Discuss the concept of knowled

Hayek was the well-known advocate of Austrian Economics. He wasa contemporary of Keynes. He shared the same views as Keynes on thepossible short run expansionary effects of monetary policy that itleads to falling unemployment but this policy of rasing moneysupply and lowering interest rates is inflationary. It causesinflation to get higher and higher as money supply rises. However,Keynes in his General Theory of Employment, Interest andMoney, suggested that monetary policy by the central bank andfiscal policy actions by the government can and do help tostabilize output and economy. According to Keynes, an expansionarymonetary policy lowers interest rates making investment moreprofitable and stimulating aggregate demand. He does not considerthe effect of rising demand on prices assuming that prices aresticky and economy operates well below full employment level. So,there is no pressure on prices. Hayek argued that Keynesianpolicies, fiscal as well as monetary, to maintain full employment,aiming to increase aggregate demand to achieve the maximumattainable level of employment would lead not only to chronicinflation, but also to a mismatch between the distribution ofdemand and the distribution of labor in the longer run. Theunavoidable mismatch between the demand for and supply of laborwould cause unemployment to rise in spite of inflation, invitingthe imposition of direct controls by the authorities. This is whatcame to be known as the resultant vertical long run Philipscurve.

Hayek acknowledges that monetary policy can be effective intimes when widespread unemployment of all kinds prevails throughoutthe economy, when aggregate demand is deficient. He howeveroutright rejects the Keynesian view that increasing aggregatedemand is the panacea for all problems