Theories of Economic Cycles

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DATE \@ "d MMMM yyyy" 13 May 2023
Theories of Economic Cycles
INTRODUCTION
British economist John Keynes created The Keynesian economic theory, describing his economics approach. The theory suggested that the government should boost its spending to boost economic growth. Increased government spending results in a rise in overall commodity demand. The economist held that a nation's economy is primarily driven by consumer spending. As a result, the Keynesian theory promotes a fiscal expansionary approach, with government spending on infrastructure, unemployment aid, and education as its key pillars. In contrast, Friedrich A. Hayek created an economic theory of money and economic fluctuations. In contrast to government spending, the concept claimed that private investments would foster stable economic development. Friedrich is therefore thought to favor a system of free markets that excludes government interference. The study discusses and compares theories of economic cycles by Keynes and Hayek while highlighting their implications for monetary policy.
Hayek's formation of a business cycle theory was his first major contribution to economics. According to Hayek's approach, the natural interest rate functions as an intertemporal cost, coordinating the choices of saving and investors within a period. The cycle starts when this natural rate of interest and the market rate of interest, which is the rate that currently rules the economy, change. As a result, the invested stock's structure is warped and no longer accurately conveys the goals of investors and savers, as demonstrated by the financial markets (Gintis 112). His argument had the regrettable policy implication that efforts to combat an economic downturn or a time of high unemployment with a rise in the money supply would worsen the distortion of the capital stock's composition. His solution was to watch for the financial crisis to end so the market rate might revert to its natural level. Although Hayek's trade cycle theory, which was developed during the Great Depression, has few adherents presently, some parts of it are still useful. These involve Hayek's view that the interest rate is an intertemporal pricing and that variations in the availability of cash may play a significant role in discoordination, especially when those variations impact prices' ability to reflect comparative scarcities fairly.
Hayek's economic theory was based on the capital, monetary, and Austrian theories of business cycles. How human behavior can be controlled is an essential issue for a financial system, according to Hayek. Markets, according to him, are impulsive and unpredictable. The behaviors and reactions of people heavily influence the economy. He thought about the explanations as to why markets occasionally did not align with people's goals and actions, which hurt economic progress and led to high unemployment rates (Bruce 89). He believed that the availability of money played a role in this situation. Low-interest rates resulted from increased pricing and production levels as central banks raised the money supply. He contends that high investment rates could result from low-interest rates. He promoted long-term financial commitments. According to him, making short-term investments causes a boom that swiftly devolves into an economic downturn.
The macroeconomic theory, referred to as Keynesian economics, was created by John Maynard Keynes. It discusses the economy's overall spending and how it affects production, job creation, and inflation. Keynes made Keynesian economics comprehend the Great Depression in the 1930s. Demand-side theory, which centers on short-term shifts in the economy, was considered by Keynesian economics (Arestis and Malcolm 310). It was the initial economic concept to distinguish between broad national economic overall variables and the analysis of markets and financial decisions based on individual motives. Keynes argued for higher government spending and lower taxation in his theory to boost demand and rescue the world economy from the Great Depression. To combat financial crises, Keynesian economics emphasizes the employment of proactive government action to control overall demand. The Great Depression recovery was the focus of this reactive economic ideology. Its objectives were to control the economy and combat unemployment.
Three fundamental tenets of the Keynesian Approach were effective demand, fixed pricing, and savings-investment variables. These presumptions conclude that markets cannot reach equilibrium in the short run when prices are inflexible and fixed. Actual demand also means that spending is determined by substantial income rather than optimal income (Kishtainy ch.50). Income, goals, and other fa...