Extras: Pete Boettke on Mainline Economics



What does it mean to "sit in the seat of Adam Smith"? Are economists describing the world or explaining the world? Read more from Lavery to learn about Pete Boettke's answers to these and more questions. 
Pete Boettke joins The Great Antidote podcast host Juliette Sellgren, once more, to discuss economists who “sit in the seat” of Adam Smith and the importance of institutions in explaining the complexity of the world as opposed to simply describing it.

Listen to the Podcast Here: Pete Boettke on Mainline Economics

Peter Boettke is the Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, and is the author of several books, including Mainline Economics: Six Nobel Lectures in the Tradition of Adam Smith, The Struggle for a Better World, and Living Economics: Yesterday, Today, and Tomorrow (Amazon affiliate links).

What is Mainline Economics? Boettke defines it as the intellectual lineage of Adam Smith. The six Nobel-winning figures that Boettke outlines as embodying this are F.A. Hayek, James M. Buchanan, Ronald H. Coase, Douglass C. North, Vernon L. Smith, and Elinor Ostrom. Specifically, this means deriving the invisible hand through the lens of rational choice and utility maximization, methodological individualism, and an appreciation of the impact that institutional context has on individual decision-making.
Okay, what does it mean to be an economist that sits in the seat of Adam Smith?... what I came up with is having to do with the invisible hand. Mainline economics derives the invisible hand proposition from the rational choice postulate, via institutions… individuals are pursuing their self-interest, but they pursue their self-interest within a specific institutional framework. Within the institutional framework of property contract and consent you unleash the power of prices and profit and loss accounting to able to guide individuals in their decisions, lure them into new ventures, and discipline them when those ventures are not the right speculations for them to engage in. That's how you generate the invisible hand. Thinkers throughout the history of economics put that emphasis on those institutions interacting with individuals, pursuing their self-interest to generate a situation where individuals can realize productive specialization and peaceful social cooperation through mutually beneficial exchange. And that's what mainline economics is all about.
Vernon Smith is an economist of note which Boettke highlights throughout the book. Smith’s main contribution is what won him the Nobel Prize in 2002: experimental economics. This prompted the examination of economic phenomena within a laboratory environment. In particular, Smith utilized experimental design to study market exchange, the success of private parties working to provide public goods, and many other questions surrounding property rights, and public choice theory. Smith came to the understanding that institutional context played a large role in market behavior. For example, Smith favored double-oral-auction rules for classroom experiments, which yielded market equilibrium with a very small number of buyers and sellers, and with little information, a groundbreaking realization. Smith’s work exhibited the power of the invisible hand and self-interest in producing mutually beneficial exchange given suitable rules of the game, exactly what mainline economics is all about.
There are several critiques of mainline economics, as Sellgren points out, which mostly take issue with methodological individualism. Methodological individualism is viewed as atomistic, devoid of the social context that individuals both operate within, and ignorant of how the decisions of individuals affect others. However, Boettke contends that methodological individualism does none of these. Instead, through using individual behavior as the mechanism of causality, economists can better analyze the varying outcomes of different social arrangements. Though individual behavior will be utility maximizing, mainline economists acknowledge this will manifest itself very differently under different rules of the game.
I try to defend methodological individualism by pointing out that Carl Menger was never an atomist, nor was Mises, nor was Hayek, but they always saw methodological individualism as the foundation of causal explanations. But that agent is always embedded within social context and influenced by social context. We’re trying to explain, through the self-reinforcing behavior of individuals, why it is that certain social contexts have such staying power? But it isn't a position that denies society. Individuals are striving to do the best that they can, given their situation, defined by legal structure, political structure, and a social and cultural structure within which they find themselves embedded. It's their embeddedness within society that invites us to study those things.
However, the criticism goes both ways. Where mainline economics seeks to explain the evolution of institutions, modern economists distill the role of institutions in market outcomes as a singular variable in the model. In other words, mainstream economics takes institutions and the conditions that emanate from them at face value instead of seeking to find out why those institutions arose in the first place and how exactly they contribute to economic outcomes.
So, if you think about a great work like Acemoglu and Robinson's, tell me what is the difference between Myanmar and Denmark, and how is it that we identify that? Well, they build a lot of the explanation into the initial conditions. So, Myanmar ends up being Myanmar because it's Myanmar, and Denmark ends up by being Denmark because it's Denmark. That's not much of an explanation, that's a description, and what we want as economists is explanations that tell us how it is that a Myanmar could be become a Denmark, right? That has to do with the evolution of institutions, and modern economic modeling, stratagem, and empirical testing. I would argue that those approaches miss the evolution of institutions that allows us to realize how to live better together than we ever could in isolation. That's where the research program of mainline economics and political economy has to go forward, because that's ultimately what Adam Smith's book is about, An Inquiry Into the Nature and Causes of the Wealth of Nations. He's trying to explain the evolution of the institutions that give rise to the wealth or the poverty of nations.
Boettke’s point is that mainline economists seek to explain economic phenomena, not just describe it. Boettke’s goal is to understand how the market itself operates through exchange within certain institutional contexts, and more broadly, develop an answer to the question of why the world changes. Boettke ties this to his view of mainline economists as distinct in their study of “verbs,” as opposed to the study of “nouns.”
So, a lot of these thinkers: Coase, Hayek, and Buchanan, use the equilibrium construct as a foil to set up their study of the world of change and dynamics. Because they want to study verbs. They want to study activity, not nouns, not states… Hayek says that the problem with Keynesian economics is that it begins in a world of resources and therefore then explains that there are resources. That isn't an explanation. That again, is just a description. So, what Hayek said is you have to start in a world of full employment, right? And then give rise to unemployment. Then that would explain why it is that we get depressions. The equilibrium is a foil against which study the world of change, and that illuminates other things like unemployment, entrepreneurship, profits, or the importance of law, and forming business organizations called firms.
Mainline economics is the study of the world from the inside-out. Mainline thinkers like Adam Smith, David Hume, F. A. Hayek, and Ludwig von Mises feared the economics of control, where the economist is idolized as the great problem-solver. Mainline economists acknowledge they are not omniscient, and therefore place themselves inside the world they are studying, and attempt to analyze how people innovates to minimize conflict and maximize welfare through stable institutional arrangements.
These individuals are practicing economics from the inside out, not from the outside in, as students of society, not as saviors of the society… Remember that the second volume of Keynes's biography is titled The Economist as Savior. When you think of economics as a savior, you step outside the economic system as an economist, and you fix all the problems that these poor little people can't fix themselves. But if you study economics from the inside out, economists have no special status. We don't have any privileged position in society to fix other people's problems. And in fact, the people are clever, creative, and resourceful so much more than the theorist that we're going give priority to the individuals that populate the world that we're studying and look at how they solve their problems.
To Boettke, and the broader tradition of mainline economics, the purpose of economists is to explain the various factors behind successful and unsuccessful problem-solving, not to serve as the world’s panacea. This is done through “economics in the wild:” studying real-life cases of actors negotiating and enforcing contracts, creating firms, and generally utilizing their own self-interest to make decisions within the bounds of scarce resources and complex social context. This point reminded me of one of Matt Ridley’s books, How Innovation Works: And Why it Flourishes in Freedom (Ridley has also appeared on the Great Antidote Podcast). Ridley claims that innovation rarely comes from top-down sources like the state or the corporate office, quite the opposite. Innovation is often produced through a long line of collaboration and trial and error from de-centralized and disconnected actors, all pursuing their own self-interest. The tradition of Smith, Hume, Hayek, Elinor and Vincent Ostrom, Ronald Coase, James Buchanan, Mises, and many others is that of analyzing the arrangements that maximize this innovation and market effectiveness and explaining how they come about. Mainline economics understands that economists will always be subject to a knowledge problem, and therefore, more emphasis is placed on the innovations and decisions made by individuals to improve their lives. In Boettke’s words:
Keep in mind that Adam Smith's baker, butcher, and brewer were already making your dinner before Adam Smith philosophically reflected on it.


Related Great Antidote episodes
Comments