Murray N. Rothbard, “Keynesianism Redux” (1995)

This short polemical essay, presented as a single chapter/commentary from Making Economic Sense, argues that Keynesianism survived not because it retained explanatory power, but because it served political and bureaucratic interests. Rothbard’s central irony is that the Reagan years, publicly associated with free-market rhetoric, helped restore and entrench the very macroeconomic doctrine that the stagflation of the 1970s had supposedly discredited.

One of the ironic but unfortunately enduring legacies of eight years of Reaganism has been the resurrection of Keynesianism.

Rothbard first reduces Keynesianism to what he sees as its operational core: a theory of aggregate spending managed by the state. In his account, Keynesian economics divides economic disorder into too little spending, which causes recession, and too much spending, which causes inflation. Private investment is treated as unstable because it depends on “animal spirits,” while government is imagined as the rational stabilizer capable of correcting private volatility.

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending.

The essay’s conceptual move is to strip Keynesianism of technical vocabulary and present it as a political theory of discretionary state control. Rothbard’s “Big Daddy government” phrasing is deliberately derisive: Keynesianism, in his view, grants policymakers both epistemic authority and moral permission to override private economic decisions.

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also—if guided by Keynesian economists—scientific and rational, able to act in the interests of all: Big Daddy government.

He then traces what he regards as an internal degeneration of Keynesian fiscal doctrine. Keynesians originally defended deficits as temporary and compatible with a balanced budget over the business cycle. But, Rothbard argues, this promise disappeared once deficits became permanent. The “cyclically balanced budget” gave way to a looser norm: large deficits in recessions, smaller deficits in booms.

Evidently, the "cyclically balanced budget" was the first Keynesian concept to be poured down the Orwellian memory hole, as it became clear that there weren't going to be any surpluses, just smaller or larger deficits.

The decisive theoretical crisis, for Rothbard, is stagflation. If Keynesian policy says to stimulate during recession and restrain during inflation, then simultaneous recession and inflation expose a contradiction at the heart of the model. The inflationary recessions of the 1970s and early 1980s are thus not merely policy failures but, in Rothbard’s telling, empirical refutations of the Keynesian framework.

The stark fact of inflationary recession violates the fundamental assumptions of Keynesian theory and the crucial program of Keynesian policy.

From there the essay shifts from economics to institutional sociology. Rothbard argues that Keynesianism persists as an “economics of power”: less a coherent theory than a professional and governmental apparatus committed to maintaining its own influence. Its remaining practical tendencies are deficits, fiat money, inflationary policy, higher spending, and higher taxes. The Reagan administration, he claims, did not defeat these tendencies but institutionalized them under conservative cover.

The final section places Keynesianism’s return within the political economy of late-Reagan and early-Bush Washington. Monetarism, its main respectable academic rival, is portrayed as having collapsed under failed predictions, leaving Keynesians to regain dominance. Rothbard’s relevance lies in this fusion of doctrinal critique and political accusation: he presents macroeconomic “management” as inseparable from the growth of state power, and Reaganism as a case study in free-market language masking statist practice.

The essay closes by insisting that the revival of Keynesianism was not accidental but symptomatic. A government that spoke of reducing government while expanding it could also revive a discredited interventionist economics in the name of prosperity and enterprise.