Policy Debate on Austerity and Stimulus




Policy Debate on Austerity and Stimulus

Von Hayek: It has come to my attention that much of the activities carried out by the Federal government prior to the occurrence of the recent recession correspond much to your predisposition towards austerity, Keynes. Nonetheless, the notion of the impact that political pressures would pose on the currency was something that was agreeable, or am I wrong?

Keynes: You speak the absolute truth, Hayek. Money, undeniably, is predisposed towards corruption and unstable political utilization if not managed effectively. At the start of the 20th century, the development of money was more of a state and political domain based on the benefits it offered. Accordingly, the medium could undergo issuance since governments possessed the authority to classify the way through which taxes could be reimbursed. Even though this tradition has occurred since the use of fiat currencies, defining a unit of account has always been left squarely to the government, or in essence, those that bear political power.

Von Hayek: From this point onwards, I am in agreement with you, Milton. The support for state-developed money will only lead to a further monopolization of a specific currency depending on the amount of political power that a nation wields.

Keynes: What you are saying, in short, is that a certain currency will tend to be considerable within the global market based on the level of political influence exhibited by the currency’s bearer?

Von Hayek: To an extent, I do believe it to be pragmatic. Think of it this way, most of the money produced by the government generally ends up under its control. This also elucidates the considerable amount of fiscal and monetary policies that governments have implemented over the years in a bid to control the spending and investment of money respectively.

Keynes: Now this is where the problem underlies Hayek. Monetary and fiscal policies are not really based on controlling the market. Government action has always been required to rouse aggregate demand. The sole objective of this is to ensure consumption in order to allow the economy to attain its potential and therefore, decrease unemployment.

Von Hayek: But what is the point of ensuring consumption if the government is incapable of controlling the market?

Keynes: What is your point then if I may ask Fred?

Von Hayek: Well, I can tell you this, not too many people have ever addressed me so colloquially. In this case, though, I am more inclined to counteract your argument. The market has always been independent based on its inclination towards a form of spontaneous order. As such, it is not a controlled entity, but rather, it should be allowed to act on its own. Moreover, the market is the outcome of human exploits. The manner in which people spend and consume is enough to structure the market in its own desirable state.

Keynes: Regardless of that, the market still requires a control mechanism. This is because it is difficult to pinpoint the exact rate of demand that customers exude. Moreover, assessing the consumer demand is inevitable especially within the control and management of the economy. That is why it is important to analyze the market since its sole objective is to determine the manner in which different economical aspects work in favor of growth and development.

Von Hayek: So, that explains the remedies imposed in the 1930s Great Depression.

Keynes: From 1930, major economic successes have been based on issues of economic control. Foremost, considerable government spending propagated the United States from the Depression during the Second World War. A similar instance was also evident in the tax cut that took place in 1964 especially when the country was characterized by a timeline of slow and distorted growth. Furthermore, restricted government investment can function as a means of utilizing unspent capital to convalesce the fissure within aggregate demand and common monetary stimulus. This is because financial institutions do not carry out an ample or full job within financial intermediation via loanable finance market, which is a gap between consumption and savings. As such, there is no reason to invest in savings, which seems to be a fault of the respective capitalist system.

Von Hayek: I agree with you on that Milton. Indeed, the business sequence was characterized by a considerable loss in productive and investment capabilities. However, a boost in money supply distributed via the loanable finance market could alter the price and value of capital commodities relative to customer goods. That would amount to an increase in investment, which would steadily amplify the production structure. Nonetheless, investments need capital commodities. Hence, by distorting fees, there comes an increase within the amount demanded without a previous increase in supply. The inadequate amount of capital commodities progresses towards the compulsory liquidation of unfeasible investments, once charges augment enough to reveal their un-profitability, which I term as mal-investments. Hence, a recession really entails a capital restructuring. The disparate production processes that create an economy need to be restructured according to clientele preferences. Moreover, this procedure of reorganization takes place by the personal capital-managing entrepreneurs.

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