This is by Peter Boettke: “How the Culture of Government Spending and the Economics of Illusion are Destroying Free Market Capitalism”, as opposed to other forms of capitalism such as state capitalism or crony capitalism. It is the free market version that is under threat, the one that actually creates growth and prosperity.
Keynesian theory tells governments which are addicted to spending that spending is good, and consumers who are anyway reluctant to save that saving is a bad thing. We now have a “fiscal commons” where the institutional structure is designed to expansionary governments. Since 1950, private real spending has grown by a factor of five, but over that same period government spending has grown by a factor of 13!
We have failed to deal properly with recessionary times by allowing adjustment. Instead we have continuously re-inflated bubbles – the economics of illusion. Governments must start doing less. Must depend on self-governance and most importantly, we much find institutional constraints on the natural proclivities of governments.
Discussant comments The problem, it is being argued, goes well beyond economic policy to the very socialist presuppositions that now exist across the board in Europe.
Peter replies that there is a rich literature on these issues. However, the subcontext in his presentation is not just a critique of Keynes. There is nothing, for example, in the way the logic of Keynesian economics is often presented that is fundamentally false. Need to divide governments into trustworthy and untrustworthy on one side with passive versus strategic citizens on the other. Trustworthy governments with passive citizens could possibly work. Untrustworthy governments plus strategic citizens is a very bad combination but that’s what we have. Challenge is to get social values in line with the needs of a limited government.
My own question was about the prevalence of Y=C+I+G+X-M. Whatever the presuppositions may be, if you overlay these with this fundamental Keynesian equation, the result will be higher public spending on a continuous basis to maintain growth and employment. Certainty of market failure is the very essence of the Keynesian message. How are we going to finally get rid of this equation, because if we don’t the problem will never go away since it is always there in the political arsenal for dealing with recession.