We Are Heading Towards a New Crisis

Greek society’s obsession with “measures” and the passion for announcing financial benefits inevitably leads to new fiscal dead ends. When that happens, dozens of loud citizens and journalists will once again wonder “where did the money go!” The answer must be – even if public opinion again refuses to accept it – “to benefits”! Essentially, this is a theoretical clash between two schools of economic thought: the views of John Maynard Keynes and the claims of Friedrich von Hayek.

Their conflict is not merely theoretical; it is a disagreement about how the world works in times of crisis. The fundamental difference is that, according to Hayek, markets self-correct, while the state usually makes things worse. According to Keynes, markets can “get stuck,” and the state must then intervene. The Great Depression (1930s) was the first major crash test. Hayek (and the Austrian School – von Mises, Kirzner, etc.) argued that the crisis was the result of a previous “bubble” and that the economy should be allowed to “cleanse” itself. Keynes, on the other hand, insisted that demand collapsed, causing unemployment and creating a vicious cycle. Therefore, the state must inject money into the economy. In practice, policies like Franklin D. Roosevelt’s New Deal, which leaned more towards Keynes’ approach, were implemented. The result was the validation of Keynesian views.

Then came stagflation (1970s). That was the big upheaval. Keynesian policies could not explain the simultaneous presence of high inflation and unemployment. (There was no way to pass the exam of Keynes’ former student Joan Robinson at Cambridge with such views.) Thus, Hayek’s ideas, and generally liberal–monetarist views, came to the forefront. With Margaret Thatcher and Ronald Reagan, these views dominated worldwide. In this way, Hayek was “vindicated” in believing that excessive intervention and monetary loosening cause distortions. Then came the crisis of 2008, the most recent crash test. The crisis originated in the markets (but also from loans by state-controlled banks, e.g., Fannie Mae). Governments (Obama) made massive interventions with bank bailouts, fiscal stimulus packages, and central banks printing money. This was clearly a Keynesian instinct. Hayek’s supporters (e.g., Meltzer) countered that the crisis was caused by wrong interest rates and distortions and that bailouts reinforce moral hazard (Roubini).

In today’s situation, it is not only Hayek who warns us, through his writings at the time, that we are heading towards dead ends, but also Keynes himself, who insisted that “in crisis you spend, in growth you save.” By spending to secure popular favor, one undermines every rational economic effort.