The Two Branches of Macro-Economic Theory: Thinking Like a Macro-Economist

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What I will do is give an outline for a good answer for each question, taking one at a time. These are just basic outlines and, of themselves, are NOT complete answers.

Compare and contrast what policies Keynes and Hayek advocated regarding how the federal government should manage the economy. (Note: There is no need to include biographical information about their lives)

JMK: The single slogan that can easily summarize Keynes is this: investment and spending are NOT correlated or connected. They are separate and must be treated as such. Spending is a function of households, and these are, mostly middle and lower class people. Investment is normally done by a much smaller group of upper class people. There is a general tendency for lower class people to keep their money in cash, to spend only when they can. This means that savings can go down when investment wants to increase (due to an upswing of the business cycle, etc), in which case, unemployment results. Once this happens, production falls even further, leading to more poverty and misery.

The big point to make is that the unemployment cycle can lead to total misery and poverty if not corrected. The corrector to this is the state (the government at some level). Since the state is not subject to economic laws (it makes its money through coercive taxation), it can fill the gap by spending money. This, to be glib, means that the state holds respond to these situations by putting as much additional money into the consumer's pocket as possible.

The policy consequences of this are pretty clear: this is the purpose of welfare, unemployment insurance, infrastructure development, etc. The state must do this to get the population spending again. Once this happens, people will start to get hired again. He really hates the idea of too much savings, since this takes money out of circulation, out of the economy.

FH: Famed supporter of the free market. Unlike the older market writers, FH deals not so much with the products the economy creates, but individuals who make specific decisions to buy x over y. His big ...