Essay Instructions: Market Behavior
In the Session Long Project, you are encouraged to use your own life experiences and opinions in your essays.
Keynes vs. Hayek: The Rise of the Chicago School of Economics*
Description:
Economic freedom is freedom from government intervention in the production and distribution of goods and services. After World War II, governments were trying to rebuild their economies from the ground up. They looked to the ideas of the top economists of their day for guidance. These ideas have shaped economic systems and the idea of economic freedom for many years.
--------------------------------------------------------------------------------
Introduction:
The ideas of John Maynard Keynes and Friedrich von Hayek have dominated the economic landscape since the end of World War II. Both of these influential economists had distinct ideas about economic freedom, ideas that were very clearly in opposition to each other.
Required Reading:
Federal Reserve Bank of San Francisco. Major Schools of Economic Theory: Keynesian School. Retreived August 12, 2009 from: www.frbsf.org/publications/education/greateconomists/grtschls.html#A8
Yergin, Daniel and J. Stanislaw. (1998) "The Chicago School" Excerpt from Commanding Heights pp. 145-149. Retreived August 12, 2009 from: www.pbs.org/wgbh/commandingheights/shared/pdf/ess_chicagoschool.pdf
Other Resources:
"The Battle of Ideas: The Core Debate- Markets vs Government"-Video Clip: www.pbs.org/wgbh/commandingheights/shared/minitextlo/vid_friedrichvonhayek.html
The above link provides a two-minute video clip that explains the ideological differences between Keynes and Hayek. You can also click on www.pbs.org/wgbh/commandingheights; then choose the "Battle of Ideas, The Core Debate" clip (choose the media player your computer is equipped with).
"2005 Index of Economic Freedom" en.wikipedia.org/wiki/Index_of_Economic_Freedom_historical_rankings
Process:
Following World War II, one major economic question dealt with the appropriate role for government in the economy. John Maynard Keynes, an English economist, developed theories that called for a large role for government in the economy. Daniel Yergin and Joseph Stanislaw (1998), explain Keynes' argument in this way: "The government would borrow money to spend on such things as public works; and that deficit spending, in turn, would create jobs and increase purchasing power. Striving to balance the government's budget during a slump would make things worse, not better. Keynes's analysis laid the basis for the field of macroeconomics, which treats the economy as a whole and focuses on government's use of fiscal policy--spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment. As a corollary, the government would cut back its spending during times of recovery and expansion."
Keynes' views on economics were challenged by Friedrich von Hayek who argued that "The problem was that under central planning, there was no economic calculation--no way to make a rational decision to put this resource here or buy that good there, because there was no price system to weigh the alternatives." Central planners could make technical decisions but not economic ones. Over the rest of the century, that criticism would prove to be extraordinarily prescient. "Socialism shocked our generation," Hayek later said. Yet, he added, it profoundly altered the outlook of idealists returning from the war. "I know, for I was one of them.... Socialism told us that we had been looking for improvement in the wrong direction"(Stanislaw and Yergin 1998).
To Hayek, less government intervention meant more economic freedom. He believed that when people are free to choose, the economy runs more efficiently. In the United States, the strongest supporters of Hayek's ideas were a group of economists at the University of Chicago. Known as the "Chicago School of Economics," this loosely formed unofficial group of economists was generally associated with free market libertarianism. The name refers to economists who received their schooling in the Economics Department at the University of Chicago. To date, nearly half of all Nobel Prizes in Economics have been won by researchers with ties to Chicago.
Please address the following issues in a 2-3 page paper:
1. In your own words, what is economic freedom?
2. How was the Chicago school in direct conflict with the Keynesian school of economic thought?
3. According to the Chicago economists, what should government’s role in the economy be?
4. Do you think there are certain economic crises that require government intervention (i.e Great Depression, Auto Industry failure, etc.)? Why or why not? (There is no right or wrong answer, but be sure to support your ideas.)
SLP Assignment Expectations:
Use concepts from the modular background readings as well as any good quality resources you can find from the cyberlibrary or other internet search engines. Please be sure to cite all sources within the text and a reference list at the end of the paper.
Length: 2-3 pages double spaced and typed
The following items will be assessed in particular:
Your ability to express your own opinion regarding changes in the economy.
Some in-text references to the modular background readings (APA formatting not required).
The essay should address each element of the assignment. Remember to support your answers with solid references.
*This lesson is courtesy of the Council For Economic Education
