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The Wrath of Keynes

Wednesday November 16th, 2011   •   Posted by Emily Skarbek at 7:45am PST   •  

James Buchanan and Richard Wagner

Image Courtesy of Liberty Fund, Inc.

James Buchanan and Richard Wagner begin their book Democracy in Deficit by explaining that prior to the absorption of Keynesian economics, the conventional wisdom of Adam Smith prevailed. Adam Smith had observed that:

“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”

This Smithian principle informed the fiscal conduct of America. Government spending should be constrained to its revenue and should not place future generations in bondage by financing public expenditure on debt.

The sad truth is that the Keynesian vocabulary dominates the discourse of the deficit reduction committee. Proposals revealed on Monday included community development grants, Amtrak operating subsidies, and funding for private sector space flight. How can more spending be the appropriate response to a $15+ trillion dollar national debt crisis, you ask?

Because Keynesian vocabulary falsely distinguishes between government spending and government investment. By spending more taxpayer money and calling it investment, Keynesian economics promises politicians a way to perpetuate spending even under fiscal crisis. As Buchanan and Wagner explain,

With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism. Keynesianism stood the Smithian analogy on its head. The stress was placed on the differences rather than the similarities between a family and the state, and notably with respect to principles of prudent fiscal conduct. The state was no longer to be conceived in the image of the family, and the rules of prudent fiscal conduct differed dramatically as between the two institutions. The message of Keynesianism might be summarized as: What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation.

What happened? …Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists.

The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.

Viewing the capabilities of government to make investments in ways that are similar or superior to what entrepreneurs can achieve in the market is disastrous to public knowledge. According to a recent poll, Americans distrust government more now than ever. But their solutions to their own distrust rest implicitly on Keynesian foundations, leading them to advocate for more redistribution, more government power, and less individual liberty. This is a dangerous road to go down and one that cannot be reversed without a refutation of Keynesian fundamentals.

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November 2011