The “New Orthodoxy” of the Public Debt Burden Is the Economic Analogue to the “Perpetual Motion Machine”

The ‘‘new orthodoxy’’ of public debt stood almost unchallenged among economists during the 1940s and 1950s, despite its glaring logical contradictions. The Keynesian advocates failed to see that, if their theory of debt burden is correct, the benefits of public spending are always available without cost merely by resort to borrowing, and without regard to the phase of the economic cycle. If there is no transfer of cost onto taxpayers in future periods (whether these be the same or different from current taxpayers), and if bond purchasers voluntarily transfer funds to government in exchange for promises of future interest and amortization payments, there is no cost to anyone in society at the time public spending is carried out. Only the benefits of such spending remain. The economic analogue to the perpetual motion machine would have been found.

A central confusion in the whole Keynesian argument lay in its failure to bring policy alternatives down to the level of choices confronted by individual citizens, or confronted for them by their political representatives, and, in turn, to predict the effects of these alternatives on the utilities of individuals.

It proved difficult to get at, and to correct, this fundamental confusion because of careless and sloppy usage of institutional description. The Keynesian economist rarely made the careful distinction between money creation and public debt issue that is required as the first step toward logical clarity. Linguistically, he often referred to what amounts to disguised money creation as ‘‘public debt,’’ notably in his classification of government ‘‘borrowing’’ from the banking system. . . .

The ‘‘New Economics’’ had finally moved beyond the elementary textbooks and beyond the halls of the academy. The enlightened would rule the world, or at least the economic aspects of it. But such dreams of Camelot, in economic policy as in other areas, were dashed against the hard realities of democratic politics. Institutional constraints, which seem so commonplace to the observer of the 1970s, were simply overlooked by the Keynesian economists until these emerged so quickly in the 1960s. They faced the rude awakening to the simple fact that their whole analytical structure, its strengths and its weaknesses, had been constructed and elaborated in almost total disregard for the institutional world where decisions are and must be made.

—James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes, vol. 8 of The Collected Works of James M. Buchanan (Indianapolis: Liberty Fund, 2000), 36-37.