Theories of Economics
By: Summer Maccubbin
Keynesian Economics
- An economic theory supported by John Maynard Keynes
- Keynes wants to steer markets, to prevent problems before they start
- Keynes stated that if investment exceeds savings, it will cause inflation
- However, if savings exceeds investment, it will cause a recession
- Keynes believed that governments should be fully engaged in their economies
Hayek Economics
- An economic theory supported by Friedrich Hayek
- Hayek wants to set markets free, and only intervene in the economy if there is a problem
- He discovered malinvestment, if interest rates are too low, then it can cause bad investment
- Hayek saw the boom and bust cycle, and believed that it was best to avoid the booms, so you can also avoid the busts
The Three Theories of Economics
Keynesian
The belief that economies need to be steered in the right direction by human actions. That policy makers need to take charge of the economy to keep it from collapsing.
Hayek
The belief that the economy is an effect of human actions. That the markets need to work themselves out, and we can't do anything to solve economic problems.
Monetarism
Similar Hayek's theory, monetarists believe that the market can take care of itself, but someone needs to watch the economy's money supply. Monetarists knew that in the short run, changes to the money supply could change demand. But in the long run, this change would diminish as people expected inflation to increase. (Investopedia)