Public Principles of Public Debt: A Defense and Restatement

“Many a citizen will never be able to understand fully the problem of the public debt, for it is too complicated for the average layman. On these technical matters he will have to accept the word of the experts.”*6 This statement by Professor Seymour Harris has two noteworthy implications. It is, first of all, a rather severe indictment of the ability of economists to fulfill their educational task. Secondly, it suggests that the experts themselves are agreed on the “truth.”

On the face of it, the problem of public debt does not seem complicated. Indeed it seems quite simple when compared with the problem of the circular flow of goods and services in a money economy. Yet it is in regard to the latter problem that great insight has been imputed to businessmen and lay leaders in times past. Critical historians of economic thought may legitimately question the depth of genuine understanding about the unemployment problem contained in the Mercantilists’ or Protectionists’ “fear of goods” or even in the Reverend Malthus’ predictions of a general glut. But economists, especially during the last quarter century, appear to accept almost universally that common everyday opinion on the public debt is fundamentally wrong. Any challenge to this relative unanimity stands in danger of being rejected at the outset. Surely, we are inclined to say, the vulgar ideas about the public debt are grounded in almost pure fallacy, fallacy which is so simple and obvious that we expose it in the early chapters of our elementary textbooks. We use the common lay reasoning on public debt as a particularly good example of the fallacy of composition before we lead the sophomore on to the more stimulating endeavors of serious study. Everyday man-on-the-street opinion on this subject continues to remain less sophisticated than that achieved by the first-week sophomore. The first steppingstone toward economic literacy has not been passed until the whole set of fallacies in the commonly accepted ideas on the public debt is thoroughly exposed, understood, and replaced by the “true” relations.

Businessmen and politicians have continued to be skeptical. They have little faith in the economists, and even if such faith were normally present, particularly strong intuitions on this question of public debt might make them reluctant to “accept the word of the experts.” Economist experts have not been granted much additional responsibility in fiscal matters, and the vulgar theory of public debt has not been wholly discarded in public discussion. The fallacies must not be quite so obvious as they are sometimes made to appear.

The genuine critic should always examine both sides of the coin. Even at this stage could it possibly be that the economists have been wrong while vulgar or common opinion has been substantially correct? This question, so seldom asked by capable critics, is always worthy of consideration.

The test of truth in public debt theory is the same as anywhere else, the consensus of informed and intellectually honest men. In spite of the dominance of one particular conception, however, truth has not yet reached the point where it is entirely uninteresting. A re-examination of public debt theory suggests to me that economists have been in error in much of their recent work. This book advances an alternative theory or conception as “true.” But the current consensus being in opposition, the burden of proof must rest with me rather than with the new orthodoxy. My efforts to supplant the accepted doctrine with a different one must do more than criticize; they must be successful in converting.

To accomplish such a reversal of ideas is the primary, in fact the only, purpose of this short book. I shall try to show that the vulgar conception of the public debt is the only one which is fundamentally correct and valid generally. The theory of the public debt which is now accepted by most economists is, at base, fallacious.