"Keynes Hayek: The Clash that Defined Modern Economics is a commendable effort to bring economic thought to the attention of the general reading public."

― Mikko I Arevuo
A good economic model is essential for the development of an organization, a firm, a company, and most importantly, a country. It is important to follow the right theories and make correct decisions at crucial times. In the last century, two highly talented economists proposed their own theories to be followed in the need of the hour. During the Great Depression, while the world was in dire need of pulling itself together, British economist John Maynard Keynes introduced the view that during the short term, the total expenditure influences the economic output, and total spending need not necessarily be a contributing factor to how productive the economy is.

While Friedrich August Hayek, an Austrian (later British) economist, emphasized on the importance of free-market capitalism and believed in long-term planning. This Buzzle article will elaborate on the comparison of Keynesian vs. Hayek economics.

Keynesian Theory Explained
  • As mentioned earlier, this theory focuses on the short-term goals.
  • It states that the total spending of the economy, technically known as aggregate demand, is influenced by a number of factors, while the monetary output is influenced by aggregate demand.
  • Some of the factors that influence the total expenditure include both fiscal and monetary policies.
  • According to Keynes, these changes affect the output and employment, more than the prices.
  • He firmly believed that we must live in the short run, because fluctuations in any component of the total expenditure (due to rigid prices), be it resource consumption or any investment, will cause the output to change.
Hayek Theory Explained
  • This theory opposes its counterpart by stating that long-term investments must be considered and worked upon.
  • Hayek said that the market evolves slowly as a result of human actions, and one of the reasons it fails to coordinate people's plans is the increase in the money supply.
  • This results in cheap credit, distorted price signals, and artificial interest rates, which would result in excess investments in long-term projects.
  • Ideally, he believed in long-term investments, but his central theme was the concept of equilibrium, i.e., coordination of all economic decisions.
The Differences

Hayek EconomicsKeynesian Economics
Central Theme
It sees a connection among business cycles, capital, and monetary cycles. It states that excess investment for the long term results in an economic bust, which is a healthy way of readjustment; however, the best way to avoid these busts is to deal with their causes beforehand.It says that prices show a slow response to demand and supply, and this indirectly affects the labor forces. It believes in solving the short-term issues first, rather than deal with what lies ahead.
People here are more rational.To fulfill current demands and requirements, people have more of an animal-spirit.
It has a long-term focus. It concentrates on avoiding boom-bust cycles.It believes in pulling the economy out of the bust as soon as possible.
It requires that the economy consist of free market forces. However, the markets here are not very predictable.The economy here can be steered by the government. A regular, circular flow of income exists due to predictable market forces.
Economic Regulation
It does not have a good, positive economic regulation.Its economic regulation is positive.
It does not have good bail-outs despite following effective long-term investments.The fact that it solves immediate problems first results in good bail-outs.
Time Frame
The long run is considered most important, as this theory believes that the free market price system is an efficient method to help people exchange ideas, which would eventually help markets evolve in the future.The short run is very important. This theory firmly believes that macroeconomic fluctuations significantly reduce economic well-being, and that whatever action needs to be taken, should be taken now, this very minute, and even the changes (positive/negative) would be for the present.
Since it leads to malinvestment, this follows an anti-government policy. The individuals here act in their own interests.This economic theory is pro-government, as it believes that the government is knowledgeable and capable enough to improve the free market, and that it acts in the best interest of the people.
It has more respect for entrepreneurship and economic stability.It has more respect for job protection and human suffering.
Settling of Economy
The economy will settle down at the optimal level, without any problem or hindrance.The economy settles down at the sub-optimal level; however, it does so without any help.
It follows the classical view that savings should be hoarded for the future.It firmly advocates that savings should be spent now.
Bad Business
Since it focuses on entrepreneurship, it believes that businesses that do not run well or are not capable of running well must be liquidated as soon as possible.It supports employment, and so, it believes in keeping bad businesses alive in order to protect jobs, especially during a recession.

Economists have now started to accept some corollaries of both these theories. The question for most of us is not which theory is right or wrong, but which one must be followed to ensure maximum benefit for the firm, the people, and the country.