… is from pages 320-321 of Vol. 19 of The Collected Works of James M. Buchanan: Ideas, Persons, and Events; specifically, it’s from Jim’s 1986 article “Ideas, Institutions, and Political Economy: A Plea for Disestablishment”:
A genuine revolution in the thinking of economists had occurred. Keynes had provided a framework with which the whole economy, not just the actors within it, could be analyzed. Economists were duped into thinking that they could “understand” the operation of a complex economic interaction process by the use of hydraulic-like models that embodied the interdependencies among a relatively small number of macroeconomic variables, with macroeconomic equilibrium being defined independent of that which described incentive-compatible states in the behavior of participating actors.
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Even though Milton Friedman disagreed with Keynes about many things, I think you have to bring Friedman into the discussion if you want to understand why thinking in terms of aggregates and macro analysis is so widely accepted today.
Friedman’s understanding of inflation was based on thinking about aggregates. And that was the intellectual foundation for Voelker’s successful policy in curbing inflation.
It’s amazing just how long the ‘incentive-compatible states of participating actors’ were able to be effectively ignored. However, I am a conservative in the sense of looking to see if I can conserve something before rejecting it like the proverbial baby with the bathwater. What that means for me is that I am willing to try and reverse the process to see if it works – that is, restore the incentive compatible state at the local level to see if it actually responds to the model (which forgot the local level at the outset) before I make a decision.