The Political Biases of Keynesian Economics

Abstract

Once upon a time it was generally believed that, so long as prevailing institutions constrained monetary excesses, a freeenterprise economy was self-adjusting within broad cyclical limits. Movements away from a fully employed economy would set in motion corrective forces that operated to restore prosperity. One source of disturbance was thought to be the profligacy of government, and it was considered important that governmental proclivities in this respect be constrained. A balanced budget was one of the practical rules that reflected such constraints. The advent of what has been called “Keynesian Economics” changed all this. The Keynesian vision was one in which monetary management could not produce a self-correcting economy; more extensive discretionary management which included fiscal policy was required to ensure peak performance. Such discretionary management necessarily required eradication of the principled adherence to balanced budget norms of fiscal conduct. The scope of the Keynesian conversion was wide indeed. It extended all the way from purely academic controversy about Say’s Law to real-world practices about whether public expenditures should be limited to the tax revenues raised to finance those expenditures. In this paper we suggest that the explicit Keynesian destruction of the rigid balanced budget rule produced a political bias in the conduct of economic policy in a democratic society, and, moreover, that this bias operates to some extent to make the Keynesian prophecies self-fulfilling.¹

The author thanks the National Science Foundation and the Resources for the Future for support of his research.