Thursday, January 30, 2014

Theories That Ignore The Real World of the Politics of States Are Not Helpful Operationally

Peter Boettke declares enthusiastically that he “loves thinking about economic theory” HERE 
“I am also struck by the beauty of an economic explanation of the self-regulating free market economy; how the really great economic thinkers are able to derive the invisible-hand theorem from the self-interest postulate via the institutional analysis of private property rights, relative price adjustments, and profit and loss accounting.  Hume, Smith, Ricardo, Say among the classics; Menger, Bohm-Bawerk, Wicksteed, Wicksell among the early neoclassicals; Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner, V. Smith, and Tullock among the moderns --- all reflect this beautiful logic of economic theory in the hands of a skilled practitioner.
The beautiful theory these thinkers helped to construct and work with, however, was part blackboard abstraction, and part hard nosed observation of the economic world.  They used the blackboard economic theory they worked out to understand the world they saw out the window.  The purpose of theory is to do history.  But you must use a theory --- there is no such thing as theory-less observation.  You either utilise articulated and defended theory or you use implicit and undefended theory, but theory is going to guide interpretation of the world of economic experience.
A lot of complaining is currently going on about blackboard economics -- some of it is justified, much of it is VERY confused and ideologically motivated.  In these discussions, however, it seems important to stress two things: (1) the world of economic life is so intellectually fascinating that taking on the role of the economic naturalist (to use Robert Frank's term) is an amazing adventure once you allow yourself to be open to the mystery of the mundane, and (2) you cannot accomplish (1) without being in possession of a solid understanding of basic economic theory.  Economic theory must be understood as a tool for social understanding, never as a tool for social control.  But in order to learn theory, you must study the blackboard, follow the logic of an argument, engage your critical reasoning skills, and adopt the attitude of a life-long learner.
I discuss this issue in my latest Economic Way of Thinking column for FEE.  Being able to look out the window is our goal, but our vision will be that much better when improved with the eye-glasses of economic theory as developed by the classical political economists, the early neoclassical economists, the Austrian school economists, property rights economists, market process theorists, and modern political economists -- i.e., what I describe as "mainline" economics in my “Living Economics: yesterday, today, tomorrow”.  2012. The Independent Institute – Universidad Francisco Marroquin).”
I warmly recommend Peter Boetkk’s introductory text book. It is refreshingly written (typical of Boettk’s writing style, which, if followed in his teaching, I can imagine  his classes are very popular.
However, sad to say, articulate writing and teaching are quite independent of the validity of the views expressed therein and while I would agree with much of what he writes I am not so certain that beyond undergraduate years the enthusiastic presentation of content is sufficient to be the sum of concerns about the advice for policies to govern in an economy.
Peter’s selection of the high contributors to economic theory ("Hume, Smith, Ricardo, Say among the classics; Menger, Bohm-Bawerk, Wicksteed, Wicksell among the early neoclassicals; Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner, V. Smith, and Tullock among the moderns") is not an exhaustive selection from the host of the world’s economists who made seminal contributions. 
I am not suggesting that Peter’s list was meant to be exhaustive, but that list or a different list identifies the problem.  Those of a different persuasion, or ideology, would produce a “beautiful logic of economic theory” and would lay claim to be “skilled practitioners”.   Or worse, “skilled practitioners” or not with “beautiful logic” or with back of an envelope ravings and particular bees in their bonnets, can and have formed other theories  (or as Keynes once remarked, “heard voices in the night”). 
In short, economies are not pristine beautiful, nor self-managed. They exist in human societies and have always been integrated within the social relations of varying degrees of sophistication, that is, within politics.  Pristine beauty is not a characteristic of any known economy now, recent, near past, distant past or very distant past.  Hence, blackboard models from the simplest demand curve to general equilibrium, to complex, adapted, economic theories function within unstated but ever present political constraints, not present in the equations for the purposes of pure analysis, but absent the political influences of humans in society means they are neglected at great cost to their operational relevance.
Much economic theory ignores the existence of the States that economies must work within, yet states in some form from primitive to recent and today’s ‘Big’ Governments have existed since some humans left the metaphorical forests and peopled the Earth.
Hence, the competitive free markets at the root of the ‘beautiful’ theories have never really existed and are unlikely to ever exist whether this fits the “beautiful economic theories – or their Statist (Marxist ‘dictatorships of the proletariat’ and Fascist ‘national destinies’) – or not. 
Moreover, arguments between ideologies of Left and Right, at root are political and therefore irresolvable once students leave the blackboards in their classrooms. Meanwhile, teachers, including brilliant teachers like Peter Boettke, clear their blackboards and settle down to think of new materials for their next class. 
The same goes for those in the higher-levels of mathematical abstraction who regularly publish in the higher academic journals, some, meanwhile, dream of winning their Nobel Prize and joining the advisory council for a friendly President or Prime Minster to assure them of the viability of the “invisible-hand theorem from the self-interest postulate” to wreck or run the state dominated, real less- than- perfect economy allegedly operating “outside their windows”. 
It is sad in a way and predictable, but I remain optimistic for the long run. 


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