Keynes vs. Hayek (stimulus vs. austerity)

A summary of Hayek's work, in case you are interested in the Keynes vs. Hayek debate (aka stimulus vs. austerity) (my previous posts in the subject here, here, here, and here)
"The discussion was very similar to the modern austerity versus stimulus debate, although at the time the major players were still busy fully developing their theories.  Keynes favored temporary and limited government socialization of investment as a means of using unspent money to recover the “gap” in aggregate demand, as well as general monetary stimulus.  He believed that banks do not do an adequate or complete job in financial intermediation through the loanable funds market — a form of disconnect between savings and consumption.  More specifically, he did not see a reason as to why savings are necessarily invested, seeing this as a natural fault in the capitalist system.

Hayek essentially agreed that the business cycle was characterized by a massive loss in investment and productive capabilities.  It was in his identification of the causes for this loss where he differed with Keynes.  The differences in business cycle theory also led Hayek to radically different ideas on the nature of the recovery.

In short, Hayek borrowed from Mises the idea that an increase in the supply of money distributed through the loanable funds market could distort the prices of capital goods relative to consumer goods. This would lead to an investment boom which would gradually spread up the structure of production — this facet formed the crux of Hayek’s work on business cycle theory in Prices and Production.  However, investments require capital goods, and by distorting prices what occurs is an increase in the quantity demanded without a previous increase in their supply.  The insufficient quantity of capital goods leads to the necessary liquidation of impossible investments, once prices increase enough to reveal their unprofitability — what Mises and Hayek term “malinvestments.”

While the recession is characterized by the mass liquidation of malinvestment, what this really entails is a capital restructuring.  The different processes of production that make up an economy must be reorganized in accordance with consumer preferences, including intertemporal preferences (the relationship between savings and consumption).  This process of reorganization is carried about by the individual capital-controlling entrepreneurs, each of which uses her best judgment in economizing her stock of capital goods.

Mises and Hayek saw government expenditure as counter-productive, because it negatively intervenes in the process of economization.  In other words, on average, government socialization of investment — whether it manifests through forced wealth redistribution or actual public investment (e.g. public works) — leads to less productive outcomes than what the alternative would have been had those resources been only been economized in the market process.  More elementarily, since government acts outside of the profit and loss jurisdiction, government cannot accurately calculate the net (un)profitability of its investments."