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TGIF: Loving Economics


“My love affair with economics began in the fall of 1979.”

With those words, Peter Boettke begins his valentine to the economics discipline, that is, his latest book: Living Economics: Yesterday, Today, and Tomorrow (Independent Institute and Universidad Francisco Marroquin, 2012). Boettke, besides being a University Professor of Economics and Philosophy at George Mason University, the BB&T Professor for the Study of Capitalism, and vice-president for research and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at GMU’s Mercatus Center, is the indefatigable intellectual entrepreneur and promoter of Austrian, or subjectivist market-process, economics.

He continues: “The summer prior to that I had experienced the long lines for gasoline, and I was confused and frustrated by the experience for a variety of reasons. Economics erased my confusion and targeted my frustration on the cause of the shortages. I was hooked.”

In an important sense, this book is autobiographical, the story of one man’s odyssey through the world of economics and his efforts to “get the teaching and doing of economics back on track.” But it couldn’t help but also be a useful introduction to the economic way of thinking. Not that it is a beginner’s book — it’s not. But an interested lay reader who realizes that economics can be about the world and hence is something to be taken seriously will learn a great deal. One need not have a degree in economics (I don’t) to profit from Living Economics.

This book is a useful discussion of why economics is valuable and how its potential has been squandered by several generations of distracted practitioners. If I had been asked to design the cover of this book, I would have depicted the old joke about the drunk who looks for his keys under the street light, not because that’s where he lost them, but because that’s where the light is. That joke perfectly fits the story Boettke tells about how economics ran off the rails.

Economics began as a verbal and logical description of the social forces that arise out of reasonable but fallible human beings engaging in exchanges for mutual benefit. However, the main practitioners in the 20th century became charmed by the method of physics and mathematics for fear that otherwise they would not be taken seriously as scientists. They thus jettisoned virtually everything that was not amenable to their formalism.

The first things to go were uncertainty, error, and competitive entrepreneurship, which led to a serious problem for the discipline, even if its practitioners did not see it: Of what relevance are elegant mathematical descriptions of general equilibrium, with its assumptions of perfect knowledge and perfect coordination, if you have no theory of the forces that tend to equilibrate markets? Who cares about the “there” if you’ve got no map to get there? Even when the theory was provided (by Israel Kirzner building on Adam Smith, Carl Menger, Ludwig von Mises, and F.A. Hayek), it was unappreciated because it was not and could not be worked into the equations. (Of course, because of constant changes in preferences, knowledge, resources, and technologies, there is no “there” there.)

Boettke has a helpful way, borrowed from one of his many great teachers (Kenneth Boulding), to convey what he’s getting at. He distinguishes “mainline” from “mainstream” economics. Mainline economics embodies insights first achieved in the Middle Ages, then elaborated by Scottish and French thinkers of the classical school, the Austrians beginning with Menger, and the school known as new institutional economics.

“The core idea in this approach to economics,” Boettke writes, “is that there are two fundamental observations of commercial society: (1) individual pursuit of … self-interest, and (2) complex social order that aligns individual interests with the general interest.”

In the mainline of economics, the “invisible hand postulate” reconciles self-interest with the general interest not by collapsing one to the other or by assuming super-human cognitive capabilities among the actors, but through the reconciliation process of exchange within specific institutional environments. It is the “higgling and bargaining” within the market economy, as Adam Smith argued, that produces social order.

The mainline also incorporates the notion, implicitly or explicitly, of entrepreneurial action in an open-ended world. People don’t make decisions by robotically choosing among known ends and means, in light of known constraints, in order to maximize something called utility. Decision-making is not applied mathematics. On the contrary, partly ignorant and fallible people act in an uncertain world where unanticipated change poses unexpected choices among unforeseen alternatives subject to the acuteness or dullness of their alertness to opportunities. The individual, whose action is by nature creative and entrepreneurial, makes decisions on the basis not of “data” but of subjective considerations such as speculations about what the future would be under various scenarios. This sort of action cannot be modeled in the precise ways that those suffering “physics envy” would wish.

More or less self-interested human agents acting under such circumstances hardly hold out the promise of social order. But theory and history counterintuitively say otherwise. The action that takes place is exchange for mutual benefit guided by prices, mostly among individuals who don’t know each other. “The market economy,” Boettke reminds us, “is about cooperation in anonymity, cooperation with strangers.”

And somehow it works. “Economics teaches us many things,” Boettke writes, “but to me the most important is how social cooperation under the division of labor is realized.” Or, as the French laissez-faire radicals put it in the early 19th century, without central direction “Paris gets fed.” There is indeed an undesigned order, one that is, in Boettke’s words, “intention driven but not intention limited.”

But to get the order and harmony that mainline economics promises, the institutions have to be appropriate: property rights, market prices, and the discipline of profit and loss.

If the institutions promote social cooperation under the division of labor, then the gains from trade and innovation will be realized. But if the institutions, in effect, hinder social cooperation under the division of labor, then life will devolve into a struggle for daily existence. Economics, in other words, gives us the key intellectual framework for understanding how we can live better together.

In contrast to mainline economics stands mainstream economics. Boettke writes,

Mainline is defined by a set of positive propositions about social order that were held in common from Adam Smith onward, but mainstream economics is a sociological concept related to what is currently fashionable among the scientific elite of the profession. Often the mainline and the mainstream dovetail, but at other times they deviate from one another.

It is here that we see the preoccupation with general equilibrium (and mathematics), whether it be the neoclassical (including Chicagoite) assumption that the economy is already in equilibrium or the Keynesian and socialist assumption that because of market failure, the real world does not live up to the blackboard model and thus the government must step in to remake reality accordingly. (Why we would want to simulate that static and nonentrepreneurial world of homogeneous products and price-takers remains a deep mystery.)

Throughout Boettke’s book we find good advice for the student of society: Be humble. Social processes are too complex to justify hubris and social engineering. He fruitfully contrasts two kinds of economists — the student of society and the savior. Beware the latter. “The mainline of economic teaching from Adam Smith to F.A. Hayek taught not only what economics can tell us but more importantly what it cannot tell us,” Boettke writes. “There are real limits to economic analysis and efforts at economic control.” Hence Hayek’s admonition, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Yet Boettke quickly adds,

But if we accept the judgment that economics cannot play the role of social engineering, we need not be content with economics being purely philosophical. Economics and political economy are capable of generating significant empirical information. The discipline can inform us about how alternative institutional frameworks will impact our ability to realize the gains from trade and innovation. If the institutional framework impedes trade and innovation, then those gains will go unrealized; if the institutional framework encourages those aspects of an economy, then those gains will be realized.

Hence the need for private property and strict limits on power: “Economists are tasked with speaking truth to power, not catering to power. The discipline, from Smith to Hayek, has taught us about the need to limit power to curb the predatory capabilities of mankind.” Importantly, he notes, “Governance without government can, and does, happen.”

Of course, Boettke realizes, many practitioners will not want to hear such talk:

The reorientation we are calling for, however, is one that would reduce the prestige and power of the economists in modern society. Entrepreneurial action is usually not set in motion when the reward for the innovation is a reduction in relative status. On the other hand, we have argued that if economists give up their privileged position in society, they might regain their “soul.”

That’s the broad outline of Boettke’s thesis. He fills it in with fascinating explorations of the thought of people who have deeply influenced him, including Smith, Mises, Hayek, Kirzner, Boulding, James M. Buchanan, Gordon Tullock, Hans Sennholz, Murray Rothbard, Warren Samuels, Douglass North, Vincent and Elinor Ostrom, Don Lavoie, and Peter Berger. Boettke has the admirable capacity to learn from a diverse group of thinkers, and his book allows the rest of us to benefit from his broad contacts, as well as his discussions of mainstream economists like Keynes, Samuelson, and Stiglitz. Along the way, readers will become acquainted (or better acquainted) with such issues as the nature of human action, the socialist-calculation debate, market socialism, economic development, Public Choice, rules versus outcomes, and “the limits of expertise.”

While it is clear that Mises, Hayek, Kirzner, and Rothbard are four of his biggest influences, Boettke can write with complete sincerity that “once we realize that it is not a label, but an approach you take and the positions you hold, then we have to admit that good economics and political economy are not the exclusive domain of those who are willing to label their work as Austrian.”

I heartily recommend this book.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.