How much intervention in the market economy should the state have? This has to be one the big questions in economic science. Another way to look at the question is asking whether the market is able to auto-regulate. This question had sparked the academic battle in between two economic giants : John Keynes and Friedrich Hayek. Their battle is so well-known that there are even videos on Yoututbe of them doing rap battle. To put it simply : Keynes wants to steer the market while Hayek leans more to laisser-faire.
Keynes thinks that the simple law of supply and demand is insufficient to explain the price fluctuation of merchandises in the market. He demonstrates his point of view in his famous concept of a beauty constest. In this contest, each participant is asked to choose the six most atractive faces among one hundred photographs. The winner is awarded to the one who picks the list the closest to the most popular of the combined lists of all participants. The natural strategy is to actually choose the most beautiful faces. But a better strategy would be choosing the list by taking into account of the choices other participants make, assuming that the others choose the most beautiful faces. We can take the reasoning further by assuming that the other participants know and apply the better strategy, and make the list accordingly.
As we can see, the strategy can be extended to the next level and the next, at each level we assume that the others apply the strategy the level before. This concept explains exceptionally well the fluctuations in the stock market. The price of shares don't always reflect their real value but the value people think they are. All Keynes wants to prove through this concept is that the market is unable to self-regulate. Thus more intervention is needed.
On the hand, Hayek argues that the market is an auto-regulated system. He believes the market is a complex system. He says that it is a system so complex that not even a powerful super computer is able to manage all the information in the system. It can only be governed by so called spontaneous order. The spontaneous order is comparable with the idea of the "invisible hand" proposed by Adam Smith. Using the price as the information in the economic system, Hayek further argues that any intervention such as a simple act of fixing an upper price limit on a merchandise, would just falsify the information thus create an inaccurate image of the reality of the market.
In recent years, we can observe that more and more right-wing authoritarians are on the rise in Europe. Figures such as Marine Le Pen and Nigel Farage are gaining popularity. The same can also be said in USA as a recent poll favoring Donald Trump. Their policies are not exactly Keysian but very closely linked. The basic idea is the same : more government's control, less liberalism capitalism. Nouriel Roubini explains all of these very well in an article he wrote for Project Syndicate, entitled "Europe's Politics of Dystopia". The rise of authoritarian governement is what Hayek fears the most. He says that the idea of assuming one can understand the market system in its entirety and is able to reconstruct the world with a program, can lead to totalitarism.
With all said, the battle of Keynes vs Hayek or authoritarianism vs liberalism reminds me of the Strauss-Howe generational theory. The theory states that the Western history follows a four-stage cycle of social or mood eras which William Strauss and Neil Howe call turnings. The four turnings are High, Awakening, Unraveling, and Crisis. During the High turning, collectivism in the society is strong and governement tends to be very authoritarian. The prime example of the High era is the 30 years after WW2 or the Trente Glorieuses in France when Keynesian model was very popular. On the contrary, during the opposite turning, the Unraveling, the individualism is high and a more liberal model is preferred. A good example of Unraveling era would have to be ten-year period before the the Great Depression of 1929.
Although being often criticized as unscientific and unfalsifiable. this theory remains influential. On paper, it does seem like authoritarianism and liberalism alternate throughout the Western history. According to the theory, we are living in the era of Crisis that will peak in the year 2020. Martin Armstrong even predict a major crisis in the year 2017. If the theory is correct, that would probably explains the rise of the authoritarians.
Bibliography
- Nouriel Roubini, Europe's Politics of Dystopia (www.project-syndicate.org, 29 Oct 2015)
- Martin Armstrong, The Coming European Revolution (www.armstrongeconomics.com, 12 Jan 2016)
- Martin Armstrong, French Politics are Turning Ahead of 2017 (www.armstrongeconomics.com, 13 Jan 2016)
- Patrick O'Connor and Janet Hook, Poll : Donald Trump Widens His Lead in Republican Presdentiel Race (www.wsj.com, 14 Jan 2016)
- Vsauce, Juvenoia (www.youtube.com, 01 Nov 2015)
- Strauss-Howe Generational Theory (en.wikipedia.org)
