Peter Boettke's Living Economics Published

Peter Boettke is a University Professor of Economics and Philosophy at George Mason University and director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center.

Living Economics: Yesterday, Today, and Tomorrow, by Peter J. Boettke HERE

This looks like a most important text for all those interested in Adam Smith’s (and F. A. Hayek’s) distinct contribution to political economy.  Peter published an extract from his new book on 2 June: “Living Economics Officially Released” HERE  

I am so impressed with the extract that I have re-posted a slightly edited version on Lost Legacy as well as ordered Peter’s book (hopefully not exposed to copyright reactions).

I agree with every sentiment Peter expresses, which presents the main thrust of Lost Legacy far more eloquently than I have attempted over the years.   Peter is still an active teacher – as visits to Coordination Problem blog demonstrate (bookmark it now for regular doses of Peter Boettke’s sharp thinking).  Note how he puts mainstream economics in its place and presents Adam Smith’s thinking sharply and without the nonsense of mainstream economics on the mythical “invisible hand”.

“Living Economics Officially Released” by Peter Boettke:

“… I use the term “mainline economics” to describe a set of propositions that were first significantly advanced in economics by Thomas Aquinas in the thirteenth century and then the Late Scholastics of the fifteenth and sixteenth centuries at the University of Salamanca in Spain. . . . These insights were further developed in economics from the Classical School of Economics (both in its Scottish Enlightenment version of Adam Smith and the French Liberal tradition of Jean-Baptiste Say and Frédéric Bastiat), to the early Neoclassical School (especially the Austrian version of Carl Menger, Ludwig von Mises, and F. A. Hayek), and finally with the contemporary development of New Institutional Economics (as reflected in the property rights economics of Armen Alchian and Harold Demsetz; the new economic history of Douglass North; the law and economics of Ronald Coase; the Public Choice economics of James Buchanan and Gordon Tullock; the economics of governance associated with Oliver Williamson and Elinor Ostrom; and the market process economics of Israel Kirzner). The core idea in this approach to economics 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 into 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 “invisible hand” solution does not emerge because the mainline economist postulates a perfectly rational individual interacting with other perfectly rational individuals within a perfectly structured market, as many critics suppose. Such idealizations would be as alien to Adam Smith as they would be to F. A. Hayek. Instead, for those who “sit in the seat of Adam Smith,” man is a very imperfect being operating within a very imperfect world. Sound economic reasoning, by focusing on exchange, and the institutions within which exchange takes place, explains how complex social order emerges through the aid of prices and the entrepreneurial market process.

The mainline of economics, in my narrative, is to be contrasted with the “mainstream” of economic thought. 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. …

Social Cooperation

Economics teaches us many things, but to me the most important is how social cooperation under the division of labor is realized. This is what determines whether nations are rich or poor; whether the individuals in these nations live in poverty, ignorance, and squalor or live healthy and wealthy lives full of possibilities. 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.

The mainline of economic teaching from Adam Smith to Hayek taught not only what economics can tell us but more importantly what it cannot tell us. There are real limits to economic analysis and efforts at economic control. The main reasons economics got off track in the twentieth century are . . . a failure to recognize those limits and a confusion of the policy sciences with the engineering sciences. Based on the knowledge of the physical sciences, the engineering sciences created technological solutions unimaginable to previous generations. My grandparents entered this world when most travel was conducted by horse and buggy; they departed this earth in a world which had not only experienced transatlantic flight but had placed a man on the moon. Since their passing, the Internet has developed and transformed not only the way we communicate but also the way we shop, the way we learn, and the way we form social bonds. These amazing technological advances tend to reinforce the idea that through science men can conquer any and all problems they face.

But even in this case of technological innovation, we tend to forget something vital to the story of progress. Technological knowledge was transformed into useful knowledge through the ordinary business of commerce. Without the guiding role of property, prices, and profit/loss accounting, the gains from innovation would not be realized. The reason for this is simple: Without the guiding signals and incentives of the price system, economic actors cannot sort out from the array of technologically feasible projects those that are most economical to pursue. And absent that economic knowledge, technological ventures will be plagued by a systemic waste of resources.

Description, Not Design

Commercial life did not emerge through design but instead out of the human proclivity to truck, barter, and exchange with one another. Specialization in production and exchange existed well before economists came up with those terms to help explain that behavior. Economists, in other words, did not invent the economy but rather came to their study with the economy already operating and were tasked with the role of providing philosophic understanding of already existing practice. This is radically different from the civil engineer who designs the bridge to ease travel between Manhattan and Brooklyn. The demand by politicians and the public that economics be more like engineering is perhaps the greatest corrupting force on the science.

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.

Two Propensities

I often tell students that humankind has demonstrated two natural propensities—to truck, barter, and exchange (as Adam Smith taught); and to rape, pillage, and plunder (as Thomas Hobbes taught us)—and which propensity is pursued is a function of the institutional framework within which individuals find themselves living and interacting. The life experience can be a virtuous cycle of wealth creation and healthier and wealthier lives, or it can be a nasty and brutish hell on earth. So while economics cannot give us exact point predictions, it can, as a science, inform us of tendencies and directions of change as well as the wealth-creating or wealth-destroying capacity of the political economic system.

… the political economy of Adam Smith to F. A. Hayek takes humans as they are and seeks to find the institutional framework that both constrains bad people so they do the least harm when in positions of power and uses the ordinary motivations of humans and their limited cognitive capabilities to realize social cooperation under the division of labor. The mainline economists found that in the private-property market economy and a constitutionally limited government . . . individuals’ unique knowledge of time and place could be marshaled to realize a peaceful and prosperous social order.

Hubris

… Hubris can come in two forms: a hubris that one is of a higher moral character, and a hubris that one is of a higher intellectual caliber than one’s fellow citizens. It is this hubris that Hayek called The Fatal Conceit. The intellectual culture in which Adam Smith wrote was sympathetic to such a critique of hubris. . . . The “man of system”—as Smith termed this hubris in The Theory of Moral Sentiments—was the object of ridicule. Only he would be “wise in his own conceit” or in possession of the “folly and presumption” to believe he should lord over other men in their affairs of commerce.

… Economics since [Ketnes] has been derailed educationally and as a tool for public policy. It became the handmaiden of the man of system and not the reason to doubt the wisdom of that conceit of men. We have The Economics of Control and not the Common Sense of Political Economy.

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. … It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.”

Comment

Pure Dead Brilliant, as we say in Scotland.