ECONOMICS 343 PUBLIC FINANCE Government and the Economy LECTURE 1 Important Links • Budget of the United States • The Congressional Budget Process • Economic Report of the President • Internal Revenue Service • Social Security Administration • Health Care Financing Agency • Bureau of Public Debt • Public Finance by David Hyman Role of the Government in the Economy Roles of Government in the Economy In the Wealth of Nations, Adam Smith enumerated four “justifiable” functions of government: the duty of protecting the society from violence and invasion by other independent societies; the duty of protecting every member of society from injustice and oppression of every other member of society; the duty of establishing and maintaining those highly beneficial public institutions and public works which are of such a nature that the profit they earn could never repay the expense to the individuals to provide them and which it, therefore, cannot be expected that they would be supplied in adequate quantities; and the duty of meeting expenses necessary for support of the sovereign. Definition of Public Finance From A.C. Pigou A Study in Public Finance PART I GENERAL RELATIONS CHAPTER I PRELIMINARY § 1.IN every developed society there is some form of government organization, which may or may not represent the members of the society collectively, but certainly has coercive authority over them individually. As a rule the government organization is broken up into a central government with large powers and a number of local government authorities with limited powers. The governing authority, whether central or local, is endowed with functions and duties, the detailed nature of which varies in different places. These duties involve the expenditure and, consequently, require also the raising of revenue. § 2. In modern conditions these processes are operated almost exclusively through the medium of money. It is true that on occasions governments make a levy of resources, of which they have need, in kind. Thus, in most European countries, even in peacetime, the services of soldiers are obtained by conscription; and it has happened that civilian labour (e.g. in Bulgaria) has been called up in the same way. In war-time commandeering is apt to be extended over a much wider range. Buildings, motor-cars, horses, stocks of food and so on may be forcibly taken over. During the later years of the 1914-18 war the British Government commandeered the whole of the wool crop and the whole of the wheat crop of the country. During the recent world war women were conscripted for national service as well as men. Resort to methods of this kind is not, however, really alternative to the use of money. Conscripted persons are paid money wages and the owners of commandeered goods usually receive money compensation. What happens is not an abandonment of the money instrument, but a supplementing of it by compulsion on the public to sell services or goods, and authority Thus we may lay it down, as a general rule for modern countries, that the spending and the raising of resources by government authorities are manifested in the form of spending and raising money. § 3. To this rule there is one exception that should be noted. A government may decide to take over and nationalise some large going concern - the Port of London, the railway system, the coal-mining industry or the liquor trade. In such a case it is certain not to raise the purchase price through taxes and very unlikely to raise it through the issue of a public loan. It will pay the sellers, not in money, but in interest-bearing government script. In so far as they retain this script the sellers will in effect, though not in form, have loaned the purchase price of their concern to the government; in so for as they retain the script on the market, the buyers of it will have done this. In neither case will the government itself actually disburse money; it will disburse new securities instead. § 4. Though, apart from special cases of this kind, money is practically always the medium of public finance, it is not the thing in which it really deals. The money is merely a ticket embodying command over services and goods. It is these, not the money that represents them, which constitute the real object of all transactions. This is, of course, a truism. But it is a truism the detailed implications of which are complex. Apart from the special cases referred to in the last paragraph and apart from creations of new money, every completed act of public finance is alike in form. £100 million are obtained by the government from the public and are paid over to certain other persons. This money is purchasing power. When it is taken away, those persons from whom it is taken are constrained to give up other things (including perhaps some leisure), which they would have had if it had not been taken away. The government then pays out the £100 million. It is evident that there are a great number of different ways in which the providers of taxes or fees or loans can modify their purchases and activities in order to furnish the £100 million: and a great number of different ways in which the £100 million can be paid out and in which the output Of different sorts of goods and services can accordingly be effected. Thus important divergences of substance underlie the similarities in money form. From Public Finance by Charles F. Bastable • In any society that has passed beyond the lowest stage of social development, some form of governmental organisation is found to be an essential feature. The various activities or functions of this controlling body furnish the material for what are known as the 'Political Sciences'. Every governing body or 'State' requires for the due discharge of its functions repeated supplies of commodities and personal services, which it has to apply to the accomplishment of whatever ends it may regard as desirable. The processes involved in obtaining and using these supplies naturally vary much in the several stages of social advance: they are comparatively simple and direct in a primitive community, while in a modern industrial society they present a high degree of complication, and are carried out by elaborate regulations. For all States, however—whether rude or highly developed—some provisions of the kind are necessary, and therefore the supply and application of state resources constitute the subject-matter of a study which is best entitled in English, Public Finance • The importance of the subject hardly requires much insistence. The collection of funds for state purposes and the use of the resources so obtained are such vital parts of the political organisation, that they are almost certain to receive attention from all who are interested in political and social inquiries. But, if demanded, abundant evidence is at hand. The citizen of any civilised country need only reflect for a few minutes in order to satisfy himself of the number and importance of the actions of the state on its financial side. His letters are carried by a state agency which claims a monopoly, and in some instances realises a large profit for the general revenue. The commodities that supply his table are in many cases taxed to create a fund for the payment of public services. Either his income or property or some of their elements is sure to be subjected to a charge of greater or less amount, and several of the most ordinary avocations are only open to him on obtaining a costly licence for permission to engage in them. Nor do the claims of the State cease here. • In addition to the central body, the local authorities have to be considered. If the person of our supposition be the inhabitant of a town, his house may be lighted by public agency, while it is highly probable that for one of the first necessaries of life— water—he is dependent on his municipality. There is little need for further working out of details. The way in which the purely financial agencies of the State— and still more those which have some connexion with finance—affect the members of the society in their everyday existence, is being ever illustrated afresh by the ordinary course of social life. • Public Finance deals with the taxing and spending activities of various governmental units. • However, the resources for all government expenditures ultimately come from the private sector. • So, public sector decisions impact private sector decisions in many ways both large and small. • The overall impact of public sector decisions must be examined in the context of their impact on private sector behavior. Government as a Decision Unit • Public finance studies the economic activity of the government as a unit. • In studying this unit in some sense we treat it as analogous to a person. • For example in studying the economic activity of a person we would want to know – how the person earns their income and how much the person earns. – how the income is spent. – how the individual makes decisions or choices among alternatives. • Similarly, in studying the public economy, we want to know – how factually the government secures it revenues -- both process and amounts --. – how the revenues are spent. – how the government makes decisions or choices among alternatives. Here the analysis becomes very complicated because, while for an individual we are examining a single mind, for governmental decisions we are looking at a collective mind or political process. Moreover, an individual’s decision is one among many decisions, government decisions can impact the behavior of many individuals. The Field of Public Finance • Public Finance is the area of economics or economic theory devoted to the study of how government policy -- tax and expenditure policy-- effects microeconomic behavior as well as aggregate economic activity. • Public finance does not concentrate on financial arrangements of government but on the economic consequences of public policy on – Resource allocation: Allocation – Income distribution: Distribution – Level of economic activity: Stabilization The Nature of Private and Public Goods: An Overview PRIVATE GOODS MARKET FORCES CONSUMER SOVEREIGNTY ALLOCATION DISTRIBUTION STABILIZATION PUBLIC GOODS DEMOCRATIC POLITICAL PROCESS VOTING ALLOCATION DISTRIBUTION STABILIZATION ALTERNATIVE VIEWS OF GOVERNMENT’S ROLE IN SOCIETY 1. The state can be viewed as a unitary being or organism. The government has a life of its own. This is what James Buchanan refers to as the “fiscal brain” approach. One extreme of this approach is the society ruled by the complete despot, Louis XIV. A more realistic example would be government decisions made by a ruling elite or clique. The theory of committees or small group behavior might be useful in analyzing such a situation. The “public interest” is inherent in the government and it transcends individual interests. 2. The second concept of government is the state as a means of individual action; a mechanism for collective action. The “ideal” example of this approach is the New England town meeting. However, more realistically we are looking at representative government in large political units. ORGANIC VIEW Society is conceived of as a natural organism. Each individual is a part of this organism , and the government can be thought of as its heart and mind. European socialist countries are based on this underlying view of the role of government. Historically, it has taken extreme forms such as national socialism in Germany in the interwar years. Individualism is subservient to the “natural” goals of the state. Government as a utility maximizing entity or government as a ruling clique. For example, Yang Chang-chi, Mao Tse-tungs, ethics teacher, states that “A country is an organic whole just as the human body is an organic whole. It is not like a machine which can be taken apart and put together again. The individual has significant only as part of the community and the good of the individual is defined with respect to the good of the whole.” In the organic approach, the community is stressed above the individual. MECHANISTIC VIEW The government is not part of the social machine. It is a contrivance -- another machine-- created by individuals to better achieve their individual goals. The individual rather than the group is at the center of the system. (Government as a democratic process) The following document expresses this view in a very concise manner. DECLARATION OF INDEPENDENCE “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed, that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness. Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. “ Important limitations on the powers vested in government are defined in Article I, Section 9, and in the first ten amendments to the Constitution, known as the Bill of Rights. These limitations are primarily in the form of general prohibitions against the abridgment or destruction of fundamental rights. Legal Framework of Public Finance Political Institutions constitute the rules and generally accepted procedures that evolve in a community for determining what government does and how government outlays are financed. United States Constitution Federal Expenditures Federal Revenues State and Local Article I, Section 8 Article I, Section 8 Governments Article I, Section 7 Provisions Provisions Provisions Welfare Clause Uniformity Clause 10th Amendment Court System Direct Taxes/16th Amend. Article 1, Section 10 Army and Navy Due Process City of Clinton vs Cedar Rapids LEGAL FOUNDATIONS OF GOVERNMENT Expenditure Provisions •ARTICLE 1, SECTION 8 : Empowers Congress to “pay the debts (borrow)and provide for a common defense and the general welfare of the United States •Bills to appropriate expenditures can originate in either House of Congress. ARTICLE 1, SECTION 9 , no money shall be drawn from the Treasury, but in consequence of appropriation made by Law: and a regular statement and account of Receipts and Expenditures of all public Money shall be published from time to time Revenue Provision • ARTICLE 1, SECTION 8: “Congress shall have the power to lay and collect taxes , duties , imposts, and excises.” • However, ARTICLE 1, SECTION 7 says “all bills for raising revenue shall originate in the House of Representatives.” Restrictions The Constitution has several provisions limiting the taxing power of the federal government. (Not surprisingly given the enormous dissatisfaction with British tax policy during the colonial period.) • ARTICLE 1, SECTION 8 : “All duties, imposts, and excises shall be uniform throughout the United States.” • ARTICLE 1, SECTION 9: “ No... direct tax shall be laid , unless proportional to the census or enumeration herein before directed to take action.” • ARTICLE 1, SECTION 9:”no tax or duty shall be laid on articles exported from any state.” • 16th Amendment:” Congress shall have the power to levy and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to census or enumeration.” • 5th Amendment: “ No person shall be ...deprived of life, liberty, or property, without due process of law nor shall property be taken for public use without just compensation.” (tax and environmental issues) State Governments • ARTICLE 1, SECTION 10:” No state shall without the consent of Congress , lay any imposts or duties on imports or exports.” • 10th Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited to the States are reserved to the States respectively or to the people.” • Thus, international economic policy is in the hands of the federal government. In addition, various constitutional provisions have been interpreted as requiring that the states not levy taxes arbitrarily, discriminate against out of state residents, or levy taxes on imports from other states. For example, in 1986, the Supreme Court declared unconstitutional an Alaskan law mandating that 95 percent of workers on public projects be Alaskans. • States can impose spending and taxing restrictions on themselves in their own constitutions. Municipal Governments • The power of local governments to tax and spend is granted by state governments. • “Municipal corporations owe their origins to, and derive their powers and rights wholly from, the [state] legislature. It breathes into them the breath of life, without which they can not exist. As it creates, so it may destroy. If it may destroy, it may abridge and control.” Quoted in Rosen, p. 12 from City of Clinton v. Cedar Rapids, 1868. GROWTH OF GOVERNMENT “The era of big government is over” Bill Clinton, 1996 To what extent are society’s economic resources controlled by the public sector? Has this control over resources been growing over time? TOTAL GOVERNMENT OUTLAYS AS PERCENTAGE OF GDP IN 1999 • COUNTRY OUTLAYS • U.S. 33.6 % • JAPAN 39.2 • U.K. 40.8 • GERMANY 47.1 • ITALY 49.2 • FRANCE 54.1 • SWEDEN 60.2 Trend in Federal Budget Receipts and Expenditures Year Receipts Outlays Surplus/Deficit Outlays % of GDP 1945. 45,159 92,712 -47,553 41.9 1950. 39,443 42,562 -3,119 15.6 1955. 65,451 68,444 -2,993 17.3 1960. 92,492 92,191 301 17.7 1965. 116,817 118,228 -1,411 17.2 1970. 192,807 195,649 -2,842 19.3 1975. 279,090 332,332 -53,242 21.3 1980. 517,112 590,947 -73,835 21.6 1981. 599,272 678,249 -78,976 22.2 1982. 617,766 745,755 -127,989 23.1 1983. 600,562 808,385 -207,822 23.5 1984. 666,486 851,874 -185,388 22.1 1985. 734,088 946,423 -212,334 22.9 1986. 769,215 990,460 -221,245 22.5 1987. 854,353 1,004,122 -149,769 21.6 1988. 909,303 1,064,489 -155,187 21.2 1989. 991,190 1,143,671 -152,481 21.2 1990. 1,031,969 1,253,198 -221,229 21.8 1991. 1,055,041 1,324,403 -269,361 22.3 1992. 1,091,279 1,381,684 -290,404 22.2 1993. 1,154,401 1,409,512 -255,110 21.5 1994. 1,258,627 1,461,902 -203,275 21.0 1995. 1,351,830 1,515,837 -164,007 20.7 1996. 1,453,062 1,560,572 -107,510 20.3 1997. 1,579,292 1,601,282 -21,990 19.6 1998. 1,721,798 1,652,611 69,187 19.1 1999. 1,827,454 1,703,040 124,414 18.7 2000 1,956,252 1,789,562 166,690 18.7 An Empirical Observation “Federal government expenditures as a percentage of national income in the United States were only 1.4 percent in 1799. They rose to double that figure by the end of the nineteenth century, but were still only 3 percent of GNP in 1929. Starting in the 1930s, however, federal expenditures took off, rising sevenfold as percentage of GNP over the next 50 years.” (Mueller, Public Choice II, p.320) Explantions for the Size and Growth of Government • Dennis Mueller in “The Growth of Government” list five explanations for public sector growth. • The government as provider of public goods and eliminator of externalities • The government as redistributor of income and wealth • Interest groups as a cause of government growth • Bureaucracy as a cause of government growth • Fiscal Illusion SOME HISTORICAL SPECULATION ON THE GROWTH OF THE PUBLIC SECTOR • Law of Ever Increasing State Activities •Wagner’s Law •Engel’s Law •Baumol Unbalanced Growth Model • Displacement, Inspection, and Concentration Effect • Critical Limits Hypothesis • Theory of Bureaucracy WAGNER’S HYPOTHESIS OF INCREASING STATE ACTIVITIES As per capita income and output grow in industrialized countries , the public sector of these countries necessarily grow as a proportion of aggregate economic activity. Wagner indicated this was a natural law of ever increasing state activity. WHY SHOULD THIS BE THE CASE ? • Economic growth and social progress lead to an increase in governmental functions. • The increase in necessary functions leads to pressure for absolute and relative growth of government activities . WHAT FUNCTIONS ? • Provide Law and Order: The need to provide a stable framework for economic activity. • Greater economic growth or industrialization leads to greater labor specialization causing increased complexities (e.g., in the contracting process) and interdependencies in economic and social life. • Greater interdependencies foster the need for government resolution of conflicts and the need to maintain continually more specialized services ( e.g.., regulating derivative financial claims and mediate cultural conflicts as well). • Need for Government Participation in the Production of certain Goods and Services – produce public and quasi-public For example, – Goods requiring large fixed investment: infrastructure projects – Natural monopolies and externalities – Communications, education, and banking / payments industries – Goods with a degree of publicness pg2 Engel Curve High Income Elasticity Per capita for Public output of Goods public goods Low Income (Consumption Elasticity of Public Goods) Real per capita income (Income) PERCENT OF TOTAL OUTPUT PUBLIC SECTOR Remember the Wagner effect takes place over time PERIOD 2 33% PERIOD 1 10% PRIVATE 67% 90% SECTOR Post-Industrialization Subsistence Wagner’s Law Falling Relative Public Per Stage Sector Period of capita pg1 Industrialization output Falling pg2 Rising Relative of Relative Public Sector Third Wave public Public Second Wave Society goods Sector Society Society Resists Too First Wave Large A Public Sector: Society Cultural Preferences for Market Activity; Individual Freedom 3000 Per Capita Real 15000 Income Baumol’s Theory of Unbalanced Growth • Public sector expenditures will tend to grow faster than the rest of the economy. • All economic activity can be grouped into two categories – those that are technologically progressive and those that are not. • Output per worker is greater in one sector than the other, however, the wage tends to be the same. • Thus, unless labor markets are sealed off, cost in the less productive have to rise. • If market demand is inelastic or if there is a strong political demand for the goods in the less productive sector then labor will shift to this sector and the level of expenditures in this sector will rise. • To the extent that the public sector is the less productive sector, expenditures in the sector will rise relative to the private sector. • That is, if we assume: – a low price elasticity for government services – improvements in productivity as more likely in the private than public sector – Relatively uniform wage rates between the public and private sectors • Then, it would be reasonable to expect that cost would rise in the public sector relative to the private sector and that governmental expenditures would rise at a faster rate than the GDP. Peacock and Wiseman Approach to Growth of the Public Sector DISPLACEMENT, INSPECTION, AND CONCENTRATION EFFECTS The relative growth of the public sector is “steplike” rather than continuous. Public Sector New fiscal Revenues plateau and Expenditures as a % Increase due to social disturbance of GDP Time • DISPLACEMENT EFFECT: War and depression create a displacement effect by which previous (lower) tax and expenditure levels are replaced by new higher budgetary levels. New levels of tax tolerance ( deficit tolerance ) support a new fiscal plateau where tax burdens are higher. On the new plateau some old expenditures by government are eliminated and new ones are substituted for them. Some of the substitutes may have been produced by the private sector in the past. Perhaps R&D or retirement benefits. • INSPECTION EFFECT: War and other social disturbance force people and their government to seek solution to important problems which previously had been neglected or perhaps unnoticed. For example, the need for an interstate highway system or re-engineering of the hospital system. • CONCENTRATION EFFECT: This effect notes the tendency for central government economic activity to become an increasing proportion of total public sector economic activity when a society is experiencing economic growth. Clark’s Approach to the Growth of the Public Sector CRITICAL LIMITS HYPOTHESIS The critical limits of public economic activity is set by the rate of inflation. The critical limit hypothesis as originally expressed is that inflation necessarily occurs when the government sector, as measured in terms of taxes and other receipts, exceeds 25 percent of aggregate economic activity. BASIS OF THE HYPOTHESIS • When taxes collected by the government reach the critical limit of 25 percent, incentives are harmed and people become less productive; thus aggregate supply is reduced. • People become less resistant to various inflationary means of financing government; thus aggregate demand is increased. The diagram below illustrates the implications of this conclusion. Price Level AS1 P2 P1 AD1 Quantity 0 Q1 The New Agenda I remember Post-Industrial Age 1980, don’t and Controlling the ? you? Size of Government: Some Observations CONTROLLING THE SIZE OF GOVERNMENT • CHANGE BUREAUCRATIC INCENTIVES – Base salaries of bureaucrats on their success in reducing their agency’s budget. – privatize governmental functions. • CHANGE THE BUDGET PROCESS – Congressional Budget and Impoundment Control Act of 1974. • Created Congressional Budget Office ( CBO ) • Formed special budget committee in each House. – GRH established a set of steadily declining deficit targets. If Congress failed to reduce the deficit to the target level before the start of the fiscal year, the excess deficit was automatically removed by cutting budget outlays-- basically across- the- board. The process of making automatic cuts was referred to as a sequester. However, under GRH when the deficit became too large to handle with accounting tricks, legislators simply changed the GRH targets. • INSTITUTE CONSTITUTIONAL LIMITATIONS – Add a balanced budget amendment to the constitution. • LINE ITEM VETO ( Signed into law by President Clinton) • Passage of the Budget Enforcement Act of 1990 (BEA) • 1997 Balanced Budget Agreement- Summary Outline of Agreement • Balanced Budget Reconciliation Act of 1997 Government Bureaucracies • As Mueller notes government bureaucracies are an independent force explaining the growth of the government sector. (Peacock-Wiseman Approach) • Empirical studies in this area have usually reasoned as follows. • The larger the bureaucracy, the more difficult it is for outsiders to monitor its activity, and the more the insiders there are who are working to increase the size of the bureaucracy. • Thus the growth of bureaucracy is likely to depend on its absolute size. • Studies have found that growth in the size of a bureaucracy's budget is expected to increase with the absolute size of the budget. • As Mueller indicates this result is broadly consistent with the pattern of growth of government expenditures observed in the U.S. over the past two centuries: slow but steady initial growth, gradually shifting into more rapid rates of growth. (Note: Mueller’s study summarized works up to the late 1980s.) • The idea that bureacracatic power increases the size of government presumes that the bureaucracy can deceive the legislature about the true costs of supplying different levels of output. • The fiscal illusion presumes that the legislature can deceive the citizens about the true size of government. • The fiscal illusion explanation for the growth in the size of government assumes that citizens measure the size of government by the size of their tax bills. • To increase the size of government beyond what people want, the tax burden has to be disguised so as to create an illusion that the government is smaller than it actually is and so the government can grow beyond the level citizens prefer. • The fiscal illusion has been empirically tested in various forms. 1 A tax structure is more difficult to judge the more complex the tax structure. 2 Renters are less able to judge their share of property taxes in the community than are homeowners. 3 The implicit future tax burdens inherent in the issuance of debt are more difficult to evaluate than equivalent current taxes. 4 Built-in tax increases because of the progressivity of the tax structure are less clearly perceived than are legislated changes. • Mueller, quoting a review of the empirical literature by Oates, concludes that “ the fiscal illusion provides plausible hypotheses, none of which have very compelling empirical support. EXPANSION OF SUFFRAGE: REDISTRIBUTION FACTOR • Meltzer and Richard suggest that one explanation for the secular growth in government in the United States and around the world over the past two centuries has been expansion of suffrage. • Those added to the voting rolls are more often than not those with incomes and productivity below the median. • Thus the median voter changes to someone more prone toward the redistribution of income by the government. • Meltzer and Richard gave increased inequality of income as well as increased suffrage • as the primary causes for the growth of government and presented some empirical support for their hypothesis. • Peltzman has also presented an explanation for the growth of government that depends on the shape of the distribution of income. • Peltzman did not however makes use of the median voter theorem in developing the argument. • Rather, he envisioned a form of representative government in which candidates competed for • votes by promising to redistribute income for those voters or groups of voters that agreed to join the candidates coalition of supporters. • Peltzman reasoned that the more equal the distribution of income among the potential supporters of the candidate, the more bargaining strength they would have. • Thus the candidate must promise a greater amount of redistribution the more equal is the initial distribution of income among voters. • Peltzman pointed to the spread of education as an important factor increasing the equality of pretransfer incomes and thus leading to a growth in the size of government. • What about redistribution ? • Mueller concludes that ― it is difficult to suppress the impression that an important component of the explanation for the growth of government lies in government’s redistribution activities, so substantial has been the growth in the transfer component of government budgets.‖ • ―However, to explain the growth of government in simple redistributional terms is inadequate.‖ INTEREST GROUPS • Mueller and Murrell presented empirical evidence that interest groups effect the size of government. • They described a political process in which parties supply interest groups with favors in exchange for the interest groups support. • When these favors take the form of goods targeted to specific interest groups, but with spillovers for other groups, government grows larger. • The number of organized interest groups in a country was shown to have a positive and significant effect on the relative size of the government sector in a cross sectional sample of OECD countries. Famous Old Quote • “But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. • Practical people, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economists. • Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. • I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. • Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. • But, soon or late, it is ideas, not vested interest, which are dangerous for good or evil.” • John Maynard Keynes, The General Theory of Employment, Interest, and Money, 1936, pp.383-384.
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