The Rehabilitation of Classical Debt Theory

Abstract

An encouraging feature of post-war developments in economic theory has been the gradual blurring of the distinction between Classical and Keynesian economics. In the discussion of problems in the theory of public finance, however, the distinction is still more marked than perhaps it should be, no doubt because of the strong temptation of writers on the subject to take up different political positions. Moreover, the contribution of continental writers on the theory of public expenditure and public debt in a full employment economy has largely been ignored in Anglo-Saxon countries, and in consequence the essentially Keynesian element in public finance, the theory of fiscal policy, has dominated recent textbooks.2 Professor James Buchanan has been one of the relatively few economists who have attempted to understand and to interpret continental developments in the subject, and the particular contribution under review is invaluable if for no other reason than for his discussion of French and Italian writing on public debt theory. We shall argue in this review that Professor Buchanan has fought for the rehabilitation of Classical debt theory on a rather narrow front and has in doing so by-passed discussion of some of the important issues in debt policy; but it may be said that he has stimulating things to say. Buchanan is concerned mainly with the question-who bears the burden of the public debt? Briefly stated, Keynesian public debt theorists have argued that future generations do not bear the burden of any debt contracted now, because receivers of interest payments and borrowers (i.e. tax-payers) are the same community. If anyone bears the burden it is those who currently sacrifice present command over resources by lending to the government. It follows that the analogy between public and private debt is a false one and, furthermore, that the position of the individual debtor is similar to that of a nation only in so far as it borrows from abroad. All these propositions are rejected by Buchanan. We shall first of all summarise and illustrate his argument and then offer some comments on it.