Orthodox Keynesian Fiscal Policy

In discussing fiscal policy, many macroeconomics professors speak of increasing output without regard to what specific component of output is actually increased. Often they put forward the [ridiculous] position that digging ditches and refilling them is just as effective as building roads, bridges, dams, office complexes, or sports stadiums. All of these expenditures, after all, shift the IS curve to the right.

The absurdity of such a claim makes it easy to refute. But we should ask whether Orthodox Keynesians actually subscribed to this idea before relishing in the defeat.

As it turns out, James Tobin (arguably the most prominent Orthodox Keynesian) states that a consensus between Orthodox Keynesians and Neoclassicals existed in the late 1950s and 60s:

I thought that there was also a normative consensus, in the sense that you shouldn't regard any output that you get from putting unemployed resources to work as free, because you have alternative ways of putting unemployed resources to work. The same classical opportunity cost considerations that determine allocation of resources in a classical equilibrium determine the allocation of resources as among different ways of returning to that supply-constrained regime. So I think in that sense there is no excuse for wasteful projects to increase employment, like digging holes in the ground, because you can arrange to employ people by investments or other projects that are socially beneficial (Snowdon and Vane 2005, p 151).

It seems as if many arguments refuting Orthodox Keynesian fiscal policy are actually in refutation of a position held by no one.

Of course, the model makes no differentiation between one type of output and another: a change in Q is a change in Q. But if the consensus Tobin spoke of actually existed, there seems to be little practical value in further specification of the model.

Rather than continue to knock over a straw man, then, I suggest one accepts that no one actually believes that one government expenditure is just as good as the other. Instead, ask another question: how is government to know what expenditure is best? And if Mises and Hayek taught us anything through the socialist calculation debate, it is that only decentralized actors working within a price system can approximate the best use of resources.