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when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated.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’?
The Economist – 5th November 2016
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?
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?
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”!
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.
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.