How the Keynesian Revolution Changed Everything

|Peter Boettke|

That was the title of a talk I gave last week at a joint IHS/Mercatus conference.  My argument was rather simple --- Keynesianism changed everything because it changed the language we used to discuss economic issues, and by controling the language Keynesianism controlled the way economics was thought, taught, and practiced.  The Keynesian habits of thought have exercised a stranglehold on economic science and economic policy for over 60 years.  Even critics of Keynesianism are forced to talk about the economy in Keynesian terms.

I argued that we must flip Keynes around and embrace the "struggle of escape from habitual modes of thought and expression". To reverse engineer the Keynesian avalanche, we must open up a different "window" and/or give people a new set of eyeglasses through which they can see the economy.  Only in challenging the fundamental language of economics can a Hayekian landslide replace the Keynesian hegemony.

During my talk, I explained how we have in the policy world simply oscilated between 'conservative' Keynesianism (tax cuts to stimulate aggregate demand) and 'liberal' Keynesianism (public spending to stimulate aggregate demand), but what is critical is to recognize that the economists caught up in this langugae game focuses on aggregate demand management.  To counter this trend, I discussed the work of F. A. Hayek, Milton Friedman, and James Buchanan.  Hayek and Buchanan, more so than Friedman, escape Keynesian habits of thought and expression.  But this is also why their work is harder to understand for many practicing economists.

Consider the straigthforward approach of Buchanan and Richard Wagner in their wonderful book, Democracy in Deficit (1977):

Such complex budgetary rules as "balance at full employment" serve to rationalize budgetary irresponsibility by playing upon the sense that the present is unique and involves special circumstances, and that once these circumstances have been dealt with, we can revert to the rules applicable to "normal" settings. This is like the alcoholic who has some sense that all is not well with his conduct of his life, and who resolves to get hold of himself once the particular tensions he currently finds unbearable have passed him by. Only each day, week, or month presents a fresh set of tensions, unusual circumstances, and special conditions, so "normalcy" never returns, for either the alcoholic or the Keynesian political economy. (165-66)

I argued that we must pursue a true microeconomic analysis of monetary and fiscal policy, and see economics as a coordination problem guided by price signals and acted upon by rational actors.  As Buchanan had to do in Public Principles of Public Debt, we must be willing to defend the vulgar position of pre-Keynesian economists against the conventional wisdom for the past 60+ years.

Comments

[michael webster]

Peter, could your approach be called: Micromotives & Macrobehavior, (despite being a title of Tom Schelling's book.)?

[Mariorizzo.wordpress.com]

As we know, there were economists recommending expanding government spending during recessions even before Keynes made it his own policy. The source was the old Chicago school. I am saying that there was this kind of macro-thinking even before the Keynesian revolution.

[Barkley Rosser]

There is nothing wrong at all with the idea of balancing based on some benchmark level of GDP. The problem that Buchanan so clearly pointed out that is particularly relevant for fine-tuned Keynesian policies is the asymmetry of such policies: it is politically very easy to cut taxes and raise spending, but very hard politically to raise taxes or cut spending. So, discretionary stimuli are hard to undo when they are no longer useful. But targeting a fiscal policy on some benchmark level of GDP is certainly wiser than obsessing with whatever the current budget balance is.

[Rafe Champion]

Interesting to see the way that Keynes (admittedly not original but very influential) changed the "rules of the game" and the "forms of life" of economists and policy-makers. What a shame that Wittgenstein and followers, who were so interested in those concepts, seldom applied them in a critical and problem-focussed manner to substantive issues in science and public policy.

[Troy Camplin]

What we need is a list of terms and an exposition of the rules so we know where we went so horribly wrong and what to avoid to avoid such habits of thought ourselves.

[Roger McKinney]

Coming from a background in mainstream econ, I found Austrian econ very difficult to grasp. I kept looking for hooks in mainstream to relate it to. Garrison's book helped a lot in that he compares the schools very well using the same concepts.

I like to poke mainstream macro with micro principles. For example, when people insist that the Fed needs to print more money or that the fiscal stimuli were too small, I ask them how that relates to diminishing marginal returns.