One of the most important though little known books in Economics is Democracy in Deficit, co-authored by James Buchanan and Richard Wagner. The significance of the book becomes more apparent by the day. The prognostications made thirty-five years ago are playing out, probably in excess of what they or anyone else could have imagined.
Buchanan and Wagner are both of the Public Choice School of Economics. Buchanan, a Nobel laureate, is generally considered the founder of the school. This school is in opposition to the aggregate modeling and mathematical modeling used in Keynesian and Monetarist economics. It focuses on the individual as the key to understanding economic events.
In the case of politics, Public Choice Theory focuses on the motivations and incentives of individual politicians. In this sense, it returns economics to its original roots where it was first known as Political Economy. (One of the more prestigious journals in the field of economics is The Journal of Political Economy, still published at the University of Chicago.)
As described by Steven Horowitz:
Democracy in Deficit is essential reading for understanding how we got into our current fiscal mess. Its lesson — that economic theorists cannot afford to ignore political incentives — is as timeless as its concern about the debt’s burden on our children and grandchildren.
Buchanan and Wagner predicted the outcome of Keynesian economics effect on the political class. Horowitz summarized the key disruption imposed by the acceptance of Keynesian economics:
… the legacy of Keynes, whether intended or not, has been to disrupt the old tacitly accepted “fiscal constitution,” by which politicians treated the federal budget largely like a household budget. Debt was justified for only two basic reasons: war or similar emergencies and long-term capital expenditures that required large upfront costs. Such debts were expected to be repaid as soon as possible because long-term indebtedness was considered both economically imprudent and immoral.
Keynesian economics provided the rationale to use the government budget as an economic tool. This understanding, coupled with the vote-buying of politicians, ensured that we would reach the point that we now find ourselves.
If you don’t want to read the book, I highly recommend a reading of Horowitz’s one-page summary.