Quotation of the Day…

by Don Boudreaux on August 13, 2013

in Budget Issues, Debt and Deficits, Economics, Monetary Policy, Myths and Fallacies, State of Macro, Stimulus

… is from pages 20-21 of volume 1 of The Collected Works of James M. Buchanan:The Logical Foundations of Constitutional Liberty; specifically, it’s from Jim’s 1986 autobiographical essay “Better than Plowing”:

The whole of the Keynesian and post-Keynesian theory of macroeconomic management (including monetarism) depends critically on the presumption that political agents respond to considerations of “public interest” rather than to the incentives imposed upon them by constituents.  Once these agents are modelled as ordinary persons, the whole policy structure crumbles.

Proposals to right the economy through discretionary fiscal and monetary policies rest on a scientific foundation no sturdier than would be the scientific foundation of a proposal to reduce air pollution by advising factory owners voluntarily to reduce their factories’ smokestack emissions and, in the process, to ignore the powerful personal incentives that each owner faces not to follow this advice.

Constructing theories that ‘prove’ that this or that level of emissions-reduction by individual factories, if such reduction were actually to occur, would indeed achieve the policy goal is child’s play.  Of course, reasonable people would still disagree over the appropriate level of pollution reduction (some people might insist that any reduction of emissions would be too costly) and also, say, whether owners of factories that produce chemicals should be requested to reduce their emissions more or less than the requested emissions reductions of owners of factories that manufacture automobiles.  But that pollution could be reduced if each factory owner voluntarily heeds the proffered advice – and, hence, voluntarily acts against his or her own self-interest – would be beyond dispute.

Anyone who proposes such a policy as a means of dealing with the problem of pollution would be roundly criticized for inexcusable ignorance of basic economics.  And such criticism would be fully justified.  That person would have no standing – professionally, with the punditry, or even among politicians – ever again to offer policy advice.  Yet whenever the relevant actors are government officials – say, members of Congress or the Federal Reserve board – suddenly such advice is widely regarded as displays of deep wisdom and great scientific integrity.

This disconnect remains, for me, one of the greatest mysteries of the social sciences.

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