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Quotation of the Day…

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… is from pages 101-102 of the 2000 Liberty Fund edition of Geoffrey Brennan’s and James M. Buchanan’s 1985 volume, The Reason of Rules [2]:

Keynes was successful in imposing on the mind-set of economists of the middle years of this century an abstract model of a high-unemployment, underutilized economy. And Keynes was surely correct when he noted that the ideas of academicians ultimately influence the actions of politicians. In the initial Keynesian model, demand brings forth supply, and increases in demand sop up underutilized manpower and capital, without creating increases in costs and prices. There are no supply-side constraints in the model, and quite literally public spending is costless in terms of effectively displaced alternatives.

DBx: Long-time readers of this blog know that I’m no fan of Keynesian economics [3]. Its creation, development, and acceptance marked a decided reversal of economists’ ability to contribute productively to the public good. Rather than, as economists had done for so long – and as they continued to do in many “micro”economics fields – dispel popular misunderstanding, economists telling the Keynesian tale merely reinforced, with scientific-sounding jargon, the man-in-the-street’s ancient prejudices, superstitions, and simplistic fallacies about how economies work.

Yet however mistaken was the belief about how, in past episodes, jacking up aggregate demand is sufficient to restore economic vigor and material prosperity, that belief is today far more mistaken. In the past – say, during the Great Depression – it was legally possible for most workers and other resources to reenter the productive process and, thus, to increase the supply of real goods and services the availability of which is necessary to maintain and to increase genuine prosperity.

Today, in contrast, it is often illegal for people to return to work – and when not formally illegal, doing so is discouraged by new social norms. Under these novel circumstances, even if we take as true and realistic all the excessively simplistic Keynesian assumptions, government-induced increases in aggregate demand cannot today possibly have any good effect. The foundational problem is an “exogenously” imposed – that is, imposed by government and culture – prohibition on increases in supply. Insofar as this prohibition remains in place, demand cannot bring forth supply. It can bring forth, I fear, only inflation.

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