For decades, two opposing theories of economics have been causing heated debates — those of John Maynard Keynes and of Friedrich Hayek.

For many years, it seems that John Maynard Keynes was more influential to economic managers. Keynes was big at the role of government in influencing the economy through spending, keeping interest low, among others. Friedrich Hayek, on the other hand is best known for free market capitalism — he argues that less government intervention is best for an economy and that an economy should be allowed to take its natural cycle of boom and bust.

With all that’s going on in the world economies, the debate between Keynes vs. Hayek is alive again, and it seems that it is more heated than it ever was before. As to whose theory will be best, only history can judge that.

To learn better about Keynes vs. Hayek, here is a ingenious video about two opposing theories… and believe it or not, in MTV style! Watch it.

… con’t.

The Philippine government tried to copy the same cheap money scenario but the local game was played very differently. The government pegged the interest rate very low, yet the bank’s borrowing rates were still stiff and did not really trickle to benefit the economy the way the government wanted it to. As a result, while there was some modest economic growth , it was a laggard by other country’s standards. When global financial institutions came crashing, the local financial companies stood their ground with nary a scratch. I got to give it to our Central Bank and sound local management to some point… but to a large degree, our local financial companies breezed through the storm unscathed because of the huge margins they enjoy. Imagine borrowing money at very cheap rates (thanks to the government) and lending them at high rates – how can you go wrong?

The first world economies and the Philippines applied what John Maynard Keynes advocates with different results. First world experienced unprecedented growth but their economy later succumbed into what appears to be a vacuum. The Philippines were spared from the financial mess but continues to await some economic epiphany that seems to be a dream. In my view, both results are failures.

Now, was John Maynard Keynes right? Should the government continue to craft policies to influence the economy? It seems that now more than ever, the Keynesian theory is alive – dole outs, stimulus packages & low interest rates; and we still claim that we subscribe to a free market? Hmmm, perplexing. Why don’t we just let the economy take its proper course; allow recession so we can learn from it; fix our houses, weed out inefficiencies and review our priorities? Allowing to do so will definitely be a painful and a hugely unpopular move. Or, we can continue applying band aid solutions to a necrotic wound.

There’s only one economy that can experience consistent growth with no recessions: God’s economy. Maybe it’s time we start focusing our time and effort in participating in His economy.

“So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?” – Luke 16:11, NIV.

A blessed New Year to everyone!

John Maynard Keynes: 20^th century economist and father of the ‘Keynesian’ Theory.

What the heck is Keynesian Economics? Simply put, “it is a macroeconomic theory that argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle” (wikipedia.com). In other words, this is a theory that gives the government a huge say in the economy.

Governments, whether they admit it or not cling to Keyne’s theory like it’s the gospel truth especially now. Governments feel the need to dictate the direction of the economy as they feel that only government intervention can solve the crisis.

Really? Here’s a thought. Isn’t government, to a large degree, responsible for the mess we are in? When you really look at the root cause of many of today’s economic problems, one major thought comes into my mind – cheap money. Cheap money or a very low interest scenario allowed for an unrealistic prosperity that was not only unsustainable, it was bound to crash – and indeed, it crashed big time. Particularly in the US and Europe, the stock market took the cheap money and recklessly gambled with it; while people took it and wantonly spent it like there’s no tomorrow. Yes, cheap money allowed for growth but when you really look at it retrospectively, the growth made many reckless and deleted the word prudence in their vocabulary. In other words, it was a bubble.

… catch part 2