Schumpeter's Opinion of Budget Deficits

I let the following quote speak for itself, and hope to return soon to draw out more substantive points relating to policy during a recession. Schumpeter was writing in 1941.

Note in passing, Barry Eichengreen’s remark that Schumpeter “was a skeptic of all things Keynesian, given his self-conscious competition with Keynes for the mantle of greatest economist of the 20th century”.

The readiness to let a budget run into a deficit in a depression by keeping up expenditures in the face of shrinking revenues is a policy which will alleviate much suffering and keep many things going which would otherwise crash. This is so and cannot be denied, and action along these lines has been taken consciously or unconsciously for more than a hundred years…

The interesting thing is not so much the degree to which remedial effects can be attained in that way; the interesting fact is the spirit in which the policy was entered into… and the way in which it was made permanent. I shall put aside the question, for want of time, whether there is something in the ruthless principle that the budget ought to be balanced under any circumstances. Action on that principle makes things worse in a depression, but who knows whether the patient is not healthier when he gets along without it than with it…

I want to discuss the implications of the fact that the policy has come to stay… Interests have been brought up, people who are profiting from it and living on it, which will never let it go. I should like to see the political hero who can break that phalanx...

This [deficit] spending is so administered as to be incapable of effecting a capitalist recovery. Combined with certain tax and wage policies it will keep up the system, but it will never allow those morals to grow which will make the system run again. So the same policy which keeps up permanent spending at the same time sees to it that that the permanent spending will be permanently necessary unless people are prepared to put up with a serious relapse. What was no doubt originally meant to be a temporary measure has become a lever in the process of transforming society. In such a situation in which the state will always control the most important part of the total expenditure in the nation, this state will not only be master of the monetary quantities, it will be master of the economic process in general...

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Anyone familiar with Schumpeter’s writing knows that when the state becomes “master of the economic process in general” he means socialism. Schumpeter predicted capitalism would eventually morph into socialism not only or necessarily because of innate intellectual hostility toward capitalism but because market innovation (the perennial gale of creative destruction) becomes “automated” and reduced to a “routine”. He viewed with suspicion the administration of monetary quantities, the "morphine" of deficits, and pump priming expenditure in the light of that self-destructive trend in capitalism which is easily accentuated during recessions.


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