Since 2008, I have argued that to gain an understanding on the current situation economists should consult James Buchanan and Richard Wagner's Democracy in Deficit and Hayek's A Tiger By the Tail. Its not like these are esoteric references, but instead summary statements from 2 of the 3 top critics of Keynesian economics among Nobel Prize winners (Hayek, Friedman, and Buchanan). Buchanan tackles the political legacy of Keynes as embodied in deficit financing and accumulating public debt. Hayek addresses the inflationary legacy of Keynesian economics.
Current affairs seem to confirm the Buchanan and Hayek analysis. Manipulation of money and credit (evidenced by deviations from the Taylor Rule) resulted in a pronounced business cycle culminating in 2008. Debt crises plague not just Europe, but at the municipal, state and federal level in the US. And both the ECB and the Fed have engaged in significant efforts to meet the economic crisis with aggressive monetary policy. So aggressive in the US, in fact, that monetary policy has been focused not only on short term manipulation of credit (QE3), but also efforts to make sure that long term signals that spur inflationary hedging are muted (Operation Twist).
However, fewer economists than I would have believed take the warnings of Buchanan and Hayek seriously especially given the political and economic history of the past 60 years. This is true even among many market-oriented thinkers. See, for example, David Beckworth's recent post at Macro and Other Market Musings "The Biggest Myth About the Fed," and Scott Sumner's recent post at The MoneyIllusion "It makes very little differnce how new money is injected."
I'd like to see an honest and thorough debate on these issues. At a fundamental level I think the debate isn't empirical but analytical, and a consequence of the very Keynesian style of theorizing that Hayek and Buchanan wrote against. It is just very difficult for economists trained since 1950 to think consistently in a framework that does not permit "macro" aggregation. Or, as Roger Garrison has put it over the years, 'While there may be macroeconomic problems (inflation, unemployment, business cycles), there are only microeconomic explanations and solutions." In other words, the only economics that works is relative price economics. But the ability of economists to think consistently and persistently in relative price economics terms is difficult and it is easy to slip into the habit of aggregative thinking, such as price levels, etc. The old habits of thoughts which stifile thought, as Keynes once wrote about classical economics, have now become Keynesian habits. In all sincereity, I don't want to assert this as the definitive answer, but only as the beginning of the conversation. But how else would you explain Scott Sumner's discussion of injection effects, or David Beckworth's discussion of monetization (btw, see last sentence to paragraph 2 for answer to his question about the empircs)?
As Hayek once said about Schumpeter in a different context, when habits of thought mislead even astute thinkers, it is time we seriously consider abandoning those habits of thought. The persistent and consistent applicaiton of opportunity cost reasoning, and the focus on relative prices and the correponding adjustments that shifts in prices engender, provides a framework of economic analysis that must be adopted. But just as the Keynesian transformation of economics required new data collection, and new data analysis tools, as well as new institutional environment within which the practice of Keynesian macroeconomics was conducted, so too will a wholesale shift in theory, empirics, and policy follow from a reawakening of economics along price theoretic lines.