In the first episode of Commanding Heights, it begins by showing the world with a global economy that is tremendously suffering by the World War 1 events. After World War I, two extremely cerebral economists tried to solve the world’s economic troubles, John Meynard Keynes and Friederich Hayek. Keynes had the belief that a government in times of economic despair should spend money and go into a deficit in order to build the economy back up and then when the economy is stable again, should then grow a surplus. On the other hand, Hayek believed that for an economy to survive the free market must be allowed to have the power to decide.
Just as the textbook states, Hayek believed that markets arose naturally. He believed that while at times unemployment would be high, government should not step in with more regulations. Hayek thought that government regulation on the market would lead to too much government control and would damage the economy. Both economists demonstrated the economic way of thinking as discussed in chapter 1 of the Macroeconomics textbook. They had to use assumptions to simplify things, and they most definitely had to think at the margin.
Many governments followed Keynes theory after World War 1. During the Great depression, Roosevelt decided to use Keynes economic theory by spending lots of money, also known as the new deal. Roosevelt had the hoover damn built, interstate systems; he created new government agencies to put the unemployed to work. This economic system sure paid off for the United States. This theory is still pretty much used as we speak. The government continues to build recreational parks, museums, repairing the interstate systems, just spending money.
Of course that money is not always spent wisely. I believe that Keynes theory will always be in effect for some time to come. After World War 2, a good portion of the world had adopted John Keynes economic theory. In many of those countries the result was not so promising. Socialism was born and economic problems became even worse. The Unites States on the other hand, continued to prosper following the Keynes theory. Hayek’s beliefs were pretty much over shadowed and unaccepted. The United Kingdom was also a follower of the Keynesian economics.
Winston Churchill tried to put a halt to the way they were running their economy, but the labour party prevailed. After around 30 years of following Keynesian economics, both the U. S and the U. K ran in to trouble. Stagflation was brought upon both economies. Inflation rates grew and economic growth rate slowed drastically. Then Ronald Regan and Margaret Thatcher came in to the picture. Both of these leaders were more on the side of Hayek’s beliefs. They wanted to cut government regulation and cut government spending, they believed that would save their economies.
The U. S and Britain had finally found a way out of the Keynesian practices. The Stagflation was over. After watching episode one of the Commanding Heights series, I have learned a lot about the old economic theories and how their still used today. Two creative young men had the ability to get half of the world to follow their ideas. It seems to me that economics is not just about technological advancements or scientific methods, but it is more about the generating of ideas. Economics comes from dedicated people using their creativity and critical thinking to make ideas turn into theories.
I believe one of the main questions to be answered is what should be the balance of power? Should the market have more power to decide? Or should the government be more controlling? After Learning about these economic system theories, I believe the President should favor Hayek’s theory slightly over Keynes. It would be best to have mixture of both economic systems equally, almost as we do now. Too much government control is still a concern in my opinion. The government is making it harder and harder for people to make good money anymore.