markets, even by government

Milton Friedman Great Depression made worse by the Federal Reserve: Recession became Depression – Failure of government, not capitalism The stagflation of the 1970s—rising inflation combined with rising unemployment – Market-oriented solutions: Ronald Reagan and Margaret Thatcher

Post-Industrial Society Welfare State ensures citizens’ welfare in the face of the contingencies of life in modern, individualized, industrialized society – government undertakes to protect the health and well-being of its citizens, especially those in financial or social need, by means of grants, pensions, and other benefits – Social security, unemployment insurance, medicare, health insurance, education post-industrial society is the stage of society's development when the service sector generates more wealth than the manufacturing sector of the economy