Will it be the Keynes school of thought or the Hayek school of thought?
I don't know the answer, but I know which one makes more sense to me. However, being a scientists myself, and therefore not versed deeply in economics... I'm wondering what our resident Kossack economic gurus think.
I recently saw an article on the BBC with a nice summary of their competing viewpoints ... follow below the squiggle for links and quotes.
Keynes v Hayek: Two economic giants go head to head
John Maynard Keynes and Friedrich August Hayek were two prominent economists of the Great Depression era with sharply contrasting views. The arguments they had in the 1930s have been revived in the wake of the latest global financial crisis.
First, about Hayek:
Unlike Keynes, Hayek believed that genuine recovery from a post-boom crash called not just for adequate spending, but for a return to sustainable production - production purged of boom-era distortions caused by easy money.
...
The straightforward recipe for the revival of healthy investment following the 2008 crisis was to liquidate.
Liquidate Bear Stearns! Liquidate Fannie Mae and Freddie Mac!
Liquidate, in short, the whole sub-prime bubble-blowing apparatus that was nurtured by easy monetary policy.
That would have meant letting insolvent banks that lent or invested unwisely go bust.
But instead our governments chose to keep bad banks going and that is why quantitative easing has proven a failure.
Okay, now on to Keynes (emphases all mine):
Keynes wrote the General Theory in 1936 to explain why the recovery was so feeble.
His revolutionary proposition was that following a big shock - usually a collapse in investment - there were no automatic recovery forces in a market economy.
The economy would go on shrinking until it reached some sort of stability at a low level.
Keynes called this position "under-employment equilibrium".
The reason was that the level of activity - output and employment - depended on the level of aggregate demand or spending power.
If spending power shrank, output would shrink.
In this situation it was the government's job to increase its own spending to offset the decline in public spending - that is by running a deficit to whatever extent necessary.
To cut government spending was completely the wrong policy in a slump
So, as you may surmise by the emphases I put on Keynes' theory, that one makes more sense. And didn't the spending of WWII and the New Deal prove him correct?
I don't have a whole lot to add, as this is not my area of expertise, but I thought this was a good primer for fellow economic noobies. And I'm especially interested in hearing thoughts on the two competing theories from the real economic thinkers among us. Please weigh in!