In economic theory, there are two significant points of view on governmental guidance and economy. One of the points was presented by Keynes and later became known as the Keynesian Economic Theory. The other one, founded by Friedman and von Hayek, is known as the Chicago School Economic Theory. This paper will summarize the theories, define core differences and evaluate which one is more compelling in the current state of the economy.
The core difference between Keynes and Friedman’s economic philosophies is their perception of the role of government in the economy. Friedman’s Macroeconomic Policy of Monetarism was founded solely on a belief in the natural equilibrium of the market (Desai 2019). Friedman’s theory states that interference from the government in the market area is unnecessary and could negatively affect the market balance. According to Friedman, instead of controlling the market, the government should focus on controlling the amounts of money. On the other hand, Keynes stated that employment level is the primary factor of the economy, as demand determines the level of economic activity in the country. He analyzed different cycles of businesses and determined that the business sphere needs additional support from the government (Desai 2019). According to Keynes, the government needs to control the economy through low interest rates to provide opportunities for job creation.
The policy of Quantitative Easing that took place in the US after the financial crisis of 2008 was mainly influenced by the Keynesian theory. From Freidman’s view, the short-term change of the money supply could cause a dramatic effect on the economy, so Freidman would possibly focus on expanding the money supply. From the two schools of thought, I find Keynes’ theory more compelling as it implies that government should help the economy and focus on full employment. In the current situation, full employment would solve many social and financial issues and increase the quality of the population’s living.
Reference
Desai, Chiragh. 2019. “Economics, Monetary Theory and Fiscal Policy.” In Management for Scientists, edited by Robert Mellor, 1-15. Bingley: Emerald Publishing Limited.