THE CONSEQUENCES OF MR KEYNES.pdf - Institute of Economic ...

sequences is essentially the same as that of the indirect consequences
of the budget surplus.
A democratic society, therefore, will tend to resort to an
excessive use of deficit finance once acceptance of the Keynesian
paradigm has led to a revision of the fiscal constitution.
For this reason, the post-Keynesian record in fiscal policy is
not difficult to understand. The removal ofthe balanced-budget
principle of constitutional rule generated an asymmetry in the
conduct of budgetary policy in our form of competitive democracy.
Deficits are created, but to a larger extent than justified
by the Keynesian principles; surpluses sometimes result, but
they occur less frequently than required by Keynesian prescriptions.
When plausible assumptions are made about the institutions
of decision-making in political democracy, the effect is
to increase the biases against the use of budgetary adjustments
to prevent and control inflation, as well as to increase the bias
toward budgetary adjustments aimed at stimulating spending.
(iii) Keynesian economics in political democracy
The grafting of Keynesian economics onto the fabric of a
political democracy has wrought a significant revision in the
underlying fiscal constitution. The result has been a tendency
toward budget deficits and, consequently, once the workings of
democratic political institutions are taken into account, inflation.
Democratic governments will generally respond more
vigorously in correcting for unemployment than in correcting
for inflation. Budgetary adjustments aimed at the prevention or
control of inflation will rarely be observed as the result of
deliberate policy. Budget deficits will come to be the general
rule, even when inflation is severe. In slack years, when deficits
might seem warranted by strict application of the Keynesian
precepts, the size of these deficits will become disproportionately
large. Moreover, the perceived cost of government will generally
be lower than the real cost because of the deficit financing.
As a consequence, there will also be a relative increase in
the size of the government sector in the economy. Budget
deficits, inflation, and the growth of government—all are intensified
by the Keynesian destruction of former constitutional
principles of sound finance.
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