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Week 11: Keynes, Hayek, and the Neoclassical Synthesis - Coggle Diagram

- - - - October - Bolsheviks beat other factions
        
        March 1918: Treaty of Brest-Litovsk
        
        Russia exits war - signs the treaty
        
        Initiate what is going to be tied to a distinct ideology about economic policy, i.e. central planning
        
        Means whilst Great Depression is rampant in the West USSR industrialises quickly and turns on its head a economic orthodoxy of this period
  - - - Hyperinflation in Germany - 1921-23
        
        Direct result of Treaty of Versailles
        
        Countries go off gold standard in WWI to pay for costs of war
        
        Germany not able to pay off its debts
        
        Defaults on debt in 1923
        
        France and Belgium occupy the border
        
        Easier for facist authoritarian ideologies to arise at a time of economic distress rather than when things are prosperous
        
        National rise to socialism - Jews as the scapegoat
  - - - Irving Fisher: “Stock prices have reached what looks like a permanently high plateau” (1929)
  - - - Prevailing policy orthodoxy is laisse faire so get much higher booms and lowers busts
  - - - Soviet Union avoided experiencing the depression and built up industrious capacity --> appears capitalism will lead to its own collapse?
  - - - In response to Great Depression, League of Nations starts assembling groups to study world economy to target recovery
- - - - "Carthaginian" peace - Western civilisation is at risk and peace struck between allies and central powers is unfair
        
        Reparation payments should be within payable limits
        
        Call for US-led European recovery
        
        Otherwise conflict would return
        
        Keynes becomes bestseller and garners international acclaim
  - - - “But this long run is a misleading guide to affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”
        
        If savings > investment → Recession!
  - - - Policy implementation: the state must step in to restore confidence
    - - Reject's Say's Law - that supply creates its own demand
        
        Expenditure creates its own income (demand management)
        
        State is largest consumer in economy - has power to bestow confidence beyond monetary policy
        
        Multiplier effect (Kahn) from government spending
        
        Keynes and liquidity
        For your investment to be liquid you have to be able to sell it off, the entire society can’t pawn off their own investments e.g. hospitals because there is no one to sell to
    - - Have to get spending to stimulate certain economic activity otherwise will lead to psychological situation of uncertainty in investment climate
  - - - Keynes at BW:
        
        “We have had to perform at one and the same time the tasks appropriate to the economist, to the financier, to the politician, to the journalist, to the propagandist, to the lawyer, to the statesman—even, I think, to the prophet and to the soothsayer.” – Keynes, at Bretton Woods (July 1944)
        
        Ascent of economics in public life
- - - - Keynes attack on Hayek
        
        Hayek conflates savings decisions with actual demands for investment goods!
        
        “one of the most frightful muddles I have ever read…It is an extraordinary example of how, starting with a mistake, a remorseless logician can end in Bedlam”
        
        Friendly letters between the pari between 1931-32
  - - - “Many economists hope…that the ultimate remedy may be found in the field of monetary policy… Others…believe that real success can be expected only from the skillful timing of public works undertaken on a very large scale. This might lead to much more serious restrictions on the competitive sphere, and in experimenting in this direction we shall have carefully to watch our step…to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure.”
      - Keynes Response
        
        “we all have the greatest reason to be grateful to you for saying so well what needs so much to be said… Morally and philosophically, I find myself in agreement with virtually the whole of it; and not only in agreement, but in a deeply moved agreement.” –Keynes to Hayek, 28 June 1944
        
        But expresses reservations
        
        Bit of a slippery slope at which the momnet you start anything that's coordinated by the state then everything will ensue
        *
        
        Agrees the possibility of the benevolent central planner who does things well and the afterlives are two strong paradigms of thought in the postwar consensus
- - - - Milton Friedman (1912-2006)
        
        “Inflation is always and everywhere a monetary phenomenon”
        
        Solution is to change the money supply
        
        Emphasis on monetary policy
        
        Context:
        
        American and British Economic Policy from the 1980s
        
        Early work is on the monetary history of the US
        
        Invested in the cold war discourse about freedom vs. oppression of the state
        
        Influential (with Hayek) in shaping ideas of Maragaret Thatcher and Ronald Reagan
  - - - New International Economic Order
        
        Permanent Sovereignty Over National Resources implemented by the colonising nations of the world
        
        At this point the paradigm guided by Keynes and underwritten by Britain and America in the 1970s is in crisis