Keynes vs. Hayek: Late Economists Hip-Hop Legacy | PBS NewsHour | Dec. 16, 2009 | PBS.

A major theme of both the AP and IB Economics courses is the long-running debate between the Keynesian, demand-side theories of macroeconomic policy and those of the Classical, supply-side school. Today’s “Great Recession” has revived this debate, which itself dates back to the Great Depression of the 1930’s, when an Englishman and an Austrian could be found at the ideological centers of two different philosophies of the role government should play in the macroeconomy.

John Maynard Keynes and Friedrich Hayek were close friends whose views on government’s role differed greatly. Hayek was a classical, laissez faire libertarian who believed that any intervention by government in a nation’s economy disrupted the efficient functioning of the free market and threatened to stifle private enterprise. Keynes, the father, of course, of modern Keynesian economics, believed that free markets left unchecked were vulnerable to the volotile animal spirits of investors and speculators whose often irrational behaviors could create externalities such as unemployment and credit crunches, thereby harming society as a whole.

Paul Solman of PBS (who I recently met at an Economics teachers conference in Washington DC) interviews a modern Keynesian, Robert Skidelsky (Keynes’ biographer) and a neo-classical economist, Russ Roberts (who I also recently met in Richmond, VA).

Essential Question: How does economic development differ from economic growth?

Objective: Whereas most assignments deal in information and analysis, this one deals in imagination. Here we ask you to portray what you believe more economically developed countries look like. And considering that development is a relative term, we also want to see how a country could end up if it only achieves economic growth, without any progress on development.

Goal: To visualize and depict the distinction between economic development and economic growth.

Process:

As you and your partner gather images online, keep in mind the definitions of growth and development. Images should portray these definitions in a creative way.

YouTube – ACDCLeadership’s Channel

More econ review videos from my new favorite YouTube channel, Jacob Clifford’s Econ Concepts in 60 Seconds.

To review for the upcoming test, you will join a small group and watch one of the four videos on the Perfect Competition. After watching and discussing one video with your group, you will be re-assigned to another group with students who watched a different video. You will then lead a short discussion on your original video with your new group.

With your first group – 15 minutes: As your group watches its assigned video, have your notes open in front of you and draw the graphs Mr. Clifford draws along with him. Pause the video where necessary to have time to draw graphs. Take notes while watching the video so you can teach it to another group. With your group, prepare a short discussion of the video’s main points, including:

• What rule or lesson about Perfect Competition does the video focus on?
• What did you already know that this video reminded you of or reinforced your understanding of?
• What did this video introduce that was new to you?
• How were graphs used to teach the concepts?

With your second group – 20 minutes: For the second part of this assignment, there should be four new groups, each including one member of the four original groups.

• Each group member should lead a 2-3 minute discussion of the video he or she watched in the first group.
• Go over each of the discussion points from above.
• Answer any questions your new group members have about video you watched.

Group 1 – The Profit Maximization Rule – MR=MC:

[youtube]http://www.youtube.com/watch?v=qaQRM6WIxpA[/youtube]

Group 2 – Perfect Competition in the short-run:

[youtube]http://www.youtube.com/watch?v=yY8f571AUxk[/youtube]

Group 3 – Perfect Competition in the long-run:

[youtube]http://www.youtube.com/watch?v=SjZmnOAPKUM[/youtube]

Group 4 – The Shut-Down Rule in Perfect Competition:

[youtube]http://www.youtube.com/watch?v=VFY2aJwpdNM[/youtube]h

YouTube – Chinas empty city – 10 Nov 09.

My buddy living in Shanghai posted this video to his Facebook profile today. It demonstrates how misaligned incentives in China lead local government officials to launch massive government infrastructure projects, all with the goal of meeting the growth targets handed down from Beijing.

Building roads to nowhere and cities that stand empty certainly creates jobs and new spending by the workers employed in their construction, so in that regard at least one goal of such projects is achieved. But whether or not all growth is good growth depends on whether efficiency in the economy is increase or decreased as a result of the growth strategies used.

Hundreds of billions of dollars worth of resources in China are currently being allocated by the government in Beijing towards massive public works projects such as this sparkling new city in remote Inner Mongolia. But it seems that government plans don’t always fall in line with the wishes of the nation’s people. A wise man once said, “build it… and they will come.” Apparently in China, that’s not always true.

I happen to have traveled in Inner Mongolia a few years ago with a group of students from my school in Shanghai. It was a sad thing in my opinion to witness the rampant development of the once pristine and culturally rich Inner Mongolian steppes. Ethnic Mongolians had been put on large reservations (not unlike the Native American people 150 years ago) and turned into tourist attractions. The cities were populated almost entirely with ethnic Han Chinese, there for the purpose of building more new cities, mining raw materials, and selling them to the rest of China’s industries.

Fiscal policy (the use of government spending and taxes to stimulate or reduce the overall level of demand in an economy) is a powerful tool for achieving the macroeconomic goals of full-employment, economic growth and price level stability. When used effectively, government spending can also improve efficiency in an economy by allocating society’s scarce resources towards socially and economically valuable projects. In China, it appears, the government’s incentives are aimed more towards pleasing the higher ups and continuing to inflate the speculative  bubble in real estate that has almost certainly formed, rather than pursuing socially desirable and allocatively efficient projects that actually help the Chinese people. Damn shame!

Discussion Questions:

1. What type of fiscal policy is the government in China pursuing? Expansionary or contractionary? What is the difference?
2. Why is government spending sometimes less efficient than private sector spending?
3. What would have been an alternative policy to allocating over $220 billion of public money into infrastructure projects that may have resulted in a more efficient allocation of China’s resources than projects such as the “empty city” in the video above?