Lets be clear about something. We did not just live through a 30 year period of laissez faire that has come to an end. Government got neither smaller in scale or scope. At best the growth of government slowed, but it was never reversed.

Fiscal policy has been irresponsible for at least two generations, monetary policy has been loose in an effort to minimize the short term pain of adjustment. WE ARE CURRENTLY SUFFERING THE CONSEQUENCES OF THE VERY SAME POLICIES WE ARE NOW ADVOCATING TO FIX OUR PROBLEMS. We didn't have an era of complete deregulation and free trade, we had partial deregulations (and attenuated property rights) and managed trade agreements. We have international agencies that promote administrative command/managed capitalism overseas and call it "free market", we have politicians at home that engage in discretionary spending unheard of before who claim to be "fiscal conservatives".

It is also the case that this is not a new argument by me or anyone else. Lawrence Kontlikoff has been sounding a warning bell on the fiscal side for my entire professional life. And thinkers such as Axel Leijonhufvud have been discussing the dire costs of inflation in terms of coordination failures since the 1960s. And it is not like the names Buchanan and Hayek are unknown to those in the economics profession since both won the Nobel Prize, and Buchanan explained in detail the consequences of the breakdown in the old time fiscal religion and the Legacy of Lord Keynes, and Hayek explained clearly the consequences of engaging in the Keynesian dance of holding the "tiger by its tail" with respect to inflationary monetary policy.

So how can it be that we get articles such as these --- Jeffrey Sachs making the case for Big Government in Time, and Yves Smith arguing that current crisis undermines the idea of economics as a science. The "analysis" of Sachs and Smith needs to be read, but also understood to be full of conceptual confusion and historical inaccuracy.

The sad reality is that since the 1940s, economic policy world-wide has been dominated by Keynesian ideas. Research in economics has been dominated by Keynesianism even when it supposedly had thrown off those intellectual ideas. Keynesian ideas led to Keynesian models, which in turn led to the development of Keynesian data that was then used to test Keynesian models with the purpose of exploring the efficacy of Keynesian policies. All that oscilated was whether we should be "liberal" or "conservative", but everyone in power was fundamentally Keynesian. After the 1987 crash, for example, Reagan was asked whether this meant the rehabilitation of Keynesian economics, he responded by telling the audience that Mr. Keynes didn't even have a degree in economics. That was his rhetoric, but the diagnosis of why the 1987 crash was one of aggregate demand failure, and the policy response was attempts to stimulate consumption. "Buy, Buy, Buy" Reagan told his audience within in 2 minutes after telling us that Keynes didn't have a degree in economics.

The very same economic framework that was unable to see the looming problems of fiscal irresponsibility and loose monetary policy, also couldn't see the difficulties of state socialism in the former Soviet Bloc and the problems of 3rd world poverty. But each of these economic policy failures are at root problems with statism, not problems with the market economy. Keynesianism is the prefered economic policy of statism (as Keynes himself pointed out when he argued that the policy experiments in Germany and Russia might be the more natural home for his ideas).

The "Washington Consensus" and the so-called era of laissez faire following the Reagan revolution are in fact, lets face it, much closer in reality to the policy prescription of John Kenneth Galbraith than Milton Friedman. Friedman's rhetoric was employed to pursue Galbraithian policies. Galbraith argued for Keynesian activism via a weird mix of Marx, Veblen and Keynes --- but the basic prespection was on of government involvement both as referee and active player in the economic game. This is what we have had since the 1940s. Friedman argued against these positions via the logic of economic theory and the empirical examination of the consequences of government activism. Friedman won the intellectual debate among his peers, but lost the war of policy implementation in Washington and throughout the world. He pointed this out himself --- classical liberal he said have won the battle of rhetoric, but lost the battle of implementation. But Friedman's argument hasn't impacted the conceptual confusion and historical inaccuracy that blames our current crisis on the era of small government and laissez faire policy. So now we read about how Friedmanesque ideas (let alone Hayekian) are refuted by the current situation. Even President-elec Obama referred the other day to the "failed ideology" of the past, and the need for a new era of regulation of the economy fit for the 21st century.

Ironcially, one of the major sources for the confusion is found in Friedman's framework himself. When it came to macroeconomics, Friedman was fundamentally a Keynesian. What was needed was a complete rejection of the entire methodological and analytical framework of Keynesianism. Friedman was the first "conservative" Keyensian arguing against the "liberal" Keynesianism of the time. So his intellectual victory did not translate into a fundamental change in the structure of public policy either in the US or abroad.

Free market public policy had absolutely NOTHING to do with our current financial crisis, just as the current policy response has absoultely NOTHING to do with free market public policy. In fact, we are responding with public policies that are exactly what caused the problems in the first place. Give me Hayek and Buchanan, and perhaps if we followed their methodological, analytical, and policy prescription the perhaps economics could be revitalized as a scientific discipline and our economy could recover from the current malaise which statism has entrapped us.