Criticism of Keynesian Theory by F.A. Hayek

in economics •  5 years ago  (edited)


This is one of the more interesting videos that I recently stumbled upon, on YouTube. However, I don't feel like this is accurate enough, because his triangles talk about an increase in production time with reduced consumer spending and is applicable to the entire economy, not just the production process of bread taken separately from the rest of the economy, where the general goal would be to reduce the production time. It is important to note that the independent variable here is consumer's time preference, which, if lower, would result in reduced consumer spending. Although, it might be worth noting that prior to watching this video (just around an hour before composing this article), I had no information about Hayek's work.

My interpretation would be that in the case of savings under Austrian model, it would lower the interest rates. Since the process of saving up occurs slowly and it takes time for them to finally turn into investment, the short term reduction in demand will be followed by a price drop for the consumer first, and then passed onto the cost of raw materials, until demand and supply reach the same levels as before. In the aftermath, the supply and demand would remain unchanged, and the ratio of consumer to producer spending would also remain the same, although there would be deflation all across the process. The lowered interest rates from savings would stimulate more investment in early stages of production of goods in the overall economy, leading to new innovations that might later replace intermediate stages of production in manufacturing bread, or some other goods, or create new goods altogether, that may or may not replace other goods. In the cases where it doesn't replace other goods, you get more deflation.

Under the Keynesian model of giving additional money to the investors would also lower interest rates prompting for a similar investment in early stages of production. The ratio of consumer to producer spending will also remain the same, because there is no change in demand and supply, initially. However, since the total supply of money has increased, all the prices will be inflated, initially. In this case, however, since a need for investment (saving) wasn't felt by the producers themselves, and since lower interest rates result in lower gross profit margins, they might as well invest in ramping up production, causing the supply side to grow at a faster rate than the demand side, which would lead to piling up of inventories and hence form bubbles. This will later result in a sudden crash in prices.

If the money was directly given to the consumers, the demand for all sorts of (even the unnecessary ones) goods would rise, again, leading to further creation of bubbles and misallocation of capital goods, which would again end up in a crash.

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