What would Hayek say about 2019 Economy
By: Junfei Ren
Tags: Economics, Economy, Invesment, History, Business

Economies have its natural cycles. Astonishing parallels can often be found in different parts of history with the striking resemblance.

After the 1920s British depression, Hayek believed that private investment, rather than government spending, would promote sustainable growth. Hayek was never a believer of the government deficit spending theory, which has been dominating the western government policy-making academics for centuries by the Keynesian faction.

In Keynesian deficit spending theory, more money on market circulation would stimulate the economy — a statement no man would ever argue with. Economy is the sum of chains of transaction that occurred between human being in any given marketplace. People exchange money or credit, for goods, services or financial assets. Spending drives economy in a way that — one person’s spending is another person’s income. For each dollar one person spends, another person earns. For each dollar one person earns, someone else has spent. Two things happen when a person’s income rises — 1) he is willing to spend more; 2) he becomes accredited borrower and qualified to borrow more money. “Income — borrowing — spending — productivity — Income” is one of the millions of billions of microeconomic cycles that self reinforces again and again which eventually leads to the macroeconomic cycles — inflation, or recession.

In 1931, during F.A. Hayek’s initial appearance of his touring lecture at LSE, he raised an unprecedented opinion for the first time — there is no direct and positive relationship between employment and aggregate expenditure, that is, if one decides to purchase an expensive coat using the credit that government issues, it does not help but on the contrary, worsen the employment rate. He criticized Central Bank for issuing groundless paper money that disorganizes market order and productivity, which in the long run scrambles social resources allocation and hence worsen the employment. Hayek insisted, that decisive factor of healthy economic cycle is management of bank savings, instead of spending, that helps sustainable growth. Groundless spending should not be encouraged. Monetary policies stay neutral. Relative pricing between industries and commercial products should be left undisturbed by capital power.

In The General Theory, Keynes alleged a direct possible relationship between aggregate demand and employment. Total demands determines the employment level. The existence of unemployment suggests not enough aggregate demand. As time elapsed and economy got worse, scholars started to question the authority.

According to Hayek, unemployment is usually concentrated in a certain sectors, industries or production stages, it has to be up to entrepreneurs voluntarily decide to allocate the additional spending and expenditures into the specific sections that are in crisis.”If government expenditure is distributed between industries and occupations different from that in which labour is distributed, mere capital increase does not increase employment.”

Market is a complex machine, in which the role of time serves a crucial part of production structure. When demand rises, supply does not increase instantly in a parallel, simultaneous manner. Without bank savings, there will always be an elapse of time and shortage of supply, in the relatively long run, produces inflation. He promoted the greatest reduction of interest rates to encourage private investment as far as possible with fewest government intervention. Private investment, rather that government spending, would promote sustainable growth.

As of today in 21st century, after the booming in lots of industries sections, 2019 seem to be the year when they describe “like a drunk throwing up the morning after the night before”. Giving more morphine will not prevent the inevitable suffering. As Hayek emphasized, there is no painless recovery from unsustainable boom. In the end after all, the only way to prevent the downhill pain is to avoid the boom from the very beginning.