Both economists built on and contributed to man's understanding of economics. They observed massive social upheaval in World War I, the Great Depression, World War II, and the post-war reconstruction efforts. This upheaval, the relationship with each other, the breakthroughs in economic understanding, and implications and utilization in public policy were my major takeaways from this work.
The Development of Economic Understanding:
The economic solutions that competed during Hayek and Keynes can almost be viewed from a linear perspective in degrees of the appropriate amount of government intervention needed to ensure economic growth. The classical perspective of Hayek argued for as little intervention as possible, Keynes believed that stimulus utilization would correct economies gone awry, subscribers to fabian socialism believed government control of production, and marxist socialism advocated control of both the supply and consumption. Economists dedicated academic careers to researching and promoting one view or another, "Keynes wrote to Bernard Shaw, announcing that, thanks to his upcoming book, a Fabian future would no longer be in the card".
The audiences of the economic works published would include other economists, political decision-makers, and the public in general. The Means to Prosperity (the precursor to the General Theory) was intended for non-academic audiences, the political elite in England and the US. Much of this book focused on the relationship between Hayek and Keynes. It provided letters written between the pair and interactions their followers had while attending lectures. Keynes wrote, "it may well be that the classical theory represents the way in which we should like our Economy to behave, but to assume that it actually does so is to assume our difficulties away" demonstrates one such debate. Their debates discussed often came down to the definition of a term or impact that term has on the system. For example, Keynes believed savers would fluctuate between saving and investing while Keynes viewed savers as wanting their money in liquid form (cash). Liquidity preference may be a footnote in most investment courses today but was revolutionary from an economics perspective at this time.
The concepts introduced in the book by Keynes and Hayek were not developed in a vacuum. Keynes built off of a denial of Say's Law (supply creates its own demand) and he integrated into his works Kahn's multiplier effect (each dollar spent was worth more to the economy than a dollar). Hayek breaks new ground in theorizing an economic equilibrium that never can be fully reached and could never be externally influenced since no one can understand the economy fully. He argued that individuals used information at their disposal(the information or deductions could even be wrong). All of the individual's choices would average out into what could theoretically be observed as the market in operation. The observable by-product that economists could see were prices. Surrounding the two economists emerged other theories the Laffer Curve (cut taxes -> increased personal spending-> inc demand via trickle down, Alvin Hansen introducing the algebraic formula for the IS-LM mode based on Keynes ideas, and the Taylor Rule (tradeoff between interest rates and inflation) replacing the Phillips Curve(tradeoff between employment and inflation).
Propositions for Public Policy in History:
Keynes blamed the 1929 slump on increased interest rates which caused deflation. He advocated for decreasing taxes along with increasing government spending (deficit financing) to get the economy back to full employment so the classical model could take over. He argued governments performed deficit financing during times of war but not in peace, "some cynics who have followed the argument this far conclude that nothing except a war can bring a major slump to its conclusion", instead offering public work programs as an alternative solution. Hayek, on the other hand, said deflation was not the cause of the slump but easy credit going towards unprofitable industries. He concluded, "to combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about". Taking this even further he argued Socialism and Nazim were near identical in their removal of the free market, thereby curtailing the liberties essential to a free society" and by implication, Keynes to a lesser extent advocated a similar model that curtailed the ability of accurate prices in his work the Road to Serfdom.
Also of Interest Topics:
The Austrian school believed the market was totally too complex to quantify or average. It would provide misleading indicators of individual preference while Friedman in the Chicago camp utilized Keynes's notion of utilizing averages to determine cause and effect of economic changes.
Stagflation: increasing of both unemployment and inflation at the same time under Ford. This wasn't supposed to occur in Keynes theories. Thatcher and Regan combated stagflation by the privatization of government-owned companies and regulation of the money supply.
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