Keynesianism in Democracy

Two years ago, semiconservative pundit Josh Barro declared that “Conservatives Have No Idea What to Do About Recessions.” The eminent progressive economist Paul Krugman agreed, then tweaked crotchety Josh by saying this idea-less condition afflicts not only “anti-intellectual and doctrinaire” Republican policymakers but also “prestigious conservative economists” such as, um, Barro’s father Robert.

Conservative intellectuals like Robert Barro, Krugman suggested, have rejected the economists’ notion of aggregate demand, and in so doing they have rejected not only Keynesian economics but also the wrong-yet-acceptable monetarist alternative and its very great avatar Milton Friedman. Why? Because politics: Krugman sees Barro père as having “the sense that acknowledging that markets fail, ever, would be the thin edge of the wedge for liberal policies.”

With apologies to Alex Pareene’s version of Malcolm Gladwell: Say that Krugman is right about Robert Barro’s motivations. Could Barro still be right in rejecting Keynesian economics? What if Keynesian economics contains a lot of truth, though? Surely then Barro would be wrong in refusing to advance those true Keynesian ideas.

Or would he?

In 1977, the classical liberal economists James Buchanan and Richard E. Wagner argued that the advancement of Keynesian economic ideas is counterproductive in a mass democracy. Buchanan and Wagner allowed that there could be some ‘truth’ in Keynesianism but said that intellectual economists—few in number and limited in influence—can no longer assert the consistent level of control over economic policy that would be necessary to deliver results. Why not?

John Maynard Keynes, as evidenced in material cited by Buchanan and Wagner, tended to think of policy in his Britain as being handed down by an intellectual aristocracy that would not soon be displaced. Keynes believed that sway over the economic levers could and would be maintained by smart folks, whatever else may transpire. But in America now, as Paul Krugman and Josh Barro both know, that ain’t so. The columns and tweets of today’s smarties, whoever they are, are just an input into the roiling democratic processes that determine policy.

So what should that input be? Krugman’s answer is twofold: Keynesian economics and Democratic Party politics. We are fortunately blessed to have with us a party of politicians who take their cues from sensible people. The Democrats are smartly Keynesian, and so if they remain in power then countercyclical policy is guaranteed. Stimulate the economy when it busts, then use boom times to control inflation and reduce debts.

But Buchanan and Wagner pointed out that since the boom-time Keynesian policies of tighter money, lower spending, and higher taxes are never popular with voters, it doesn’t make a lot of sense to bet on continuous Democratic victories. An opportunistic opposition party could put forward pseudo-Keynesian ideas designed to win elections: Say, if tax cuts are stimulating during recessions, then shouldn’t they be stimulating all the time? A voter who really understands Keynesianism, who learned what she was taught in intermediate macro, wouldn’t be suckered by such an opposition. But in a mass polity dominated by noneconomists, vague notions about the benefits of ever-lower taxes can sink in. Sometimes the Republicans win, and who knows what they end up doing.

So Buchanan and Wagner’s answer was this: Mass democracy requires a wiser brand of economist, one who understands Keynesian economics but refrains from offering the Keynesian policy prescription. Economics professors shouldn’t, in their classrooms, push their smart kids to advocate for strongly countercyclical budgeting. Teach them about the idea, yes, but teach them too about the politics that are likely to frustrate its successful implementation, and remind Timmy in the front row that he’ll never chair Ways and Means.

Buchanan and Wagner thought a better result would obtain if the economists and their sharp students hold that politicians should consider the government to be broadly constrained by its budget. Then less nuttiness gets around. The idea of ever-lower taxes, dumb on its face, is affirmed as dumb. And some of the less defensible Gladwellism in politics is stymied. A crotchety man or two might be happy about that much.

They would be, right?

9 thoughts on “Keynesianism in Democracy

  1. Neither this entry nor your entry on bullshit in economics textbooks…

    https://sweettalkconversation.com/2016/03/09/on-bullshit-in-economics-textbooks/

    … includes any acknowledgement of “Tabarrok’s Rule”: actions speak louder than words. Your solution to bullshit in economic textbooks was…. ironically… a cheap-talk survey.

    In this entry you’re considering Buchanan and Wagner… which is wonderful. But you’re not quite acknowledging or appreciating “Buchanan’s Rule”: using a resource one way means sacrificing the other ways that it could also be used.

    Because of Buchanan’s Rule… we need Tabarrok’s rule in order to ensure that we don’t massively violate “Quiggin’s Rule”: society’s limited resources should be put to more, rather than less, valuable uses.

    The logical, but extremely detrimental, consequence of massively violating Quiggin’s Rule is the major misallocation of society’s limited resources. Keynesianism tries to solve recessions/depressions by violating Quiggin’s Rule even more.

    If you’re interested in learning more…

    http://forum.nationstates.net/viewtopic.php?f=20&t=369166

    1. The only way that a political idea can truly do good is if it’s based on solid economics.

      Mercatus recently celebrated the 240th anniversary of Adam Smith’s “Wealth of Nations” by encouraging people to share their favorite passage…

      I really like this passage… “Public services are never better performed than when their reward comes in consequence of their being performed, and is proportioned to the diligence employed in performing them.”

      Would I give it a thumbs up? Of course! Why not? A thumbs up is entirely free. But would I spend $1000 dollars to boost a post of this passage on facebook? Well…

      Democracy asks people what they want (X)… but never lets them decide what they are willing to sacrifice (Y). Markets ask people what they want (X)… but always lets them decide what they are willing to sacrifice (Y).

      With democracy… X is rarely, if ever, more valuable than Y. But with markets… X is always more valuable than Y. This is why not-markets , rather than markets, are always to blame for recessions/depressions.

      1. It is a huge leap (indeed, a chasm) from pointing out how markets are incentive compatible (though that is only true when certain ethical constraints hold) to arguing that recessions must be caused by something external, exogenous to markets. The fact that someone has an incentive against making mistakes does not mean that no mistakes will be made; the fact that people in general have incentives against making mistakes does not mean that no systematic mistakes will be made.

        Schumpeter, no enemy of markets, believed that business cycles were caused chiefly by something good—innovation. The upside of an innovation, and especially the timing of that upshot, are highly uncertain. Overoptimism on the investment side eventually lead to corrections—if the optimism was excessive enough and in enough areas, a very large correction.

        This doesn’t mean that recessions are _only_ caused by such things, or that non-market factors aren’t frequently the chief culprit or at least share the blame (though I think separating non-market from market factors is not nearly so clean a matter as you seem to indicate). I merely wanted to illustrate how dynamics perfectly internal to markets are capable of producing recessions.

        Finally, you underrate human intelligence and other forms of collaboration and cooperation outside of the market. Consider that physicists at the turn of the 20th century made theoretical arguments which would not see any empirical support for a century or more. Yet they were right, and the empirical support did eventually arrive. The situation was clearly not incentive compatible in the way you describe—they had to persuade their peers, just as we must persuade one another as voters on various matters. That persuasion was done on the basis of reasoning and rhetoric, and the empirical investigations that might have created greater accountability than that were not forthcoming in the lifetime of those doing the persuading. Yet they arrived at accurate conclusions, nevertheless.

        In short (too late, I know), it seems to me that you both overrate what incentive-compatibility can do to correct human shortcomings, and underrate what humans can accomplish outside of incentive-compatible contexts.

  2. You’re correct that it’s a huge leap! But you really don’t need to leap the chasm… there’s a perfectly functional bridge. It’s called “diversity”. Markets are inherently diverse. Let’s say that an asteroid destroys our planet tomorrow. Who do we blame for humanity’s extinction? Alex Tabarrok? Nope…

    http://marginalrevolution.com/marginalrevolution/2015/06/planetary-defense-is-a-public-good.html

    Maybe we blame Mark Lutter? Nope…

    “With humanity concentrated on earth, an errant asteroid could wipe out civilization. Nuclear war could end human life. Rogue AI could eliminate humanity. Colonizing other planets limits the destructive potential of such threats. If life on earth is wiped out, Mars would still thrive. Private space exploration literally has the potential to save humanity.”

    View story at Medium.com

    Of course we don’t blame these two individuals. Do we blame the market then? Well no… contrary to Lutter’s argument for private space exploration… we’re talking about a public good here. Therefore… the not-market would be entirely to blame for human extinction. Centralization, by definition, limits the variety of the very different paths that individuals would be naturally inclined and incentivized to take. Centralization, by definition, puts far too many eggs in far too few baskets.

    If people were free to choose where their taxes go then we would have a market in the public sector. As a result, public goods would be just as diverse as private goods. This is because the demand for ALL goods is inherently diverse. You and I wouldn’t put the same exact public goods in our shopping carts just like we don’t put the same exact private goods in our shopping carts.

    Progress is a function of difference. Sexual reproduction is all about difference and voila! Here we are!

    Regarding Schumpeter’s “corrections”… any such thing is the logical, but extremely detrimental, consequence of centralization. With the current system there are public “shepherds” who are so confident in their information that they are very eager to limit the natural diversity of markets.

    Don’t get me wrong… we need rules/regulations to protect diversity. But nearly all of our rules/regulations do the very opposite.

    Regarding the physicists… you seem to appreciate the benefit of persuasion. So do I! Persuasion is a function of choice though. Take away people’s choices and it becomes entirely unnecessary to persuade them. If people are marionettes… then it’s pointless to try and persuade them. If you want marionettes to behave differently… then you’re going to have to try and persuade whoever is pulling the strings.

    Allowing people to choose where their taxes go would cut all the strings. So we’d have infinitely more persuasion than we currently have.

    For me it’s not difficult to cleanly separate not-market factors from market factors. You’re an intelligent guy. And you can’t choose where your taxes go. If the economy struggles in any way… then it’s because your difference (creativity/intelligence/knowledge/foresight) and Tabarrok’s difference and Lutter’s difference and the difference of millions and millions of other people has been and continues to be squandered to a significant extent.

    Our system needs to be less like Hitler and more like Churchill…

    “Since the Germans drove the Jews out and lowered their technical standards, our science is definitely ahead of theirs.” – Winston Churchill

    1. If an asteroid destroyed the Earth, I would not blame anyone, particularly, because I don’t hold people responsible for whether or not a natural disaster occurs. Speculations about how it could have been forestalled are quite cheap and unconvincing, in reality. Assuming it could have been forestalled, I would blame humanity in general for not getting its act together in any particular form, via the variety of institutional means available, tax-funded ones being merely one subset.

      Your model of persuasion doesn’t cut it, I think. It doesn’t all boil down to persuading Bob to buy candles or buy potato chips. Some persuasion—arguably the most important sort—only matters when you’ve managed to persuade a broad base of people. Thus an idea held by one or two physicists doesn’t have the weight (for, for example, informing future research or theoretical developments) as a widely held _consensus_ among physicists does. Even persuading a large group that certain contested questions are worth _asking_ or _exploring_ has value, and more value in relatively large numbers than individually.

      For questions of public goods, or what McCloskey refers to as conjective (see https://sweettalkconversation.com/2015/08/11/truth-without-objects/), broad-based persuasion is the most important of all. Such as persuading people that dollars are, in fact, something with general purchasing power. An individual decision not to believe that is simply an incorrect belief. But when a broad base of people stop believing it, it becomes true.

      1. I’m not sure which part of my argument, exactly, it is that you find “cheap and unconvincing”. From my perspective… the most accessible story on the topic is the fictional story of Noah’s Ark. If he had been prevented from building his boat then humanity would have been lost. As it was… he was not blocked from choosing his preferred path and, as a result, humanity was not lost. Unlike Noah… millions of taxpayers are blocked from spending their own tax dollars on their preferred public goods. As a result, we have far too many eggs in far too few baskets. Centralization A. decreases the rate of discoveries and B. increases the impact of disasters.

        I’m struggling to understand your objection to my model of persuasion. “My” model was pretty much the basic concept of rational ignorance…

        “This greater complexity of political choice is compounded by an inability to gain from any investment in knowledge. In a market setting, a person can gain by storing food during the boom periods; it is a simple task to profit directly from knowledge. In a political setting, however, even if a person has acquired knowledge about the more complex question of “why,” there is no way that he can profit from his knowledge because a change in policy will take place only after a majority of people have come to the same conclusion. Consequently, it is rational to be considerably more ignorant about general policy matters than about matters of market choice.” – James M. Buchanan

        It seems like you’re arguing that persuasion is somehow better when we have no choice but to convince a majority of voters that our conclusion is correct?

        I read your blog entry about “conjective”. Some people wanted to remove the confederate flag while others wanted to keep it. These two options are mutually exclusive. My solution would have been to simply measure each side’s willingness to pay (WTP) in order to determine which option was the most valuable. Let’s say that you represent the “keep” option and I represent the “remove” option. Maybe you would have spent $10 dollars on your option and I would have spent $5 dollars on my option. So the flag would have been kept… but I would have received your $10 dollars. Your $10 dollars would have been more than fair compensation… according to my own definition of “fair compensation”.

      2. Oops, I pointed you to the wrong post on conjectiveness, the flag’s a bad example. You don’t have to read it (since you probably got the gist) but https://sweettalkconversation.com/2015/08/02/of-subjects-and-object/

        I don’t think persuasion is better when we’re talking about broad based social things, I think it’s _different_. That’s all I was getting at. There’s the straightforward case of me trying to persuade you in this comment section. Then there’s the case where an idea spreads widely, and widespread adoption creates second-order effects. That’s what I explained badly.

  3. Language isn’t subjective… it isn’t objective… it’s conjective! Yeah! Thanks to our exchange I now know this! And I’m sure it’s relevant to our disagreement… but I’m not quite sure just how relevant it is.

    Personally I’ve invented quite a few words. But I’m not much of a wordsmith so I would be really surprised if any of them caught on. One word that I invented is “linvoid”. It’s a word for a word that needs to be invented. McCloskey spotted a linvoid and she channeled her inner wordsmith and voila! Now we have “conjective”!

    I think that, when it comes to the topic of persuasion… there are quite a few pretty big linvoids.

    Frank the salesman knocks on the Smith’s door. Billy Smith answers the door. Billy’s just a kid. Does Frank try and persuade him to buy his product? No. Why not? Because Billy’s just a kid! So Frank doesn’t try and persuade him to buy his product. Instead, Frank tries to persuade Billy to go get his mom or dad.

    Billy runs to get his dad. Bob Smith comes to the door and Frank introduces himself and tries to persuade Bob to buy what he’s selling. What’s Frank trying to sell? Something tangible like a vacuum? Ok. Something intangible like religion or vegetarianism? Sure.

    If Frank successfully persuades Bob to become a vegetarian… then Bob will choose to stop buying meat. The choice is Bob’s to make. So we wouldn’t be very surprised if Frank does try and persuade Bob to stop buying meat. It’s entirely rational for Frank to take the time and make the effort to share his information about the benefits of vegetarianism with Bob. Why is it rational? Because if Bob sees the merit/truth/validity of Frank’s information… then Bob is entirely free to act on it.

    Would it be rational for Frank to try and persuade Bob to become a pacifist? Kinda! Bob can certainly buy the idea of pacifism… but it’s not like he can very easily act on this idea. It’s a lot harder to boycott war than it is to boycott meat! Clearly it’s not impossible to boycott war. Bob could certainly stop paying taxes and risk going to jail. He could also stop earning money… then he wouldn’t have any taxes to pay. Given that there’s a much higher (transaction?) cost for boycotting war than boycotting meat… it becomes that much less likely that Frank would take the time and make the effort to persuade Bob to become a pacifist.

    What comes to mind is locus of control (LOC). Choosing to boycott meat is a decision that Bob is entirely free to make. So the locus of control is internal. Choosing to boycott war is a different story. Bob is not entirely free to make this decision. So the locus of control is more external. The terminology doesn’t work perfectly though because LOC is primarily an issue of perception. In the case of boycotting war… the cost of doing so is real rather than imagined.

    Another thing that comes to mind is modular versus monolithic. In terms of persuasion… vegetarianism is modular while pacifism is more monolithic. Each time a person becomes a vegetarian… marginally less meat is purchased/produced. But each time a person becomes a pacifist… marginally less war is not purchased/produced. Modularity allows for small and incremental improvements to be made. Modularity facilitates the exchange of less desirable traits for more desirable traits. In other words… modularity facilitates evolution/progress.

    In some cases the “product” being sold has to be monolithic. For example… when the product is mutually exclusive. Like in the example of the confederate flag. Other examples include gay marriage and the legality of drugs. These are yes/no issues rather than matters of degree.

    What would happen to persuasion if we replaced voting with spending? Well… we would clearly see the intensity of people’s preferences. This would allow us to make far more informed decisions with regards to persuasion.

    From my perspective… society works better when more, rather than less, information is exchanged. We maximize the amount of information that’s exchanged by maximizing people’s freedom to act on information. This is how and why markets work. This is how and why it’s a problem wherever and whenever markets are missing.

    So how many linvoids did you spot? In theory… creating words for all the biggest linvoids would facilitate a far more productive discussion on the topic of persuasion.

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