Introduction
Sound economics encompasses how governments, companies, and even individuals make choices, especially when allocating limited resources to meet their unlimited wants. The idea presented an opposing view between two of the most prominent economists. Fredrich Hayek and John Maynard Keynes developed distinct theories to support their argument concerning the role of government in the economy (Gwartney et al., 2021). Each of the individuals had their opposite stance when it came to the operations of the government in the economy. In other words, the two economists criticized the work of one another since they had different opinions.
Keynes Economic Theory
Based on Keynes’s argument, the government, through its different operations practices, has the ability to stabilize the country’s economy. Keynesian economics is more of a macroeconomic perspective, and it views the role of government expenditure as an essential facet that impacts the overall economic performance. The economist believed that when the government intervenes, there will be a significant improvement that will benefit the people. According to Keynes, it is essential for the government to increase its spending and lower the impact of taxes (Gwartney et al., 2021). The individual argued that through the process, the government would be able to stimulate demand and thus pull the economy from possible recession.
Hayek’s Economic Theory
Hayek, who is well-known as a key member of the Australian School of Economics, believed that the government has an insignificant role in the economy. In other words, the economist argued that the economy should be a free avenue without government interference. According to the individual, the essential role he deemed suitable for the government is maintaining the aspect of law and order. Hayek stated that a command economy is disastrous because, in most cases, only a handful of people might have the ability to control all the key processes, including the allocation of essential resources (Pennington, 2021). The economist believed that marketers had the ability to obtain the necessary information that would facilitate their engagement in business activities.
Impacts of Saving on the Economy
Generally, saving is the difference between the consumer’s disposable income and the amount spent within a specific period, presumably one month. Individuals with significant balance tend to save more money as compared to those with low salaries. When people save, the overall demand for goods and services in the market declines because the amount of disposable income decreases as well. In other words, through the process, consumers sacrifice the sum of money they should spend on different commodities at that time (Gwartney et al., 2021). The facet lowers the performance of the economy as most of the rate of sales will fall accordingly. Furthermore, increasing saving lowers investment since people will opt to forgo most opportunities to accumulate resources. Therefore, the aspect of saving is harmful to the performance of an economy.
Despite the negative impacts of saving on the economy, the practice is essential as well in promoting economic growth. For instance, when individuals save money, they accumulate adequate funds that they can use to invest in big projects, thus creating employment opportunities for the overall population. In addition, since most people save with banking institutions, they increase the amount of finance available for borrowing, especially with business owners, to advance their engagements in the economy (Vogel, 2021). Therefore, saving makes it easier for individuals to access necessary funds for developmental projects, which in turn inject significant cash inflow into the economy; hence it benefits it.
Impacts of Government Intervention on the Economy
Based on the Keynes school of thought, the performance of the performance of an economy is directly influenced by the involvement of the government. In other words, if the government fails to intervene, the business cycle will perform poorly (Karagiannis & King, 2019). The economist stated that through government expenditure, marketers are able to obtain necessary relief in the form of subsidies to facilitate their operations. Furthermore, effective policies will ensure that the available resources are allocated effectively, thus fluctuating economic performance.
However, based on Hayek’s viewpoint, the economy will fluctuate higher when there is no government involvement. The economist believed that the aspect of the business cycle is due to stubborn government regulations (Klausinger, 2019). The individual argues that when the economy is left to operate without restriction, the issue of economic instability will be eliminated, and thus, the investment will increase, leading to effective growth. Hayek assumes that imposing economic policies prevents the market from producing adequate income.
Conclusion
Based on Keynes and Hayek’s economic theories, I believe the Keynesian approach is more accurate as compared to Hayek’s school of thought. Keynes’s model addressed the aspect of employment which is crucial in promoting economic growth. The government plays significant roles, such as controlling resource allocation, thus protecting the business from exploitation by well-established firms. Furthermore, without proper policies, it might be challenging to address critical issues such as inflation which is more likely to affect the performance of an economy. Therefore, it is essential for the government to intervene constantly in the economy to ensure effective processes.
References
Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D. A. (2021). Economics: Private & public choice. Cengage Learning.
Karagiannis, N., & King, J. E. (Eds.). (2019). A modern guide to state intervention: Economic policies for growth and sustainability. Edward Elgar Publishing.
Klausinger, H. (2019). Friedrich August Hayek. In R. W. Dimand & H. Hagemann (Eds.), The Elgar Companion to John Maynard Keynes. Edward Elgar Publishing. Web.
Pennington, M. (2021). Hayek on complexity, uncertainty and pandemic response. The Review of Austrian Economics, 34(2), 203-220. Web.
Vogel, R. C. (2021). Savings mobilization: The forgotten half of rural finance. In D. W. Adams (Ed.), Undermining rural development with cheap credit (pp. 248-265). Web.