Theories of Business Cycles, Macroeconomics Video Lecture | Macro Economics - B Com

welcome to essential Hayek I'm Don
Boudreaux professor of economics at
George Mason University senior fellow at
the Fraser Institute and blogger at Cafe
Hayek this video is part of the fraser
institutes in ishutin to present the key
ideas of FA Hayek in an easily
accessible format in this video we
explore hi ex work on economic booms and
busts work for which he was awarded a
nobel prize in economics in 1974 one of
Hayek's key observations was that when
governments interfere in the economy it
results in people acting in ways that
are not sustainable which ultimately
leads to booms and then inevitably busts
let's simplify this idea with an example
this is Brian Brian is a politician who
thinks he has a great idea for creating
jobs and widespread prosperity with the
best of intentions
Brian convinces his government to
support companies so that they can
develop and build factories
to sell chocolate-covered pickles but
Brian's plan is flawed he assumes there
will be great demand for
chocolate-covered pickles but they're
truly a great demand for
chocolate-covered pickles the pickle
industry would naturally respond and
build factories have covered pickles
with chocolate all without the
government's assistance so what happens
when there is no real demand by
customers for chocolate-covered pickles
the resources provided by the government
whether in the form of direct support
like subsidies or indirect support like
loan guarantees distorts the economy by
encouraging people to make bad decisions
in this case to use resources to make
chocolate-covered pickles as the lack of
demand for these pickles becomes
apparent businesses must adjust by
retooling or even scuttling factories
adjusting their production lines
changing their distribution networks etc
all of these things mean idle resources
in the short-term as businesses adjust
to the reality of the market the
challenge is to ensure that producers
have the knowledge and the incentives to
produce goods and services that people
want government interference such as
through subsidies or especially
importantly by manipulating the money
supply obscures that knowledge by
distorting prices this interference by
initially causing producers to to up to
produce things that consumers don't
really want inevitably results in
producers having to tool down and
readjust in order to better meet true
consumer demands the core insight from
Hayek on economic booms and busts is
that government interference even when
done with the best of intentions changes
people's behavior by changing incentives
and changing signals in the market these
changes result in investments that are
not sustainable and which ultimately
lead to recessions or busts to learn
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