In accordance with the Keynesian economic theory, increased government expenditure, as well as a reduced taxation, is likely to lead to the growing social demand for goods or services. Therefore, these two mechanisms can ensure an effective and well-balanced economic performance of a country and prevent the risks of an economic recession. Otherwise stated, Keynesian theorists believed it critical that the government interferes in the market to ensure a consistent economic growth.
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In the meantime, it would be unfair to claim that the supporters of Keynesian theory rejected the importance of other sources of spending except for the governmental resource. They likewise considered the importance of business investments or social expenditures, though they did not regard them as the tool capable of spurring an economic growth (“Episode 5”). The practice has shown that Keynesian’s assumptions were rather grounded as the so-called “invisible hand of the market” does not possess sufficient power as it is initially expected – hence, it cannot ensure a stable economic growth and hazards, in such a manner, the country’s wealth.
Hayek’s theory, in its turn, puts a particular emphasis on the coordination of humans’ actions in terms of economics. Therefore, Hayek believed that human actions are mainly determined by the market dynamics; the latter is free and spontaneous. The pivot point of the Hayek’s theory is the consideration of those factors that illustrate the market’s failure to coordinate human’s actions in an appropriate manner and the consequences of this failure such as unemployment (“Episode 5”). At this point, it should be noted that admitting the problem of unemployment Hayek contradicted his own assumption that free market coordinates humans’ activity effectively.
Therefore, the two economists targeted to explain one and the same problem – the root of unemployment and its elimination. Generally speaking, Keynes relied on the assumption that unemployment is determined by the joined demand rather than by the labor cost (“Episode 5”). He was right pointing out that the government can reduce unemployment by affecting the joined demand level. Hayek would argue that this intervention resulted in the increased inflation. This argument was likewise rational, but the economist overlooked the fact that reduced unemployment and increased inflation can coexist.
“Episode 5.” Capitalism., Icarus Films. Brooklyn, New York. 2014. Television.