 Seventh lecture by Professor Buchanan. I call on Howard Court. One of the most dominant voices within American higher education several decades ago was that of Clark Kerr. Most of you will recall that Kerr was the president of the University of California in Berkeley for something like nine years, before he rather unceremoniously was dismissed in 1967 at the height of student turmoil. But Kerr was not easily daunted by this swing in his fortunes and remarks shortly after his departure that he had had the rather dubious distinction of having entered upon his presidency, fired with enthusiasm, and having left in much the same manner. Even a cursory glance at the veto of our next speaker would suggest that within the discipline of economics, he has indeed been one who has been fired with enthusiasm. Since completing his doctorate at the University of Chicago some 38 years ago, James Buchanan has compiled a publishing record that would be the envy of many a professional writer. He has published individually or collaborated with others on over 20 books, a number of which have been translated into other languages. He has made contributions to well over 150 other books, and the list of his journal articles comprises something like eight pages. But Dr. Buchanan has not been a professional writer, rather an academician. When one considers then the students he has taught, the university committees he has been a part of, and the other routine obligations of a university professor, his publication record is all the more remarkable. In addition to his university responsibilities, Professor Buchanan has held numerous consultancies and has been a visiting professor at such institutions as the London School of Economics and Cambridge University. The list of awards and honors he has received is lengthy. I'll simply mention that the last two academic posts he has held have been perhaps the highest honor any university can bestow upon one of her own sons, namely that of a university professorship. The first of these was held at the Virginia Polytechnic Institute and State University, while the current one is at George Mason University. Professor Buchanan also serves at the same institution as the director of the Center for the Study of Public Choice, a position which reflects his longstanding interest in the interpenetration of economics and politics. His interest in precisely how individuals make political decisions which affect their economic futures. It is in these areas that some of his most substantive contributions have been made, and necessary also that he has especially encouraged the creative efforts of others. Dr. Buchanan, we warmly welcome you. And coincidentally, we extend to you the very best wishes for a happy birthday tomorrow. Thank you very much. I had been a bit concerned about being last on the program because I thought that I might find that there's a good deal of redundancy in these various talks. And I thought I would have to start off with a story about the blind man in the nudist camp and say I was just going to feel my way around. But fortunately, I don't think there is as much redundancy as I had feared. So I think my argument will hold up pretty well that I have prepared. You will find shades of agreement with almost every previous speaker in certain aspects of my argument and some shades of disagreement. But I think it is sufficiently different. Now this conference itself attests to the proposition that John Maynard Keynes did exert a major influence on the ideas and events of this century. Now for me, this Keynesian difference carries a negative sign because I retrospectively can predict an alternative history that might have been, a sequence of events that would be normatively superior to the history that we have experienced. Now any such retrospective prediction is of course beyond the reach of any scientific falsification. Objectively measurable imputation of the effect of any person, whether that be negatively or positively valued, is an impossible exercise. Now I've chosen my title, which is Keynesian Follies. I've chosen that title carefully. If you look in Webster's dictionary, you will find Follie defined as first, lack of good sense or of normal prudence. And second, inability or refusal to accept existing reality or to foresee inevitable consequences. Now both of these definitions convey something of the policy stance that I associate with the term Keynesian. And I've put this plural in my title in order to suggest that there are several separate and related elements involved and also to hint that to an extent the whole historical episode has theatrical aspects of its own. Now as someone mentioned yesterday, a Keynes stated quite explicitly that the central purpose of the book, the half century life of which we are celebrating with this conference, that the central purpose of the book was to change the perception of his fellow economist, that is, his peers among the academic scribblers. Now in that statement, Keynes indicated his own respect for the influence of ideas on events. And he set out quite deliberately to modify the mindset of those whose chief business it is to impose intellectual order on a highly complex social process. And as we all know, he succeeded perhaps beyond his wildest dreams. By the middle years of the 1940s, economists almost everywhere had become Keynesians in their conceptualization of the macroeconomy. They had quickly learned to look at the world through the Keynesian window. Perception of a reality is not, however, equivalent with reality itself. And the Keynesian follies find their source in the matching failures. Once having taken on the Keynesian mindset, the Keynesians proved to be notoriously reluctant to change their perception of macroeconomic and political reality, even in the face of accumulating empirical evidence throughout the 1940s, 1950s, and 1960s. Keynes was the consumist artist. And his macroeconomic abstractions were comparable in boldness with those of his painter, poet, and composer peers in the world of high culture that he inhabited in the Bloomsbury world. Because his acknowledged purpose is to change perception rather than to explain, the artist must acknowledge the existence of competing perceptions. Further, when perception is used instrumentally for more ultimate purpose, as it was used by Keynes, there would necessarily be some allowance made for appropriately timed switches among alternative perceptions of that which is. But while Keynes may be interpreted in this way as an artist, his economists peers were scientists, or thought they were. His work was not taken as offering a situationally constrained perception of economic reality appropriate to the 1930s, but it was interpreted as embodying a generalizable scientific paradigm. Now neither Keynes nor any of his early disciples was aware of this fundamental difference that emerges naturally between the artist and the scientist. This theme, which is my theme for the whole paper, deserves further clarification. The scientist research program and any policy implications based on that program is based squarely on a uniqueness posture. That which is to be explained is the objective reality that exists. And this reality by its very objectification excludes alternatives. The scientist research program yields hypotheses that may be falsified. And a sufficiently robust bundle of rejected hypotheses may lead at some point to a genuine revolution. The replacement of one research program by another, a shift in the hard core to use the terminology introduced by Axel yesterday. And he referred quite appropriately to the physicists going out and settling their questions. At any moment, there exists for any scientist only one research program, only one hard core, one of a set of mutually exclusive alternatives. By contrast, the artist offers us a personal perception of reality, a perception that is not directly falsifiable. Even within the mind of the individual artist, there may exist alternative perception. Several windows through which reality may be explained. I find myself using that Nietzsche metaphor more and more. As among several artists, a multiplicity of competing perceptions is necessarily acknowledged. Considered as an artist perception, the Keynesian model of the macroeconomy takes its place alongside alternative perceptions. It is neither true nor false, neither right nor wrong, since these are descriptive attributes that simply do not apply. The Keynesian perception offered original insights that may have been helpful in the interpretation of the macroeconomy of the 1930s. As many who knew him have suggested, the perception might well have been replaced by others in response to the shifts in the economic and political environment. The Keynesian follies emerged only when the perception of Keynes as artists were falsely interpreted as a research program of Keynes as scientists. Now in the sections that follow, I want to discuss several elements of this, what I call a scientific ossification of the basic Keynesian perception. I want to discuss this in terms of several familiar topics, like matters of money, full employment, functional finance, fine-tuning, ordinary politics. And I hope to show that each of these separate areas of inquiry may be viewed in a somewhat different light in the context of this artist-scientist comparison that I have suggested here. So let me first take up matters of money. The Keynesian model that was presented to us in the general theory in 1936 was subjected to very early and continuing criticism on the grounds of its relegation of money and monetary institutions to secondary importance in the operation of the real macroeconomy. Now in the interpretation that I have advanced here, Keynes may at least be partially defended from these charges. In earlier works, he had presented alternative perceptions of the workings of a macroeconomy that embodied a central role for money in the stabilization of the macro aggregates. The new book was deliberately different. It was a new canvas, upon which was now placed a model aimed to draw attention to non-monetary relationships. So interpreted, the folly lies not in the initial Keynesian presentation of the alternative model, but in the scientistic inference that the model represented indeed a revolutionary switch between research programs. I admitted to hear my argument suffers a bit from the rhetoric of Keynes himself, since this rhetoric seems to have been explicitly intended to convey the mutual exclusiveness between the new model and the old. In any case, rhetoric or no, the scientistic interpretation was placed on the effort. Keynes was read as having advanced the falsifiable hypotheses that money matters little if at all, a hypothesis that was clearly rejected by events as early as the middle 1940s. A more important implication for the political economy of policy was the shift of attention away from monetary institutions as the potential targets for change and for reform. Interpreted as advancing the hypothesis that money matters little if at all, Keynesian economics tended to support an acquiescence in the sometimes gerry-built monetary regimes that were in existence in the 1930s. The rational constructivism of the Keynesians was directed toward alternative targets that were much less amenable to feasible reform. And let me just as a side comment say that I associate myself totally with Carl Bruner's reaction to Jeffrey Harcourt's comments yesterday in which Jeffrey seemed to indicate that unless you supported the policy activism of the Keynesian models, you somehow were not passionately involved. Let me only mention one of my professors, Henry Simons, who totally rejected the Keynesian apparatus. And no one was more passionate in his aim toward reform than Henry Simons. But he rejected totally the Keynesian apparatus because of its neglect of the fundamental monetary institutions, which required changing rather than acquiescence in those institutions. As I've noted, the inefficiency of money as a relevant macro aggregative variable in the early Keynesianism was quickly recognized. And attempts were made to reckon with this apparent gap in the analysis. But the shift in perception had been so total that these attempts were almost universally carried out within the basic Keynesian framework of analysis rather than in the form of substitution of an alternative perception of the macroeconomy. This emphasis on a single model of the macroeconomy was directly traceable to the scientific mindset of both the Keynesian advocates and their opponents. There seemed to be little or no appreciation of the possible side-by-side existence of alternative models of economic process, each one of which might yield helpful insights, and each one of which might prove more or less appropriate in differing situations. The artist claims no monolithic legitimacy for his own perception. The scientist, by contrast, brands as heresy any perception that does not seem consistent with the prevailing research program. The whole mid-century history of economics and political economy might have been quite substantially different had economists proved more willing to tolerate the simultaneous existence of competing models of reality. Rather than money does not, does matter and can be incorporated readily into the Keynesian research program, we might have had Keynesian real variable models in existence alongside non-Keynesian monetary theories of the business cycle. The disciplinary dominance of the Keynesian program, even as the relevance of money came to be incorporated within the models, this ensured the continued neglect of basic reform in monetary institutions or monetary regimes, a neglect that need not have occurred in the alternative competing program scenario that I have suggested. It seems, therefore, fully appropriate to label this institutional neglect as having resulted, at least in part, from Keynesian folly. Now let me go on to talk a little bit about full employment. As we know, Keynes is largely responsible for elevating employment to a position as an explicit objective for policy. As I've emphasized, Keynes sought to change the basic perception of the economic process. He sought to bring employment as such onto center stage as a variable subject to direct manipulation. He sought to overthrow the classical model of market equilibrium in which employment is determined only as an emergent result or consequence of the interaction among the demand and supply choices of many market participants. Once again, in this respect, Keynes was too persuasive by elevating full employment to explicit consideration as a policy target and thereby generating neglect of both monetary and market institutions. The Keynesian emphasis ensured the eventual stagnation that we experienced in the 1970s. The scenario might have been quite different if the Keynesian effort had been recognized for what it was rather than what it was not. The folly of full employment can perhaps best be discussed with reference to an early Chicago-based criticism of the theory of Keynesian macroeconomic policy. Initially attributed here to Charles Hardy, who was a Federal Reserve Bank economist but taught to many of us by Henry Simons, the criticism could be summarized in the following way. If you consider a closed economy for purposes of simplicity, it can be characterized by any two of the following three conditions but not all three simultaneously. You can have full employment of your labor force. You can have stability in the value of your monetary unit. And you can have non-competitive labor markets. You can pick out any two of those three you want, but you can't simultaneously have all three. There need be no inconsistency between the satisfaction of the first two desired conditions, that is, full employment and price level stability, if you have competitive labor markets. But until and less competitive wage adjustments are observed, you must violate one of the other conditions. And concentration on full employment as a macroeconomic target must therefore ensure that you are likely to have inflation. That was, of course, an early recognition of what later became the Phillips Curve type trade off. Keynes himself would probably not have denied the elementary validity of that central Chicago proposition, interpreted as a set of mutually inconsistent equilibrium conditions. What Keynes argued was that the macroeconomy of the 1930s could not be and should not be perceived in terms of the classical market clearing research program which the Chicago proposition embodies. In this respect, the long continuing debate over whether the Keynesian analysis is an equilibrium or a disequilibrium theory may have missed the mark. The Keynesian analysis is an equilibrium theory, but it is one that is constrained in its temporal setting to the 1930s. That environment's embodied an expectational chaos in which existing monetary arrangements seemed to have lost all of their equilibrating pressures. Animal spirits were cautious to an extreme, and the simplistic model of a highly elastic aggregate supply function did indeed capture a feature of the economy that was. The economy that was in the 1930s, however, was not the economy that was in the 1940s and beyond. Hard evidence was available as early as 1946 to suggest that the supply function, after all, sloped upward. As with money, however, the Keynesian success had proved so sweeping that the accumulating supply side evidence was incorporated within the aggregative Keynesian model of the macroeconomy as opposed to the restoration of a competing classical program. In terms of policy targeting, the Phillips Curve trade-off of the late 1950s and the 1960s replaced the more naive full employment objective that had been advanced earlier. Only with the natural rate hypothesis developed in the late 1960s did most economists finally discard this basic hard core of the Keynesian program. For the best part of three decades, therefore, economists tried to use a perception designed to isolate features of a macroeconomy in deflationary, expectational chaos. They tried to use this perception to look at a macroeconomy in postwar boom. The supreme folly of the Keynesians was perhaps the genuinely held but arrogant opinion to the effect that the surge in employment and output was itself consequent on application of the Keynesian policy tools. Now let me talk a bit about functional finance. Now the policy instrument that was used to generate employment and output expansion in the basic Keynesian blackboard construction or in those hydraulic machines that were used with various colors of ink, colored water that was circulating around that Aberlerner was displaying in this country and invented by Bill Phillips in London, the basic policy instrument used to generate employment and output expansion was government spending, the G in the simplified algebra. And as Carl told us yesterday, Keynes did not really emphasize this. This really came with the Keynesians rather than with Keynes himself. But in the Keynesian policy models, you get the expansion through shifting the G, an exogenous increase in government spending adds to aggregate demand, and directly or indirectly creates new employment and additional output. But how can government spending be increased exogenously? Governments like persons must finance the spending somehow. And of course, there are three alternatives. They can either tax and secure revenues, they can create money, or they can borrow. In retrospect, looking at it from 1986 perspective, it's surprising to me anyway that any attention at all was devoted to the first of these, that is devoted to financing aggregate spending expansion by taxation, to the macro aggregative effects of tax-financed instruments to rates of government outlay. Nonetheless, as we know, books as well as articles were devoted exclusively to analyses of balanced budget multipliers that attempted to compare the expansionary effects of incremental government spending on one side of the budget with the offsetting contractionary effects of incremental taxation on the other side. Given the level of expositional simplicity that was involved in these models, the commonly stated value of unity for the balanced budget multiplier cannot be criticized. What remains surprising, however, is the apparent failure of the economists who worked with those models to recognize that within the structure of the models necessary to generate the unit value result, there is no normative argument whatsoever for the levy of any positive taxes. In order to produce a value of unity for the balanced budget multiplier, the share of the tax dollar that would otherwise have gone into personal or corporate saving must represent a net drainage from the economy's spending stream. But the value of that multiplier could be increased several fold by the simple expedit of spending without taxing. Where the question that may be raised is whether or not these analyses were subconsciously motivated by a desire to increase the relative size of the governmental sector quite apart from macro stabilization objectives. Some such motivation combined with the underlying prediction that the macroeconomic objectives call for continuous expansion rather than contraction and contraction may have been present. Once government spending was introduced as an instrument for the achievement of employment targets, attention was necessarily averted from the allocative decision between the private and public sectors, which always must be somehow a part of the collective choice process. But the center of attention of the whole Keynesian theory of economic policy was, of course, on unbalance rather than on balanced budgets. From the outset, the emphasis was placed on the use of government spending to expand output in employment with this spending financed from non-tax sources. The Keynesian approach to policy was and has continued to be associated with deficit financing. Formerly, their models require that a budgetary regime involve both deficits and surpluses. But the underlying predictive thrust is on the need for employment and output expansion and hints on budgetary deficits. The increase in government spending is to be financed by either money creation or by borrowing. Now, it's precisely at this point that I've been mystified by the Keynesian policy discourse, a mystification that has continued for 40 years and that's shared by all Chicago-trained economists of my generation. Why did the Keynesians and why have the Keynesians concentrated their policy analyses on the financing of spending by government borrowing rather than on the money issue alternative? Why has the textbook thrust of Keynesian policy embodied bond financing of either expanded spending rates or reduced tax rates? Note that the superiority of money issue to finance deficits does not depend in any way on the relevance or irrelevance of money as such. We can remain within the very simplest of the early Keynesian models in which only rates of spending matter and still conclude that money issue dominates government borrowing as a means of financing spending. This result follows so long as any share of the funds borrowed might have entered spending stream. The money financing of budget deficits is superior even if attention is exclusively concentrated on the efficacy of the instruments in securing the employment and output objectives. Among many Keynesian economists, only Abel Erner consistently recognized the distinction between money creation and borrowing as means of financing deficits. And Erner's idealized regime of functional finance embodied compensatory budget adjustments accompanied exclusively by the required issue or destruction of money, and hence neither net government borrowing nor net government debt retirement for macro stabilization. Had other Keynesian advocates followed Erner in this respect, another Keynesian folly might have been avoided because the subject matter need never have emerged as relevant to the macro policy debates. But instead, the Keynesian emphasis was placed on the debt financing of budget deficits, government borrowing, creation of public debt. As a result, somehow, Keynesians felt it obligatory to demonstrate that the creation of public debt, generally and apart from any particulars of macroeconomic policy, that public debt involved no temporal displacement of payment for public spending that is so financed. Further, the Keynesians felt obliged to argue that public borrowing is categorically different in effect from private borrow. The network of intellectual analytical confusion in the elementary theory of public debt was the direct target of one of my first books, and I don't want to devote any space here to a repetition of old arguments. But the Keynesian intellectual fog, for that is what the whole discussion surely reflected, was motivated in part by the underlying purpose of securing widespread public and political acceptance of an activist fiscal policy regime, to convince the non-economist public to abandon the classical precepts of fiscal prudence. The Keynesians felt that they needed to show somehow that public debt did not matter because after all, we owe it to ourselves. How simple it would have been to make the straightforward learner Keynesian argument to the effect that neither taxation nor borrowing is an appropriate means of financing deficits that are called for by an activist fiscal policy regime. The classical analysis of public debt could have remained in the filing cabinet labeled public finance orthodoxy. Now, the introduction of an activist fiscal policy regime of budgetary adjustment did require, does require, that the classical precepts of fiscal prudence be abandoned, and specifically that budgetary balance be dethroned as a central and overriding policy constraint. I'll discuss that a bit a little later. But the activist regime of fiscal policy did not require any shift in the classical analysis of public debt, either policy or normative. Because of the widespread failure of economists to make the appropriate distinction between budgetary imbalance on the one hand and the means of financing such imbalance on the other, an unnecessary source of confusion, ambiguity, and argument was introduced. We can go a bit further in this speculation about the might have been, if the Keynesians could have followed learner's lead in making the clear distinction between debt issue and money creation. The highly questionable research program initiated by Robert Barrow's 1974 paper, Our Government Bonds Net Wealth, could have been totally avoided. Following up Martin Bailey's earlier suggestion, Barrow sought to demonstrate the inefficacy of a fiscal policy shift from taxation to bond financing of governmental outlay. Now this Barrow effort was directly stimulated by the claim of the Keynesians of the 1960s to the effect that the tax to bond shift was expansionary in the macroeconomic sense. Now if the Keynesians should have adhered consistently to learner's norms for functional finance and their treatment of policy, there would have never been any cause for the Barrow type reaction, at least in the same form that it took in the 1970s. Even the most zealot of the rational expectationist could scarcely make a counter claim to a Keynesian argument that an unanticipated tax to money shift is expansionary. And on this point, I think I want to join forces with Jim Tobin and Axel and others. And I'm very much Keynesian on the side as opposed to the new classical macroeconomist or the rational expectations. Now let me talk a bit about fine tuning. And my discussion here can be brief. Since this deficiency in the Keynesian theory of macroeconomic policy has been more widely recognized than any of the others. Indeed, the very concept of fine tuning the economy through compensatory budgetary adjustment is antithetical to the initial thrust of the Keynesian model as advanced by Keynes himself. In the macroeconomic environment of the 1930s, this model did yield useful insights. And policy implications may be gained from the modified perception of the economic reality that then existed. But the compensatory budgetary adjustments called for by that initial Keynesian perception, this reflected broad tuning, rough and ready catch-all revolutionary shifts in any parameters deemed subject to immediate political control. Jeffrey Harcourt mentioned this yesterday. The folly lay with the post-Keynesians who converted the broad strokes of the master here with the implied time-constrained shifts in budgetary flows into a highly sophisticated, if naive, analytical structure from which idealized budgetary adjustments were derived in apparent independence of any expectational setting to have believed sincerely that budgetary fine tuning, even in the absence of the political realities, which I'll discuss a bit in a minute, to have believed sincerely that budgetary fine tuning would have been efficacious for stabilizing employment and output over possible swings of an ordinary business cycle seems in retrospect beyond the limits of acclimatized isolation, yet such was the state of the Keynesian intellectual epoch. Now let me talk about ordinary politics. The most significant folly that has been widely attributed to Keynes and the Keynesians involves the presumed neglect of the workings of ordinary politics and political institutions in the implementation of any activist stabilization policy and notably any use of spending and taxing as instruments of that policy. In his biography, Herod refers to the presuppositions of Harvey Roeb, which he defines as the attitude toward politics and government that was held by Keynes who wrote the general theory in 1936. This attitude embodied a disregard for ordinary politics based on a belief that Keynes' own powers of persuasion were indeed such as to ensure that any government would follow his lead along with those of his economist peers in any matter of policy. Now this stance of Keynes can, on the one hand, be interpreted directly as a reflection of the isolated intellectual elitism that was characteristic of Cambridge early in this century. And there seems to be no question but that elements of such elitism were present. Keynes was no small D Democrat despite his early philosophical liberalism. On the other hand, a somewhat more favorable interpretation may be placed on this characteristic of Keynes himself when we recognize that his work was aimed at changing the economic perception of his colleagues in extraordinary times. When the politics as well as the economics might have been expected to be non-usual and non-ordinary. We need only recall our own United States history in this respect. When Franklin Roosevelt assumed office in early 1933, the ordinary institutions of politics were in effect suspended. The checks and balances ceased to function. So extreme were the times. And politicians stood ready and willing to implement sweeping changes almost without regard for consideration of permanent consequences and with little apparent regard to the special interest of their constituents. Keynes had not, of course, published his book by 1933, but he may have had something like this early New Deal setting in mind as an idealization modified as appropriate for the political structure of his own country. If we interpret Keynes as the artist who sought to change perception with broad brush abstraction in the environmental parameters of depression, there need be no inference concerning the extension of the perception to the workings of the economy or the polity in ordinary times. Once again, this interpretation suggests that the folly lies with the Keynesians who imposed the scientistic straight jacket too readily on Keynes' work and who failed to sense that the word general in the title of the book should not have been understood to convey the notion of an unchanging economic and political environment. In any case, whether we attribute the folly here directly to Keynes or to the Keynesians who followed him, the record is here to be observed. Ordinary politics in democracy prevents implementation of the policy norms emerging from the Keynesian theory of macroeconomic management independently of the analytical difficulties that I've already noted. That is to say, even if there should be no problems at all inherent in the Keynesian explanatory model, the attempt to stabilize the macroeconomy by compensatory budgetary adjustments would have failed. In ordinary times, political decision makers, ever responsive to constituency pressures, are driven by natural proclivity to expand rates of spending and to reduce rates of taxation. The Keynesian policy model seemed to offer an intellectual and moral argument for expanded public spending financed by either debt or money. But ordinary politics fails almost totally when the other side of the Keynesian policy norms are required for macroeconomic purpose. Political decision makers cannot increase taxes merely to generate compensatory budgetary services. The bias toward deficits emerges directly from the most elementary application of public choice principles. And when people ask me what is public choice, I always cite that as the simplest of the principles that emerge. In this context, the net contribution of the whole Keynesian half century must be evaluated negatively. It is represented best by the regime of massed and continuing budgetary deficits that we now observe. Deficits that bear no relationship to any alleged macroeconomic purpose and that are almost universally acknowledged to have adverse consequences for the economy as well as for the moral bases of modern society. These deficits emerge because the Keynesian impact was to dislodge almost totally the precept of budget balance from a once effective fiscal constitution. Once the budget was introduced as an instrument for policy adjustment, there was no means of avoiding the non-Keynesian consequences. Even here, however, the negative impact would have been severely constrained if the learner norms should have been adopted. It seems unlikely to me that the irresponsible irresponsibilities of the fiscal politics of the 1970s and 1980s could have been achieved by money financing of the deficits of the magnitudes we now observe. So let me now go to my conclusions. The Keynesian follows that I have discussed matters of money, full employment, functional finance, fine tuning, ordinary politics. These of course summarize very familiar criticisms of the whole Keynesian enterprise. What I've tried to do here is to incorporate these criticisms in an interpretation of the Keynesian effort that may offer an insight into the intellectual history of the half century. My theme here is that Keynes was essentially an artist, offering others a new perception of the economic reality of his time, perception that he may have deemed to be necessary to draw out inferences for the dramatic policy action that he felt governments should undertake. The economic reality need not have been presumed invariant over time. And in this respect, my interpretation is fully consistent with that of George Shackle who has always called himself a Keynesian and who has emphasized always the subjective element in Keynes's vision. I was very pleased to hear Professor Preston mention George Shackle and the fact that he mentioned George Shackle and Frank Knight in the same paragraph meant that I never could say anything negative to about Professor Preston's presentation because they are two of my great heroes. If he had added Newt Vicksell, I would have bowed in obeisance. But let me just quote from Shackle, an interpretation of Keynes that I think I share and which sort of summarizes, I think something close to my own position. Let me just, this is a quotation from Shackle's book, The Years of High Theory. Keynes's whole theory of unemployment is ultimately the simple statement that rational expectation being unattainable, we substitute for it first one and then another kind of irrational expectation. And the shift from one arbitrary basis to another gives us from time to time a moment of truth when an artificial confidence is for the time being dissolved and we as businessmen are afraid to invest and so fail to produce enough demand to match our society's desire to produce. Keynes's general theory attempted a rational theory of a field of conduct which by the nature of its terms could only be semi-rational. But sober economists gravely upholding a faith in the calculability of human affairs could not bring themselves to acknowledge that this could be his purpose. They sought to interpret the general theory as just one more manual of political arithmetic. Unquote. I might say in passing that in my view, George Shackle is the most neglected economist of our time by some odds. The economic reality of the 1930s, characterized by expectational chaos could not be understood properly modeled as if it were an economy in periods of expectational stability. Now argument may of course be joined over whether or not Keynes, even if interpreted as I have suggested here, whether or not he failed to foresee the consequences of the widespread acceptance of his own time constrained perception. Indeed, we may go so far as to suggest that the elementary folly of Keynes himself lay largely in his presumption of too much intellectual sophistication on the part of those whom he sought to convince and or too much arrogance concerning his own powers of persuasion. But the Keynesian follies emerge for the most part from the failure of those who followed the master to sense the critical dependence of the whole perceptual apparatus on the presumption of fixity in the reality that was being perceived. Now this is not the place for an extended treatment of the differences between the natural and the human sciences or of the differences between the science of economic behavior on the one hand and the science of the macroeconomy on the other. The non-falsified propositions in economics are at best very few in number only in part due to the familiar difficulty in setting up controlled experiments. As I've suggested in other places, men are like rats only in some aspect of their behavior. And to the extent they are not rat-like, their behavior is unpredictable. At best, imaginative economists whose interests transcend the boredom of rat maze experimentation can hope to isolate and abstract elements of uniformity in particularized expectational and institutional circumstances. And let me end with a simple question. In an economy that was characterized by an effectively operating commodity-based monetary standard, would the Keynesian enterprise have been a part of our intellectual history? It's related to the question that was raised yesterday by Les Thoreau. In my view, in an economy characterized by an effectively operating monetary regime, we would not have had the Great Depression. And of course, we would not have had the whole Keynesian enterprise. Thank you. I think that's a pretty good question. We have some of the audience in a couple of comments, pre-arranged. Oh, just that one. No, I wrote it for this number. In resuming our panel discussion, I'm going to attempt a bit of stage management by calling for some pre-arranged comments. If the members of the panel would like to interject additional comments, they can signal to me in some way. If the general tenor seems appropriate, we will move relatively promptly into some of the questions that have been accumulating from the floor. And we invite you during the course of this discussion to send up additional questions if you like. We will try very hard to get to as many of them as we are able to. Let me begin by calling upon Professor Tobin to give a response. Well, first, my rational expectation expressed this morning that Jim Buchanan would blame John Maynard Keynes, who died in 1947 for Ronald Reagan's deficits in 1986, was verified. Second, I'd just like to comment on what I think is a misunderstanding by Jim Buchanan about what Keynesian economics, other macroeconomics has had to say about the financing of government deficits by money or by other obligations. That has been a field of considerable inquiry and theorizing and empirical investigation as well by me, among other people. So it's not been neglected and a learner's suggestion has not been overlooked. However, to have an independent monetary policy, which is not just fiscal policy, not just a auxiliary and inevitable complement of fiscal policy, it is necessary to have open market operations by which the central bank can buy and sell something for money. It doesn't have to be government securities, but it's been convenient for it to be government securities. And for that reason, the composition of the federal debt and the deficit is really a joint decision, almost one might say a decision of the central bank, not of the Congress and the president. Now, I think that's a good idea to have the freedom to have two policies rather than one to have a monetary policy and a fiscal policy because some outcomes depend on the mixture of the two. Many countries in the world are tied to the system that Jim Buchanan recommended, namely that all government expenditures be financed either by taxation or by printing money. And the consequences of that in those countries have not been very happy, not been a very happy one. And the only third thing I'd like to say about Professor Buchanan's talk is an old question of what economists ought to be doing in respect to recommending policies to governments and to electorates and to publics. Now, as I understand Buchanan, economists should anticipate the possible abuse by the political process of their abuse and misunderstanding and distortion by the political process of recommendations that they might make. For example, that it's not always the best economic practice to balance the budget every year. And I don't think so. I think that economists should say what they have to say about economic policy recommended to the public and to the Congress and the president and have to leave it to the political process to see what they do with it. I don't think we can pull our punches or change our message because we think that that knowledge might be used in a way that might turn out not to be good. Thank you. Professor Buchanan has agreed to receive that blow unanswered unless time permits some additional response. We do have some additional comments on the other papers. I'll ask Professor Harcourt who has indicated that willingness to comment on Professor Preston's paper. Thank you very much and I apologize for speaking again but I wanted to say something about Professor Preston's paper because I enjoyed it so much. Unless I'm much mistaken, he and I are the only two Christian socialists on this platform. If I am mistaken, I apologize. However, his road to Christian socialism is quite different to mine because I grew up in a non-practicing Jewish household and did not become a Christian until I went to Melbourne University. It took me six months to become a socialist and three and a half years to become a Christian because that was the proportions in which God and Mammon were mixed in those days. These days, people are not even sure whether the question does God exist is a real one but as we used to say, of course God exists and she's a good socialist. Now, the point I particularly wanted to emphasize in his talk was the following. People like Milton Friedman and other conservatives who in some aspects are quite right to put important emphasis on freedom also are inclined to argue that human nature is not particularly changeable and therefore we ought to design institutions which use it to the best of our collective ability without worrying too much about it and so capitalism is interpreted as the best institutional form we've thought of for exploiting the selfish base of an unchangeable human nature and of course there is something in that argument but I would like to put the counter case which was in Professor Preston's talk and that is that while it's true that selfishness gets a good ride and sometimes has useful byproducts for societies a whole under capitalism, capitalism simultaneously stunts some of the more admirable and lovely trays that are in human beings namely tolerance, compassion and altruism and what social democrats or democratic socialists try to do admittedly not always with great success but we keep on trying anyway is to design institutions which will allow those particular virtues not to be stunted but also to be developed and produce desirable byproducts both for ourselves and for society as a whole and I think that's an extraordinarily important point and I think the difference between agnostics and atheists like Keynes and the enforcer and many socialists and Christian socialists is not their ends but their views on how you attain those ends I've always interpreted the Holy Spirit as being the means by which we don't have to necessarily haul ourselves up by our own bootstraps but we get a bit of help on the way whereas the humanists on the whole think we can do it all by ourselves well good luck to them if they can and I'm certainly a former united front with them personally my interpretation of human nature is such that you need a bit of help on the way the odd bit of forgiveness comes in and also it takes your preoccupation of looking at your own navel and you can worry about other people's problems Professor Buchanan Well I would like to respond to that I think Jeffrey Harcourt is totally out of order I simply he's out of order in this discussion this is not appropriate we're not talking about comparative economic systems the idea was the legacy of Keynes we could all enter into a debate on capitalism versus socialism Christianity versus atheism we could all spend hours on that it's inappropriate for this discussion to introduce those totally extraneous parts of the discussion We have some questions from the floor Poor Professor Tobin the question reads frequent concern is expressed about persistent $200 billion deficits without specific identification of the problems created by those deficits what are these problems when unemployment is unacceptably high Well the problem is that the deficits are not just a product of the present state of the economy that they're not wholly or even most of them cyclical deficits in nature they will persist under current tax law current defense programs and other expenditure programs even if the economy should fully recover in the next couple of years I wouldn't be so concerned about reducing the deficit now this year or even 87 but I am concerned that the so-called structural deficit eliminating those parts of it that are due to the shortfall of the economy from full utilization, full prosperity that that deficit would continue at the large ratio to GNP that it has been and will be unless something is done so what's wrong with that wrong with that is that it results in for one thing the high deficit in our trade so that we're borrowing from overseas to finance both our government deficit and some of our domestic capital formation well that's a way of short changing future generations to be sure and so it's also true that we were in danger and we still may be of being in an unstable vicious spiral which the size of the deficit even with prosperity would force the Federal Reserve to raise interest rates to balance the economy that adds to the interest outlays of the government that adds to the deficit itself and that just goes on and on and the deficit rises faster than the GNP and the federal debt rises faster than the GNP without in that's crowding out more and more either capital formation at home or the accumulation of assets relative to the rest of the world where you've come a net debt or the rest of the world now so government dissaving at high prosperity is not a good idea in the mix of monetary and fiscal policy that we have now that creates that situation is one that should be ended in my opinion, the best way to end it is by raising taxes raising the revenues of the government since I don't think that there's much that can be done on the expenditure side anymore Question for Professor Lehenhoved if you think that the modern Keynesians are not very Keynesian do you consider the theories of the quote post-Keynesians more legitimate heirs? Well, I think I'd better start by saying that maybe I gave too reverent an impression yesterday in sort of preserving what Keynes thought there are actually elements of the NRL theory which I believe are quite wrong and those have to do, this is a very technical matter and I won't go into it but it has to do with what is called liquidity preference theory of interest rates and there's a number of quite important implications that follow if you believe that theory of how the interest rate is regulated that were further developed by John Robinson and the Cambridge School and I confess, I'll lean away from Jeff Harkin when I say this, that I think the post-Keynesians are fairly deeply mired in in that particular tradition flowing from Keynes so I'm not looking for that school of thought to lead anywhere in particular may I enlarge upon my remarks a little bit become irrelevant to the direct question because I'll connect it up with my reaction to Jim Buchanan's talk I was reflecting on what he had to say about the social scientists and the what, the social artists and Keynes' tendency to change the theory he presented at different junctures, he had a theory that to us today looks like monetarists during the high inflations in post-World War I he then had the treaties on money that several of us have discussed here as being more sophisticated on the financial side and so on and then the general theory is still another picture is there something unscientific about it and then there's the question to what extent is it legitimate let's take Jim Tobin's line to blame Keynes who died in 46 for the deficits of 86 I think these two things are actually related and a rather difficult matter and the way I think about it is that I view the history of the discipline as if you will a decision tree and the big and influential authors sit at the nodes of this decision tree and there the ones who said you can't go on like this you have to go either this way or that way and I'll spell out alternatives and then maybe they also force most of us to go this way because they are taking that path now that's generally speaking how a science developed but the resulting situation in the end is very very different in a science which like say physics has very sharp tools for deciding which path is right or wrong at any particular young tree in the decision tree I think of physics as growing like Swedish pine that is you get a long straight trunk with all the old branches having fallen away because you got a definitive answer and what seemed at some other point in time back there to be a reasonable alternative answer is known to be false well economics grows like some garden bush of some kind with very few branches being cut off once and for all and that has something to do with how we look back at previous authors we look back at Keynes in particular and I've always been opposed to this question about asking what Keynes really meant in part in my own interest I admit I've been opposed to that way of looking at it and why because we sit on some twig of that decision tree and we sort of trace back to Keynes often as if it was inevitable that the decisions that were made by influential authors between him and us would have to lead for example to where we are sitting or if we don't like Keynes would have to lead to the twig in which our worst enemies are sitting and then we impute this to Keynes or a particular individual in the past as if they had anticipated all these choices and made them ahead of time and of course they never did and that I think is also related to this thing with the shifting pictures that is we have a set of alternative theories coexisting at a given time I don't think that it's scientific to insist that one of them is true and the others are false because we don't know how to settle the matter and the rational thing to do is to know that we don't know how to settle it Thank you I have a question for Professor Brunner a question reads you said that Keynes advocated socialization of investment over fiscal policy pursuits why do all the textbooks say Keynes' big contribution was active fiscal policy Well, here I thought I could peacefully rest now I have to work so that's justice I suppose well there is a very simple answer the authors of the textbook never read the general theory Thank you For Professor Tobin would you agree that the recessions of the 1970s and 1980s were preceded by tight monetary policies in pursuit of reduced inflation if so what happened to the business cycle I think not just the most recent recessions but almost every recession we've had since the Second World War was a policy induced recession designed to reduce inflation rates that was true of the last two recessions in 1981-82 and 1980 it was true of the previous one, 1974-75 it was true of the one before that it was the Vietnam War inflation, 1969-71 it was even true of the 58 recessions and perhaps the one after that in 1960 so that has been generally the case that worrying about inflation has led the Federal Reserve to tighten money and that has led to disinflation Well what's happened to the business cycle that is the business cycle that is the post-World War II business cycle anyway and I don't think that there is a a natural rhythm of business cycle independent of policy actions of that kind Thank you We approached very nearly now to the end of our time we've managed to take a substantial number of the questions I wonder if I might poll the members of the panel at this time for any brief summary comments they might like to make at what will be our closing major convocation of the panel before this large group Professor Buchanan, any closing comments? Baron Rommel The closing comments for today Then I would like to say that I came to this conference with great expectations I hope to be illuminated but if Keynes was still alive a number of years ago I got the impression that he was not only dead but some people gave me the impression that he had never existed Now I leave this conference with a feeling that he is very much alive at least as an artist I also would like to state the position of the general opinion in my country as far as how policies are shaped just now I gave a lecture last night about it I have received many questions afterwards all the Swedes still, Keynesians are, they're not and I think that the policy, the new policy adopted and now pursued for years is basically Keynesian Keynesian in the sense that we put we don't believe that you can have a situation with a high unemployment in a democracy and we still continue to have a goal to have a very, very low figure of unemployment We would like to have the same figure for unemployment and inflation and that is 3% So I'm Mr. 3% yet today On the other hand, if the cake is Keynesian there is a new awareness of the importance of money so there is a monetaristic layer above the cake and isn't it so that we are now we have to face a new situation a new situation has come up So I think this Swedish synthesis somewhere between the monetarists and the Keynesians is a very useful one Thank you Professor Thoreau, any comments? Professor Tobin, any closing comments? Yes, I would say this One could hope and with better reason 20 years ago than now or 30 years ago that economists didn't have to be labeled all the time and that the contributions of past writers and current research would be assimilated into a common body of economic science tested econometrically in other ways and we wouldn't have to be classified in press or elsewhere I thought that's where we were coming to about 25 years ago Keynes had been pretty much absorbed in the mainstream or in macroeconomics Keynes may have sort of absorbed some of the mainstream so that there wasn't a it wasn't so much a partisan matter as it is again now and as it was in the initial days of the Keynesian Revolution You know, the fact is I made my contributions early in my career criticizing Keynes and trying to straighten things out that were, in my opinion, wrong as Axl said, not everything in the general theory is right and that's the way I like to think about it I wasn't being anti-Keynes or pro-Keynes I was trying to be an economist I'm afraid there's too much impression that may be left here that, you know, it's like taste in art You mean that you like the impressionists or you like the surrealists or the abstractionists There is some element of test of truth and survivability and survivability of tests in economics even though it's difficult to do it and we can't just believe anything because you like to believe it I'm saying these things because of what Professor Buchanan said about Keynes being an artist and not a scientist You know, I think maybe he was both maybe he was both setting forth some hypotheses which were refutable and subject to truth, to tests some of them have been refuted others have withstood tests and the same is true of things in the counter-revolution So I wouldn't like to have the idea that even though we've, as economists here sort of bear to our immense disagreements of today of these moments to you and I give the idea that that there's no substance in economics and no way of settling these matters may take time but they will be tested and the processes of science will in the end choose among various hypotheses and it's not just a question of choosing upsides on the basis of how you feel emotionally about these matters Thank you Professor Brunner, any brief comments to close this session I was thinking what I should say at the end quickly, but I'll listen along here Well, I think I do take up a point by Jeffrey Harcourt which he made because I think it fits in very well in a basic theme which I tried to convey in my paper and also which has plagued me and which I've been following now for quite a while in various papers over the last ten years Namely, when he presented what he considers the Christian socialist conception he made one interesting point with a follower the point which he made that there is of course an acceptance as I understood him I hope I don't do you injustice, Jeffrey the acceptance of the basic nature of man but this basic nature of man for which I use the description of self-interested behaviour deliberately because the term self-picture is related with egotism and egotism lots of people have egotistic aspects egotistic behaviour and on many other occasions directions and situations they can mobilize quite a bit of altruism also we have this ambivalence but both are subject to the self-interested behaviour that it is according to their assessment, their lights and their understanding and their decision making in this respect Now, the point here is then the following as Jeffrey said, the issue is from the vision which he presents to develop institutional arrangements not in the sense to expect and of course man's basic nature in a relatively different pattern but to mobilize more the altruistic strands or components in this context now this raises of course now questions which are important, which need attention to I only raise the questions we have to explore that on other occasions in other times and these are the following what is the role of the government in this context and I see two possibilities as usual one is that it provides opportunities for the development of such arrangements which gives incentives for more pronounced mobilization of altruistic components this could occur just talking of the curve and from the top of my mind at the moment in the sense of lowering transaction costs for setting up and such organizations after all it does require organizational efforts in various ways in one form or the other but there is also an alternative which is what is not clear in which direction it goes namely that there is somehow a coercive pattern involved but as soon as we have this then the whole thing becomes in my view morally very very questionable just particularly from a moral point of view now just to end up the point along the line if I may make a remark about the personal experience having come to this country in Switzerland 37 years ago and one of the experiences here among the many many others which I find attractive in this country that I find in this country an incredibly greater variety of all kind of organizations which do mobilize altruistic strands in men to an extent which I simply have not observed well say in Switzerland or whatever parts of Europe I have seen to the same extent with the same tremendous diversity diversity which is quite correct because we do have very different conceptions many of us what we think if we look at our precise moral ordering about the good causes there's nothing wrong about this it contributes to the richness of our life and I think basically that if we want to go in the direction which Jeffrey Hart would pronounce and essentially it is simply to encourage that but not through coercive patterns but if we see in which way we can lower transaction costs which are all involved in this way in one fashion or the other that simply at the moment just a immediate reaction I do need further thought on that Thank you very much Professor Brunner Professor Harcourt Well first of all I'd like to apologize for getting up Jim Buchanan's nose I did not intend to do that but I just wanted to I thought that he might also have been interested in the relationship between human nature ethics and the organization of society in the light of the legacy of Keynes and that was something which I thought came out of Professor Preston's paper which struck a responsive chord in me but since I've enjoyed Jim's company so much and all that I've been told about him has been fulfilled I should hate us to part good friend a bad friend so so I hope you'll accept my apology for as I say getting up his nose The only other thing I'd like to say is that I was very glad that he mentioned George Shackle because George Shackle is also one of my heroes because I think he has had enormous insights developing from his initial association with Hayek and then swinging over to his work on Keynes and it's very interesting I think that someone of Professor Buchanan's views should also see so much in Shackle because if one takes Shackle's views to their extreme then I do think you end up very much with either an apolitical philosophy or the particular hands off as much as possible let's interpret society rather than to actively change it except by some very general rules that seems to me to be the implications of the end result of Shackle's formulation the other end result is that you only give one lecture in economics and then you give up because it does lead to nihilism and I've always thought that unless one had Shackle's facility with the English language and subtlety of mind you would not have been able to continue the output that he had if you'd followed the logic of what he had to say but anyway I hope Jim that we can have a beer afterwards and make it up thanks very much Professor Preston well I was asked two questions which I can give one syllable answers to both one was Keynes an alcoholic the answer is no the other one is did Keynes have any contact with Max Weber the answer is no no undoubtedly Keynes read some of Max Weber for the rest in reference to Jeffrey Harcott's remarks one of the problems these days is defining what should mean by socialist most of the traditional Christian criticism of it in the 19th century have not I think much substance and the article that I wrote as a young man which my astonishment Professor Paul found and I hadn't looked at for years and years was actually trying to make among other things that comment then and I've got less and less interested in the nomenclature as to whether one is a democratic socialist or a social democrat I don't really think it very profitable to pursue it much further what I do think is important is that the institutions in society should express the social institutions in which people grow up and which influence them from infancy should express the fact that the things which are common to human beings are very much more significant than the things that are different I mean human beings have immense variety and that is a great thing about life but the things that make them different are their different talents their different good looks different states of health and so on while they add variety the things that are really important and vital about human beings are their common humanity and these need expressing in their social institutions and the traditional philosophy of capitalism has an extremely attenuated way of doing this and this is I suppose the fundamental thing and I think Christian theology leads to that and I think a fair number of humanists of various sorts would agree with it also with regard to something I would like to have taken up yesterday from Professor Bruno I do agree with him that it is a very serious matter to think that human beings are indefinitely malleable and the great number of horrors arise from people who have that view on the other hand it is not true to say that human nature is just not unchangeable which is at the other extreme position and one wants to find social institutions which encourage the more desirable parts of human nature and discourage the less desirable parts and that is another thing I think if I followed what he was saying just in the last minute or two I would probably go a long way with it Professor Leonhovet would you like to make a closing comment? Well perhaps just one reflection I think that in this conference I personally learned the most from Carl Brunner and from Dr. Preston which I was very interested in both those talks but I also have the reflection that Keynes, the legacy of Keynes Keynes is important to us and his significance essentially as a monetary economist macroeconomist and nothing else on the whole he was brilliant it's true but his socio-political thinking I think Carl Brunner was in a sense was fairly shallow and when Brunner went through it he described him as a product of his age rather than as an independent thinker of great significance and I also view Preston's discussion of his ethical evolution I think of it in the same way it was a product of an age and in a particular set the Apostles and G.E. Moore I don't think he was important in his own right I don't think he was important in his own right intellectually except as a macroeconomist and as a public figure he was of great importance in his day to make a particularly during World War II so we shouldn't the Renaissance man I think should be shrunk down to those things Finally Professor Thoreau has asked after all to make a comment I told myself I would resist but I just couldn't I think Professor Laveron-Hovind's description as the hard science is a Swedish pine where the trees drop off it's absolutely wrong and it's a much more complicated process that Jim Toblin was talking about and determining the truth or falsity of any proposition which can't be replicated in the laboratory about a month ago I was privileged to go to the Pugwash conference and sit in Eastern Europe with a group of physicists and electrical engineers within 500 miles of Chernobyl and one night a group of American and Russian physicists gave a talk on what do we know about the impacts of Chernobyl and often times they feel very badly about economics but these things make me feel better about it the physicists would say things like that's a terribly important variable but we don't know its value within a factor of 10 well when you start talking about those kind of human physical events there's a great amount of uncertainty and one of the things that was described at that session which shows you the statistical difficulties of these things there are only two incidents Hiroshima and Nagasaki where we know the people have had very different exposures to radiation from very high levels to very low levels depending on how close they were to the epicenter and of course one of the key things you would like to know in this area is if you get a dose of radiation is a big dose twice as bad as a little dose and of course what you would hope is that perhaps little doses don't have too much effect even if big doses is the interesting thing is that if you take the data from Hiroshima it looks like a straight line that a big dose twice the dosage causes twice the harm if you take the data from Nagasaki it's very clearly curvilinear and it isn't a straight line now the question a physicist has to answer is which of those two is right now if he could drop a lot of A-bombs on a lot of different cities he would be in some sense in a position to tell but not being able to drop an A-bomb on a lot of different cities physicists don't know and you can get physicists to come down on different sides of that proposition is cancer linear related to radiation dosage or curvilinear related to radiation dosage and so I think in all of these areas hard sciences and soft sciences it is a very difficult thing to establish the truth or false of a proposition and I'll mention one other semi hard science biology if you've kept track recently of the literature between the biologists and the various other scientists as to whether the dinosaurs died slowly as Darwin would suggest or in the Big Bang they have completely managed to tie themselves into knots and the fact that economists occasionally tie themselves into knots I don't think should be too badly held against them thank you thank you very much professor Thoreau on that note I will remind you all that the final event for the Nobel program is the Nobel dinner tonight at 6.30 in the college dining room by special ticket we hope to see the bulk of you there for those of you who may not attend that function we hope you have enjoyed our program thus far very much good evening to you