We reject this set of blindfolds. We step back one stage, and we try to observe the political along with the economic process. We look at the political economy. The prescriptive diagnosis that emerges suggests disease in the political structure as it responds to the Keynesian teachings about economic policy. Our specific hypothesis is that the Keynesian theory of economic policy produces inherent biases when applied within the institutions of political democracy. To the extent that this hypothesis is accepted, the search for improvement must be centered on modification in the institutional structure. We cannot readily offer new advice to politicians while at the same time offering predictions as to how these same politicians will behave under existing institutional constraints. By necessity, we must develop a positive theory of how politics works, of public choice, before we can begin to make suggestions for institutional reform.
Keynes was not a democrat, but, rather, looked upon himself as a potential member of an enlightened ruling elite. Political institutions were largely irrelevant for the formulation of his policy presumptions. The application of the Keynesian precepts within a working political democracy, however, would often require politicians to undertake actions that would reduce their prospects for survival.
Ch. 1 : What Hath Keynes Wrought?
What happened? Why does Camelot lie in ruin? Viet Nam and Watergate cannot explain everything forever. 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.
Ch. 1 : What Hath Keynes Wrought?
John Maynard Keynes was a speculator, in ideas as well as in foreign currencies, and his speculation was scarcely idle. He held an arrogant confidence in the ideas that he adopted, at least while he held them, along with a disdain for the virtues of temporal consistency.
Ch. 3 : First, the Academic Scribblers
Without Keynes, government budgets would have become unbalanced, as they did before Keynes, during periods of depression and war. Without Keynes, governments would have varied the rate of money creation over time and place, with bad and good consequences. Without Keynes, World War II would have happened, and the economies of Western democracies would have been pulled out of the lingering stagnation of the 1930s. Without Keynes, substantially full employment and an accompanying inflationary threat would have described the postwar years. But these events of history would have been conceived and described differently, then and now, without the towering Keynesian presence. Without Keynes, the proclivities of ordinary politicians would have been held in check more adequately in the 1960s and 1970s. Without Keynes, modern budgets would not be quite so bloated, with the threat of more to come, and inflation would not be the clear and present danger to the free society that it has surely now become. The legacy or heritage of Lord Keynes is the putative intellectual legitimacy provided to the natural and predictable political biases toward deficit spending, inflation, and the growth of government.
Unfortunately for Buchanan and Wagner’s story, Keynes was not a proponent of “continuing and increasing budget deficits.” Nor was he the naive rationalist and antidemocrat that Buchanan and Wagner paint him as being. From top to bottom, Buchanan and Wagner get it wrong as regards John Maynard Keynes.
Bradley W. Bateman, "Scholarship in Deficit: Buchanan and Wagner on John Maynard Keynes" (2005)
The most insidious attack on Keynes was probably James Buchanan and Richard Wagner's book, Democracy in Deficit: The Political Legacy of Lord Keynes (1977). Buchanan and Wagner explained Keynes's entire understanding of the economy as fallacious because it was based on a naive understanding of human nature. They used the phrase "the pre-suppositions of Harvey Road," a reference to the location of Keynes's childhood home, to argue that he had a simplistic and unrealistic understanding of the economy and human nature. […] It is a noteworthy feature of Buchanan and Wagner's book that they do not investigate any of the evidence regarding Keynes's own work as a policy analyst for the British government. Their entire portrait of Keynes is a straw man built on assumptions about his work and its effects.
Bradley W. Bateman, Toshiaki Hirai, and Maria Cristina Marcuzzo, "Introduction: The Return to Kenyes", in The Return to Keynes (2010) edited by Bradley W. Bateman, Toshiaki Hirai, Maria Cristina Marcuzzo
Then the question comes along: Why didn't we have deficits before? You see the Keynesian economic revolution gave the politicians an excuse for deficits. You give politicians half an excuse; they play out this natural proclivity. So from the '60s on we have the regime accelerating deficits. This ties into my support of the constitutional amendment as a corrective device. That's an easy example. You can also take these other aspects—regulatory policy or anything like that—and you can come at it from a Public Choice perspective.
Buchanan’s idea is useful as an argument against passing permanent deficit increases during a recession. To use it as an argument against all stimulus is sort of like saying that when college kids drink beverages they like beer or booze, and alcohol is bad for them, so we should prevent them from having any beverages at all. Why not just try to keep college kids from getting booze while letting them drink all the water they want?
There is a widespread tendency to portray Keynes as the founding father of the Welfare State and to claim that the Keynesian revolution provided the justification for the need of a large public sector in the economy. [Note: There is a vast literature containing such claims, an extreme example being Buchanan and Wagner (1977): see, for instance, the following assertion: ‘The legacy or heritage of Lord Keynes is … political bias toward deficit spending, inflation, and the growth of government’ (ibid.: 24).] As the literature has amply shown, there are scant grounds for these claims.
Maria Cristina Marcuzzo, "Whose Welfare State? Beveridge versus Keynes", in No Wealth but Life: Welfare Economics and the Welfare State in Britain, 1880–1945 (2010) edited by Roger E. Backhouse and Tamotsu Nishizawa
Often you'll hear the argument that whether Keynes was right or wrong, he opened the flood-gates to politicians who destroyed fiscal sanity in his name. Buchanan makes this argument in Democracy in Deficit, and recently it's been repeated by Peter Boettke and Don Boudreaux. […] I appreciate James Buchanan a great deal. I've said here before I was thoroughly impressed when I was first assigned to read him as an undergraduate. I still am. But James Buchanan did a very poor job thinking about the legacy of Keynes, and unfortunately his arguments have been reproduced widely. […] If you have a problem with politicians - criticize politicians. Don't bring the bone you have to pick with Keynes into it unless there's a much clearer connection than this one.
I would say that Buchanan makes two mistakes here: (1.) a history of thought mistake, in diagnosing exactly what Keynesians and their models say or assume, and (2.) an analytic mistake, in addressing how we should expect this to play out. The first is actually easily corrected. The second is a little more involved, I think. But the empirical evidence makes it pretty clear that he was wrong, I think. Think of every argument we've had about fiscal policy and the debt in the last several years. This is clearly not a world where Keynesian economics is driving policy in an over-indebted direction. The picture is complicated by (1.) automatic stabilizers, and (2.) long term trends in entitlements that have nothing to do with deficit financing or Keynesian stabilization. I think that's part of what throws people. I'd like to explore this more, but I'm still not sure if it's worth the investment of time.
Whenever I read from Democracy in Deficit I always have the same reaction that I do reading Hayek on "scientism". I think "how could someone who was otherwise so brilliant go so terribly wrong?". It happens I suppose. Notice the strange conflation of everything liberal he doesn't like with Keynesianism. Notice the bizarre characterization of fiscal irresponsibility as the origin of the problems of the 1970s (this was written in 1977).
First, my rational expectation expressed this morning that Professor Buchanan would blame John Maynard Keynes, who died in 1947, for Ronald Reagan's deficits in 1986, was verified. Second, I'd like to comment on what I think is a misunderstanding by Professor Buchanan about what Keynesian economics has had to say about the financing of government deficits — by money or by other obligations. That has been a field of considerable inquiry and theorizing and empirical investigation, as well, by me among other people. […] Many countries in the world are tied to the system that Professor Buchanan recommended — namely, that all government expenditures be financed either by taxation or by printing money — and the consequences of that in those countries have not been very happy. The only good thing I'd like to say about Professor Buchanan's talk is with respect to the old question of what economists ought to be doing in recommending policies to governments and electorates, and to the public.
James Tobin, in D. A. Reese (ed.), The Legacy of Keynes (1987), p. 166
I was at a meeting where Buchanan was speaking just a couple of weeks after his prize was announced. It was a meeting on Keynes on the golden anniversary of the General Theory –there are endless anniversaries these days. Speaking before Buchanan, I predicted that he would blame Reagan's deficits on Keynes. And sure enough, he did.
James Tobin, "Concluding remarks" in James Tobin et al., eds. Money, macroeconomics, and economic policy: essays in honor of James Tobin (1991)