From Smith, Mises, Buchanan and Hayek to the study of PPE

With professor Peter Boettke 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.

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 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 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.

Economics, Politics and the classics in political philosophy - those are ingredients producing together a mix of ideas that - when applied to education - can produce a unique way how to understand society. Many scholars and students prefer this broad approach over a focus on hyperspecialized disciplines studied in isolation. You are the director of PPE at GMU. In what way do you believe PPE gives us something which standard approach misses?

My interest in philosophy, politics and economics traces back to my undergraduate days at Grove City College, where I studied with the great Austrian economists Hans Sennholz. Sennolz was a gifted lecturer and while he stressed the positive science of economics, he also stressed the social ethics and personal moral issues involved in public policy discourse. I majored in economics, but minored in philosophy. But as I pursued my education in economics at the graduate level, I had several other professors – Don Lavoie, James Buchanan and Kenneth Boulding in particular – who also stressed the positive science of economics, but the moral theory embedded in social philosophy. So intellectually I was drawn to the questions that reside on the border of the disciplines of philosophy, politics and economics. I learned from my teachers that political economists must appropriately stress the technical economic principles that are necessary for the analysis of how alternative institutional arrangement impact the ability of individuals to realize productive specialization and peaceful cooperation. But the political economist must not stop there, but must bring into the open a discussion of the fundamental moral and ethical theories that are involved in any assessment of the proper role of government.

The technical rendering of economics in the 20th century, I often tell students led to a situation where economics as a discipline became more and more precise about less and less. The discipline in essence became precisely irrelevant to the most important questions that it has historically been tasked with asking. So if we imagine the shape of an hour-clock, what happened is that at the end of the 19th century, the discipline asked broad questions such as why are some nations rich and other nations poor, how do poor nations become rich, and how is that rich nations might become poor. But as the discipline strove to ape the natural sciences and transform into social physics, what the discipline could say about such broad questions became limited. The failure to explain the divergence in economic growth between nations became a glaring example of the irrelevance of the modern technical theory. Adam Smith’s great book was title An Inquiry into the Nature and Causes of the Wealth of Nations, but mid-20th century economics argued that the model of market socialism could mimic the results of laissez faire capitalism in theory and outperform capitalism in practice by eliminating business cycles and the problems with monopoly power. The argument in economic growth theory was also that countries would converge over time as poor countries would catch-up and rich countries would experience slower but steady growth. The breakdown of the Keynesian consensus, the collapse of communism and the failure of development assistance all brought to the forefront the intellectual bankruptcy of an institutions free economics. So to answer the most pressing questions at the end of the 20th century going into the 21st century, the discipline had to open up once again to the broad questions and this is seen in such works as Acemoglu and Robinson’s Why Nations Fail, but also Sachs’s The End of Poverty, Piketty’s Capital for the 21st Century, Zingales’s A People’s Capitalism and Easterly’s The Tyranny of Experts.

GMU PPE program has the name of F. A. Hayek in its title. What is the link between a broad approach to social sciences and Hayek? What do you want to signal to potential students by picking the name of one scholar out of so many other?

We take as our motto Hayek’s basic claim that nobody can be a great economist who is only an economist. Hayek is the 20th century version of Adam Smith in our estimation and his work spans not only from technical economics to public policy, but from theoretical psychology to philosophical anthropology. Yet, as discussed earlier Hayek is deeply rooted in the mainline of economics, so there is an intellectual unity to his varied sojourns into the other disciplines. This is what we are striving to replicate – his breadth, depth and yet analytical unity. I will resist the urge to advertise for our program at GMU, but I invite all your readers to visit us at http://ppe.mercatus.org/ and look at the various programs we currently pursuing.

In the past, you actively helped (such as a visiting Fulbright scholar) developing undergraduate and graduate programs offered by the CEVRO Institute in Prague.Today, you occupy a position of the director of Austrian School specialization which is about to start accepting students under the umbrella of a newly accredited PPE MA program launched by CEVRO Institute in a few months and you will teach a course each year in Prague for students of the PPE program. In what way do you believe this new project is important?

First, I absolutely love Prague as a location and intellectual culture so I am thrilled to be part of this new initiative at CEVRO. And I am thrilled to be working with you, and with the international board of scholars in philosophy, politics and law that you have assembled. Second, I believe this program is not only unique throughout Europe, but that it is an essential for the advancement of mainline economics and political economy that educational ventures like this exist and in fact expand throughout the globe. With the advancement in technology, I believe this sort of tapping into various academic talent across the globe to be a significant entrepreneurial venture for CEVRO and will put the institution at the forefront in Europe.

And, third, I am of course thrilled that in developing the program it was decided to specialize in the economics division in the teachings of the Austrian school of economics. The research program developed by Menger, Bohm-Bawerk, Mises, Hayek, Rothbard and Kirzner is continually evolving and there are several individuals in this generation who are making major scientific contributions, and I think our program at CEVRO will be able to combine the classics in the Austrian tradition as well as the modern developments by Rothbard and Kirzner, and the varied contemporary branches that have emerged since the 2000s. In the educational market-place, there are numerous programs focused on training students in mainstream economics and the corresponding tools of mathematical modeling and sophisticated statistical analysis. Without necessarily engaging in a wholesale rejection of this dominance in the educational market place for advanced economic study, the CEVRO program is going to offer an alternative and one that is fully integrated with philosophy, politics, and law. This returns Austrian economics not only methodologically and analytically to its mainline roots, but also cultural to the Central European educational culture that produced Menger, Bohm-Bawerk, Wieser, Schumpeter, Mayer, Mises, Machlup, Haberler, Morgenstern and of course Hayek.

In an interview we did together in 2012 you warned against the deficit-debt-debasement circle which government like to engage in. Any additional thoughts on this process given the new experience we have with our governments in the last 3 or 4 years?

Actually, my views about deficit-debt-debasement have been reinforced by events over the past several years. I listen to slightly out of sync mainstream voices such as Lawrence Kotlikof and William White on fiscal policy and monetary policy respectively, and I think we need to really think hard about the institutional solutions to the serious institutional problems that face the social democratic states of Western Europe and the US. The problem the fiscal gap (the gap between the promised outlays government’s have made to their citizens and the ability to pay for those promises) and the exit strategy for the Federal Reserve and the European Central Bank from the policy regime post 2008 will be the challenge that the next generation must face head on. It is my sincere belief that this isn’t a technical issue exclusively, but a political and ultimately philosophical issue as well. We have to reassess not only the scale of government, but more importantly the legitimate scope of government, and we have to address what institutional environment is most conducive for individuals to realize the gains from exchange and the gains from innovation. The CEVRO program in philosophy, politics and economics will provide graduate students with the tools necessary to tackle these very difficult problems and to think imaginatively about the appropriate institutional solutions.

Peter Boettke Peter Boettke