More - Keynes v Hayek

Stephen King (the Brit, not horror writer) makes the following comment in discussion UK v US economic performance.

It's worth going back to the 1930s debate between John Maynard Keynes and the Austrians. For Keynes, economies could settle at different levels of activity, from full employment through to the deficient demand associated with recessions and depressions. The losses associated with these periods of deficient demand could be corrected via government intervention designed to lift animal spirits, thereby bringing markets back to their senses and allowing full employment to be regained.

This story is central to those who believe that the world economy is on a sustained recovery path. Seen through Keynesian eyes, the recession was a failure of market forces associated with a collapse of animal spirits. All that's happened over the past 12 months is that, slowly but surely, those animal spirits have been revived.

For the Austrians, led by Friedrich Hayek, government (and central bank) intervention often made matters worse. Indeed, an Austrian take on the crisis would argue that the damage was done not during the crisis itself through a failure of animal spirits but during the earlier boom, a period during which central banks left interest rates too low, thereby distorting the cost of capital and promoting excessive investment in real estate. This "wasted" investment now means that the capital stock is less effective than it should be, lowering the economy's long-term growth rate on a permanent basis.