Economics discussion exercise – Keynes v Hayek

This year I am trying to get students to develop a deeper understanding of economic issues and to improve their evaluation skills for the written exam. The goal is that students will arrive at a collective meaning, rather than seek a “right” answer. Below is a plan of how you could structure the discussion.

Subject content – Economic schools of thought. Keynes v Hayek – this is part of Unit 9 of the CAIE A2 syllabus.

Content knowledge: Types of economies (left and right wing) covered at CAIE AS Level. The schools of thought are taught in class and questions (MCQ) and short answer are used to test student understanding of the characteristics of each. The two videos below are useful to consolidate knowledge.

Austrian economics and Keynesian economics explained in 1 minute. See below

Music (rap) video ‘Fear the boom and bust’ – Keynes v Hayek. See below

One of the challenges is to keep students on task and try and get contributions from all students. In order to overcome these issues I have developed a set of playing cards with certain statements on each. Students receive 8 playing cards with different assessment objectives/ skills/ elements of written work in economics – see photo. Students can only talk when they place a card on the table. Once a student has used up all their cards they can no longer contribute to the discussion. The link below has more detail on this method:

https://econfix.wordpress.com/2022/09/20/using-playing-cards-for-economics-discussions-2/

Tutorial preparation (outside the classroom)

Students read a media extract on the topic. Extract selection is important – not too long and must be easy to relate to core knowledge. I have picked the article by Larry Elliott in the Guardian newspaper as this is media that is different to what students tend to be exposed to.

Guardian Weekly

‘Like COVID-19, capitalism has evolved a new variant to survive’ Larry Elliott

Number of students in a group is a determining factor – 8 to a group.

Tutorial/discussion over 2 periods

Opening question – essential that this is pitched at the level appropriate to the group as the intention is for the discussion to proceed through student interactions.

The new variant of capitalism should be the dominant policy option for governments.

If this is question doesn’t engage the students you could ask some of the following questions:

• Start off with a simple question that is referenced from the text – ‘What aspects of Keynesian economics are evident in the extract?’
• Allow each student to answer the opening question – 30 seconds. Other responses can spark conversation once everyone has replied.
• Get students to continually reference the text so to keep the conversation relevant

Coaching – there may be the need to encourage deeper and more critical thinking. Need to avoid teaching by offering analysis and possible evaluations. Some questions to encourage critical thinking:

• Why was the Keynesian variant relinquished in the 1970’s?
• How did the 2008 GFC influence government policy?
• Was austerity the answer to the issues caused by the GFC?
• How did COVID-19 impact policy for left right and centre governments?

Should allow students to respond from their own perspective but must be related to the extract.

Student reflection – the hope is that students are able to develop a deeper understanding of the complexities of the subject content and read newspaper/magazine articles with a more holistic view of the how an economy works. The level of scaffolding for reflection will vary with each student but there is potential for all students to feel more confident in their knowledge and participation in future discussions.

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Keynes v Hayek with Chinese characteristics.

You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.

Now there is Chinese version of the debate:

Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.

Their latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning  potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.

Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies.  He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.

China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.

Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.

However the debate is sure to continue – what works best ‘Markets or Governments’?

Sources:

The Economist – 5th November 2016

CaixinOnline 

Masters of Money – John Maynard Keynes

Although screened by the BBC in 2012 this 3 part series is very useful for A2 students looking at macro objectives and policies. Keynes has never been more applicable or contentious than the present day.

In Masters of Money, produced in partnership with the Open University, BBC economics editor Stephanie Flanders examines how three extraordinary thinkers, Keynes, Hayek and Marx, helped shape the 20th century and continue to exert a huge influence on our world today.

Stephanie begins by looking at John Maynard Keynes. Many argue only Winston Churchill had a greater impact on British life than Keynes over the last century. Even today his ideas remain crucial to one of the most important debates of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt?

Is China going down the Keynes or Hayek route?

You will no doubt have seen the Keynes v Hayek Rap which was produced by econ stories. Now the debate turns to the Chinese economy – which of these economist’s policies is more prevalent? The Economist Free exchange column addressed this issue recently.

In order to maintain the level of economic activity in an economy Keynes believed in investment spending to maintain aggregate demand and employment. However, Hayek believed that investment spending might be directed in the wrong areas and would leave the economy poorly coordinated and workers stranded in the wrong jobs. Economist Andrew Batson has argued that Hayek seems to be gaining the upper hand in the battle of ideas as China is now keen to avoid the Hayek malinvestment even if there is less aggregate demand and growth which Keynes favoured. As mentioned in previous posts there has been huge investment in China in areas that normally stimulate growth in downturns – eg. creation of new cities or infrastructure projects.

There are others that say the Chinese economy has areas of its infrastructure that need to be developed. Cities like Beijing and Shenzen are congested and need investment spending on them. Although Hayek believed that malinvestment would result in a worse downturn what is different in China is that their high investment is backed by even higher savings. This means that investment projects don’t need to generate high returns in order pay back external creditors. According to The Economist the real cost of malinvestment is with the empty shopping malls, vacant apartments etc when there are poor medical facilities and overcrowding in housing. Might a more market approach be a better driver of the economy rather than that of central planning?

Keynes v Hayek Rap – Round 2

From EconStories

According to the National Bureau of Economic Research, the Great Recession ended almost two years ago, in the summer of 2009. Yet we’re all uneasy. Job growth has been disappointing. The recovery seems fragile. Where should we head from here? Is that question even meaningful? Can the government steer the economy or have past attempts helped create the mess we’re still in?

In “Fight of the Century”, Keynes and Hayek weigh in on these central questions. Do we need more government spending or less? What’s the evidence that government spending promotes prosperity in troubled times? Can war or natural disasters paradoxically be good for an economy in a slump? Should more spending come from the top down or from the bottom up? What are the ultimate sources of prosperity?

Keynes and Hayek never agreed on the answers to these questions and they still don’t. Let’s listen to the greats. See Keynes and Hayek throwing down in “Fight of the Century”!

Why is the Austrian school of economics not talked about?

With the aftermath of the financial crisis there has been little mention of the Austrian school of economics led by Frederick von Hayek. The Economist Buttonwood column last week mentioned the fact that when you actually look at the Austrian theory of business cycles there are a lot of similarities with that of the last couple of years. Below are the main characteristics of the Austrian beliefs followed by what happened during the financial crisis:

1. Interest rates are held at too low a level, creating a credit boom. Low financing costs persuade entrepreneurs to fund too many projects. The Fed and ECB definitely kept rates at levels that encouraged borrowing.
2. Capital is misallocated into wasteful areas. Too many houses, apartments were built in Spain and Ireland as well as in the US. The vast majority are lying empty or still unfinished which keeps downward pressure on house prices

Maybe this lack of exposure for the Austrian school in media circles is because their panacea for the crisis is to do nothing and let the market run its course. This is in contrast to the monetarists who propose tax cuts and lower interest rates and the Keynesians who would support deficit spending. As a politician you can’t be seen to do nothing especially leading up to an election. Remember US President Jimmy Carter during the 1970’s, when the best thing was to let the economy run its course through the cycle instead he increased government spending and inflation hit 14% and interest rates 21.5%. Ronald Reagan won the election (as did Margaret Thatcher in the UK) and economic policy changed drastically.

Hayek and Keynes Battle at The Economist’s Buttonwood Gathering

You may have already seen this on the Tutor2u blog or YouTube. On October 25th, an audience of financial managers and CEOs, politicians, central bankers and Nobel Prize-winning economists at The Economist’s Buttonwood Gathering were treated to an unusual experience: a live rap battle between John Maynard Keynes and F. A. Hayek.

Following a presentation by Nassim Taleb, the lights went down in the auditorium and Fear the Boom and Bust blasted onto the screen. This video picks up at the end of that special presentation, where Keynes and Hayek stepped onto the stage to give a preview of the next EconStories music video.

In the final new video, which will be completed in the months ahead, expect many more lyrics and an all new beat.