As a matter of historical record, the former case — that Keynesianism hasnt really been given a chance to meet the needs of our beleaguered economy — seems a tad less certain, but lets not argue that now. Let us grant to both sides their common complaint: Since the Progressive Era, neither laissez-faire nor Keynesianism has had free rein to respond to the conditions of economic depression in their ideal manner. The former has been relegated to conservative rhetoric and the latter has been limited by the requirements of special interest politics.
So I have a question:
Given the special interest politics at play in the U.S. and elsewhere, which policy is more likely to be achieved in something like its pure form?
Would it be possible to constrain desperate, on-the-make politicians, special interests, and entrenched bureaucracies from engaging in hysterical attempts to save the economy after every downturn, as would be required by free-market economics? — that is, particularly by the Austrian School economists?
We have excuse to express some doubt. We live in a government-drenched, unlimited, post-Constitutional quasi-republic, with vast welfare state programs that compete with regulatory demands from businesses as well as citizens groups, in a full panoply of confused cross-purposes best described by one theorist as the churning state.
How on earth could this political mess limit itself? The Constitution is de facto dead letter; limitations on power are so old-fashioned.
So is, then, Keynesianism the policy most likely to succeed in todays political environment?
Well, lets take a step back. Some readers are gasping at this point.
Keynesianism not a success? Why, Keynesianism was the dominant macroeconomic theory from the late 1930s to the early 1980s, when its rationale collapsed under the weight of that great anomaly, stagflation. Further, Keynesian policy dominated that period as well, around the world. When word leaked out that someone in the Nixon administration had said We are all Keynesians now, it was accepted as either the glad truth or the sad truth (depending on your politics) but as truth no matter what. Keynes had transformed economic policy in the 20th century, had brought an effective death to both laissez faire and fiscal conservatism.
So, in a period when Keynesianism reigned triumphant, how was it that Keynesian stimulus could not be achieved? Free markets were almost universally despised up until the 1970s, anyway. What gives?
Consider a possible answer. Keynesianism achieved its political hegemony by being bastardized. Politicians took from Keynes not what he offered, but what they wanted. Few politicians get re-elected by increasing taxes to meet every spending demand. Better to postpone payment, make some future politician deal with the costs. Politicians like going into debt. And Keynesianism seemed to be saying that debt was good, deficit spending was effective, and fiscal conservatism deadly. Politicians took Keynesianism as an eternal green light to spend without fiscal limits.
And if the central bank helps out by inflating the money supply? Better (because trickier) yet!
Now, it may be that theres some sense to Keynesian policy. Im not convinced; it seems a theory lacking insight into how investment and capital really work. But I could be wrong. Maybe it is all about the circular flow and keeping spending up.
Maybe Keynesian Viagra makes sense.
But the reality is that this policy can only be implemented in an open society with democratic and representative structures. Politicians will have their say, will try to please not only enough constituents for re-election, but enough special interests to pay for those re-election campaigns.
Which is why Keyness notion of accumulating budget surpluses during boom times was so rarely implemented. That part of the Keynesian prescription rarely gets mentioned. Its inconvenient — and entirely unrealistic.
Even todays latter-day Keynesian wizards ignore it. Instead, they now prescribe continual stimulus, managing boom after boom. Theres no let-up, no period of enough boom to build up surpluses and pay off debt. The dot-com bubble spurred Keynesian guru Paul Krugman to advocate a housing boom with cheap money. Thats what we got in the oughts, and thats what popped. To fill the balloon, Krugman and Keynesians and the like insisted on trillions of borrowed and specially created dollars to fill the balloon back up. When that pops, theyll talk about more special stimulus. Theres no end, no reprieve.
Modern Keynesians sound like addicts, stuck on stimulus. Not normal investment. Not stability. To something more. All the time. Never a let-up.
They will always promote mounting debt. They will pretend, up until the moment of fiscal collapse, that debt does no harm, can do no harm. They are junkies hell-bound to overdose.
So, if you want rational policy, we have to go back to the laissez-faire prescribed by the greatest classical economists, and by Austrian economists such as Ludwig von Mises. We have to go back to limited government.