From Smith, Mises, Buchanan and Hayek to the Study of PPE || Part I

Peter Boettke via YouTube

On the importance of mainstream vs. mainline distinction in understanding economics, the power of ideas and education focusing on the link between philosophy, politics and economics, and the new master’s PPE program in Prague with professor Peter Boettke talked Josef Šíma, president of CEVRO Institute, Prague.

Professor Boettke, when talking about the story of development of economic knowledge, you often distinguish between economic mainstream and economic mainline. What is the point in making this distinction?

Well, there are actually a few motivations that led me to emphasize this distinction between mainline and mainstream. First, as a fresh PhD and at the beginning of my career I often heard “But, the position you hold isn’t ‘mainstream’!” This always seemed somewhat off. I mean my professors included a Nobel Prize winner (Buchanan), a Distinguished Fellow of the AEA (Tullock), and the 2nd John Bates Clark Medal winner (Boulding).

In short, I had studied directly with what could be termed academic royalty, and my ideas merely reflected aspects of their thought – and my points of emphasis derived from another Nobel Prize winner (Hayek) and another Distinguished Fellow of the AEA (Mises). And, at the time I was teaching at New York University and was named a National Fellow at Stanford’s Hoover Institution on War, Revolution and Peace. So did I miss the memo or something?!

Yet, in another way the criticism was obviously correct. The ideas I was working with were decidedly out of step – methodologically, analytically, and ideologically. Yet, if you did a time-travel thought experiment and went to 1800 or 1900 and asked people what they thought an economist would believe, the answer I think would sound closer to someone who help my beliefs than what many a modern economists believes. So that thought experiment was always on my mind from the 1980s onward – and was only reinforced by my understanding of the breakdown of the Keynesian consensus in the 1970s, and the collapse of communism in the 1980s. Wouldn’t the 1990s be the beginning of a new era of acceptance for the ideas of Mises and Hayek as in the middle of the 20th century they were the most visible voices against the Keynesian revolution and the promise of socialism.

Mises and Hayek have important and subtle differences in their scientific systems, but they were united for all practical purposes in their critique of socialism, Keynesianism, and the methodological and analytical confusions in the development of modern economic thought which clouded professional understanding of the fundamental flaws with these approaches to economic planning and economic management. Yet my judgment about the 1990s proved to be too optimistic, and that led me to wonder further as to why and I concluded the ultimately this is a methodological and analytical issue that must be addressed head on. So while I am primarily an applied political economists with a specialty in comparative systems and international development, I had to devote considerable research and teaching to history of economic thought and methodology and this is reflected in my publications in the 1990s and early 2000s.

Second, in the 2000s I made several trip to the Universidad Francisco Marroquin (UFM) in Guatemala. UFM is a very special place for numerous reasons, but one that I want to emphasis here is that it is founded by, and run by, businessmen. Businessmen, unlike academics, are very focused on the little details and the campus at UFM reflects – every corner you turn there is symbolism of the core educational mission of the university. In the hallway as you enter the Economics Department there is a mural of all the great economists from the classics to the moderns.

When I was at UFM for a 2 week visit about a decade ago I became obsessed with this mural – who was on the wall, and more importantly who wasn’t on the wall, and what criteria could be used to justify that decision. There were figures from Adam Smith to Vernon Smith, but no Malthus, no Marx, no Keynes, no Samuelson. Keynes himself had said that he was building on the work of the rogues gallery of economists in writing The General Theory. But what actually was the central theme. I reasoned it was the way one understood and either accepted or rejected the “invisible hand” theorem in economic reasoning. And, thus I found the answer to my question.

Mainline economists from Adam Smith onward represent a set of substantive beliefs about how an economy operates and how to study that operation. Mainstream economics, on the other hand, was simply a sociological designation relating to whether your ideas are considered scientifically fashionable at a point in time or not. The substantive set of beliefs held by mainline economists centered around, I contended, the idea that analytically one derives the “invisible hand” theorem from the “rational choice” postulate via “institutional analysis”.

The mainline of economic thought from Adam Smith to Vernon Smith believes that there are “good reasons” to support the veracity of the claims about the self-regulation of the market economy with the proper institutional framework. Sometimes the “mainstream” of the science of economics dovetails with the acceptance of these claims, at other times it doesn’t. Thus, I argued that when the mainstream deviates significantly from the mainline, various schools of thought emerge within the mainline to try to bring back the mainstream to the core teachings of the mainline – and as an illustration I discuss not only the Austrian school, but also property rights economics, public choice economics, law-and-economics, and New Institutional Economics. The ideas found in all of these 20th century schools of thought can actually be found to a significant degree in the writings of 18th century Scottish Philosophers such as Hume and Smith, but also in 19th century French liberals such as Bastiat and Say.

One final reason I think this distinction is vitally important for young economist to understand. The dismissal that one’s opinion are not mainstream is a substitute for critical thinking. I want young people following in the footsteps of Mises and Hayek to never feel embarrassed by their intellectual allegiance to these ideas. They are the ones “sitting in the seat of Adam Smith”, and not the modern technocrats. They must be confident in their intellectual priors – not rigid and unwilling to either test or learn from criticism – but confident enough to engage in the rough and tumble of scientific discourse in economics. It is not an intellectual game for the faint of heart; science hurts when you are wrong. I want to next generation of Austrian economists in particular to not be too bashful to assert the fundamental correctness of their methodological and analytical positions, nor do I want them to follow the lead of the arrogant eccentric who eschews professional engagement with scientific peers. These ideas are too important to leave on the sidelines of professional discourse. The mainline must become the mainstream of thought within the scientific profession of economics. And those of us committed to the fundamental truth that the discipline has taught from Adam Smith to today must be scientifically responsible, effective communicators, and unrelenting in our efforts to persuade our professional peers and impact the next generation through our teaching.

This is the theme that runs throughout my book Living Economics, which was published by UFM and the Independent Institute in 2012, and is available in a Romanian as well as Spanish language editions.

People often consider economic knowledge to be utterly theoretical with no direct practical implication for current economic policies. Can we somehow see the importance of the mainstream/mainline distinction when debating economic crises (such as the recent financial crisis) or current regulatory policies?

I will be brief after having gone on so long in the first answer, but ultimately the answer is unequivocally YES. The relevance of the distinction comes up in the most general terms about as I said above the veracity with which one believes the claims about the self-regulating properties of the private property market economy. But it gets even more detailed in debates such as that between “spenders” versus “savers” in the recovery phase of an economic downturn, as well as to whether the “cause” of the downturn is some “aggregate demand failure” or due to “price distortions” brought on by the manipulation of money and credit and impediments to smooth market adjustments to the previous pattern of errors. It was Adam Smith who warned about the consequences of the “juggling tricks” that governments – ancient as well as modern – rely on and that juggling trick is deficit finance resulting in accumulated public debt which in turn is ‘paid off’ through debasement of the currency. If the juggling gets out of hand, Smith warned, it is an economy killer. This is what economists believed from Adam Smith to F. A. Hayek and James Buchanan. The advice was straight forward – STOP THE JUGGLING. Keynes changed that, and his advice – LEARN TO BE A MASTER JUGGLER.

You are a student of the late James Buchanan, a Nobel-Prize-recipient who is famous for opening the sphere of politics to economic analysis. His pioneering works are more than half-a-century old. Can decades old arguments about the nature of political processes be relevant today in the 21th century? Does Buchanan have anything meaningful to teach us today in the realm of fiscal and monetary policies or in the realm of microeconomic regulation?

Keep my mainline vs. mainstream distinction in mind. Now what is the greatest satire ever penned by an economist? Bastiat’s “Petition” is recognized as such across ideological spectrum – left, right, center. In his famous “Petition” the candlestick makers lobby government for special privileges against the unfair competition from the sun. Since this was a classic widely understood and appreciated, why did “rent-seeking” theory need to be rediscovered in the second half of the 20th century? The reason must be methodological and analytical clouds had descended on economics to distort the message. The mainstream had forgotten what the mainline taught. Thus, Buchanan and Gordon Tullock had to reignite the imagination of economists. And as Buchanan often told us in class – “It takes varied iterations to force alien concepts upon reluctant minds.” So just as I don’t think the relevance of Bastiat’s “Petition” is lost on the 21st century even though it was penned in the 19th, certainly the ideas of public choice analysis of democratic decision making are continually relevant.

Ultimately, Buchanan’s economics is simply about exchange and the institutions within which exchange takes place. We possess two natural human proclivities – Adam Smith identified our natural propensity to truck, barter, exchange; Thomas Hobbes identified our propensity to rape, pillage, plunder. Which human proclivity wins out is a function of the rules of the social game within which we interact. It is the emphasis on the rules of the game, and the strategies that we pursue given those rules of the game, that represents Buchanan’s main methodological and analytical contribution to our understanding of political economy. He wrote his first challenge to the prevailing orthodoxy in public finance in 1949, basically saying that you cannot practice public finance as if you were Adam Smith’s “man of systems”. Buchanan called that the “fiscal brain” theory of public finance, later this approach become completely embedded in our textbooks with the idea of a social welfare function which the benevolent social planner utilizes in making policy choices.

Public choice sought to intellectually blow up that exercise of benevolent social planning. While Mises and Hayek had basically left the assumption of benevolence alone, but challenged the assumption of omniscience; Buchanan and Tullock for argumentative purposes left the assumption of omniscience alone, but challenged the assumption of benevolence. Modern political economy must draw from both Mises-Hayek and Buchanan-Tullock and challenge both the assumptions of benevolence and omniscience in public policy deliberations. This is what is meant by the research program of robust political economy for the 21st century (see my Czech book, as well as Mark Pennington’s book on this subject).

Unfortunately, too much of public policy thinking still proceeds under the assumption of a benevolent and omniscient political decision maker, and thus our lived reality of the consequences of a drastic disjoint between the promise of policies and the reality of unintended and undesirable consequences combined with privileges being conferred on special interest groups. Capitalism thus becomes crony capitalism, and is subject appropriately to blistering criticism. But this is not free market capitalism, and the promissory politics of modern social democratic states is not the constitutionally limited government of classical liberalism. Those of us working in the Hayek and Buchanan tradition have a lot of work to do to clean up this intellectual mess.

To be continued…

Peter Boettke
Liberalni Institute