Video essay 1

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Video essay 1

  1. 1. Commanding the Heights: the Battle of IdeasThe essay gives an overview of the documentary Commanding the Heights: the Battle of Ideas made byPBS, followed by the analysis of the two competing economic ideas Keyes vs. Hayek, and then presenteda detailed illustration of their impact on the America’s economic policies since 1980s.IntroductionThe PBS-made documentary ‘Commanding the Heights’ is to promote better understanding ofglobalization, economic development and world trade, featured with specific examples of differentcountries and interviews with related parties.Episode One: "The Battle of Ideas," gives an overview of the battle between two major competing ideasabout the world economy over the course of last century. One the one and, the English economistsKeynes believes in the ‘planned economy’ and advocates the government intervention to mitigate therisk during economic recession or depression; On the other hand, the Australian economist Hayek favorsthe free market mechanism and believes in minimum government intervention as market will eventuallytake care of itself and the prices system is at the heart of what makes a functioning economy work. Theepisode tracks the root of these ideas and explains how the world moved toward the governmentcontrolled economy during the 20th century in a chronological order.The Russian Revolutionary in 1917 marked the beginning of communism economy, in which governmentis very important to allocate resources and goods. During the great depression of 1930, the Keynes’theory began to dominate. According to Keynes, the solution to the depression was for the governmentto spend more money to restore the full employment. By late 1940s, socialism was on the march andfree market was on the retreat all over the world from Great Britain to United States. The Keynes’ 1
  2. 2. economic theory dominated for decades until the economic crisis of 1970s, which forced politicalleaders to look for new ideas. In the 1980s Margaret Thatcher took the helm of Great Britain and RonaldReagan was elected president of United States. Both of them embraced Hayek’s free-market theory andplayed a critical role for the worldwide acceptance of this different economic approach. The next sectionillustrates my opinions/analysis on these two different economic theories after viewing the film.Keynes vs. HayekIn order to better understand these two ideas, further research has been done beyond the film. Themain concept of Keynesian economics is that market sometimes can lead economic in-efficiency,therefore requiring significant government intervention. Keynesian economics advocates the ‘mixedeconomy’ and government should play an important role in the marketplace. According to Keynesianeconomics, the solution to great depression is for government to reduce the tax rate and increase thespending on the infrastructure. In certain situations, market is not able to restore to full efficiencyautomatically. (Wikipedia) The two theories of mainstream Keynesian economics include LS/LM modeland Philips curve (See, Exhibit 1). LS/LM model gives the relationship between real market output andthe interest rate. And the Philips curve describes the inverse relationship between inflation rate andunemployment rate. (Wikipedia)By contrast, Hayek is a strong advocate of free market capitalism. Hayek is one of the major contributorsof Australia Economic School thoughts. The Austrian Business Cycle Theory (or ABCT) is key theory ofAustralia Economic School. Exhibit 2 gives an overview of ABCT. To illustrate, in a totally free market ifdemand is greater than supply, the prices increase, therefore leading to the increased profits andeventually the production increase; on the contrary if supply is greater than demand, the pricesdecrease and the profits decreases therefore resulting in the decreased production. (Slideshare)Australia Economics also argues that during the recession, the government intervention can only slow 2
  3. 3. the recovery and worsen the situation as the prices sends information signal to determine the outputeventually. For example, the US bailout in 2008 and the stimulus package will be considered as a badmove to recover the economy by Hayek’s theory.After viewing the film and further researching on these two major economic ideas, I found myselfneither a Keynesian follower nor Hayek persuasion. Both theories have made great contribution to theeconomic development. However, they both have their limitations as well. The main difference betweenthese two ideas is the government role in an economy. In my opinion, I agree that ‘No matter if it is awhite cat or a black cat; as long as it can catch mice, it is a good cat’ by the famous Chinese reformerDeng Xiaoping. No matter 3
  4. 4. Exhibit 1a, LC/LM modelSource:Exhibit 1b, Philips curveSource: 4
  5. 5. Exhitbit 2, Austrania Business Cycle theory 1. Demand > Supply 2. Supply > DemandSource: http://www.slideshare.net/ManAgainstTheState/austrian-business-cycle-theory 5
  6. 6. References:http://en.wikipedia.org/wiki/IS-LM_model#See_alsohttp://en.wikipedia.org/wiki/Phillips_curvehttp://www.slideshare.net/ManAgainstTheState/austrian-business-cycle-theoryhttp://en.wikipedia.org/wiki/Keyensian 6

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