Russ Roberts

Boettke on Living Economics

EconTalk Episode with Pete Boettke
Hosted by Russ Roberts
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Peter Boettke of George Mason University talks with EconTalk host Russ Roberts about his book, Living Economics. Boettke argues for embracing the tradition of Smith and Hayek in both teaching and research, arguing that economics took a wrong turn when it began to look more like a branch of applied mathematics. He sees spontaneous order as the central principle for understanding and teaching economics. The conversation also includes a brief homage to James Buchanan who passed away shortly before this interview was recorded.

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0:33Intro. [Recording date: January 9, 2013.] Russ: Our subject for today is your book, Living Economics, but before we get into that I want to talk about James Buchanan, who just passed away this morning. And there's a chapter in the book on his contribution to economics. I'd like you to start by summarizing that. What was important about Jim Buchanan and his work? Guest: Well, about Professor Buchanan I'd like to say two things. First, one is on a personal level. He was my teacher and a role model in many ways. When I came here to George Mason U. to go to graduate school he had just moved from Virginia Polytechnic Institute to George Mason and he sort of created the Ph.D. program at George Mason, and instilled in all of us this idea of daring to be different, which was his model. And he said, we never wanted to be the MIT of the Potomac. But instead to have our own reasons for excellence. And he really did--me and my classmates benefited tremendously. I had him before he won the Nobel Prize, so he was around all the time and I had that great experience and whatnot. And of course when he won the Nobel Prize in 1986 it was a thrill for all of us because we had all made the choice to go in a kind of unconventional way by going to George Mason to begin with rather than traditional graduate programs, and then be able to say our professor had done that. And he created a niche for us in the professional which I think was extremely important. And then he was very supportive of young people all the way through. On an intellectual level, the reason why you get drawn to Jim Buchanan is an analytical set of arguments within economics, the most important of which is a demand of behavioral symmetry. The way that I study individuals in the marketplace is the same way that I'm going to study them in the voting booth or in any other walk of life. And traditional economics--textbook economics--had suffered from what Buchanan and Gordon Tullock would refer to as the Roman Emperor problem. A Roman Emperor is asked to judge a singing contest between two contestants, and upon hearing the first gives the award to the second under the assumption that clearly the second couldn't be any worse than the first. This was the old market-failure/government-correction kind of idea. Russ: Because we don't like the way the world is; obviously we should use government because we don't like the way the world is. Guest: So we see the market fail and we say government is a deus mach-- Russ: deus ex machina-- Guest: and can fix it. So, Buchanan, by forcing us to do this behavioral symmetry, said that: look, if people in the marketplace are doing these things because they're greedy, well, what's it like when we look at politicians when they are greedy. Rather than looking at people in the marketplace as greedy but people in politics as angels. So, you couldn't do that. Man was neither sinner nor saint. He's sort of both, this complex character. And you do that. Russ: Very Smithian. Guest: Yeah. And Buchanan is a modern Adam Smith. Like Friedrich Hayek--I think you could make a claim that he is the most Smithian of modern economists. But then there's a whole host of other things that he applies this idea to. When he won the Nobel Prize one of his lines was, they asked him to sum up his position, which is similar to the way they asked James Tobin. They asked James Tobin and he said: Don't put all your eggs in one basket. Russ: That was his contribution to the Nobel Prize management portfolio. Kind of an embarrassing line, because we all know that already. But he formalized it a bit. Guest: But Buchanan said: Don't let the fox guard the chicken coop. Which is about like who guards the guardians kind of thing. And in particular, in reference to the public debt. Because Buchanan really cut his professional teeth on the issue of the public debt and the burden of debt, and at the time that he was coming into professional prominence and economics was at the heyday of the Keynesian revolution--and it's not just on monetary discretion. The Keynesians were really the old fiscalists--that's why we call it monetarists--fiscal policy is effective; monetary policy is not effective. Friedman came along to point out that we needed them to worry about money, on the money side. So, Buchanan, rather than emphasizing the monetary policy side went after the micro foundations of fiscal policy. And he asked the question, in reference to the standard functional finance position, which is that you don't worry about balancing the budget, but worry about using the budget to balance the economy. And the belief was, from Abba Lerner and all those people that you would balance the budget over the life of the business cycle. So, you would run deficits in times of recession; you would run surpluses in times of plenty; and then you would balance the budget over the life of the business cycle. And Buchanan simply asked the question: What are the electoral incentives that politicians face that would ever make them want to do exactly that? Right? You can see why you want to run deficits during times of recession, but why would you ever want to run the surpluses in times of plenty? And so as a result you end up getting permanent deficit financing. Russ: He was onto something. Guest: Yeah, you think? And so to me, ever since 2008, people ask me: How do I understand what's going on? I say: Prerequisite reading are Hayek's Tiger by the Tail and Buchanan's Democracy in Deficit. And the connection between those two. And that's 628 what I personally still think is going to be the undoing or the unwinding of this current situation, is that we've done deficits, debt, and debasement. And we haven't gotten completely to the debasement part of the situation yet. Russ: But we're getting close. Guest: Yeah, we're getting close. Russ: Last week there began to be a discussion of a 'trillion dollar coin' that would be minted--for those of you listening who haven't heard about it, it's just a legalistic fiction to allow the government to print a lot of money. Get on the web if you want to read about it; it's not worth talking about. But it's a further step down the road to debasement. Although, as you point out, there hasn't been much, if any--very little inflation. And the anti-monetarists have used that fact, which is a fact--to prove that we are overly worried about inflation. Guest: Right, but I think that if you, just to put things in historical perspective, I believe it's accurate to say that Arthur Burns was the first one to try to do this Operation Twist, in the late 1960s, in which what you do is you try to suppress long-term interest rates at the same time while you are trying to stimulate the economy in the short run by pushing down short-term interest rates. And the Fed is doing both. And that's because you want to make sure you mute this signal that the short run monetary stimulus is going to cause inflation-- Russ: is going to have long run consequences. Guest: To link this back--I don't want to go into a thing about contemporary policy necessarily--but Adam Smith in the fifth book of the Wealth of Nations refers to the juggling trick that governments engage in ancient as well as modern. The juggling trick is that they run deficits that then accumulate into public debts; which then they debase their currencies. And his argument in there--you remember in the fifth book of the Wealth of Nations he's giving advice to the statesmen that you need to sort of do. And he's basically saying: look, we have to stop government from engaging these juggling tricks. Which is going to be rules that bind the government. And in large part that's what Buchanan ends up by working his career on--is on: What are the rules by which we can get the government to be bound but yet still effective at doing the things that they can do well?
8:56Guest: So the last thing I would say about Buchanan is that I think the work that he did on social philosophy and political economy is extremely important, in the way that he analytically distinguishes between the productive state, the protective state, and the redistributive state. And the puzzle, the Constitutional puzzle that Buchanan-- Russ: Just quickly explain those terms. Guest: Okay. So 'protective state' is like police, law--the criminal justice system, judges. Russ: 'Productive state'--roads. Guest: Roads-- Russ: Bridges. Guest: And then the 'redistributive state'-- Russ: We know what that is: entitlements, Social Security, farm bills. Guest: Right. So Buchanan's puzzle, Constitutionally, is: can I empower the protective and productive state without unleashing the redistributive state? And it turns out, in the 20th century we haven't been very successful at doing that. And that becomes our puzzle. Now, how do I think through that Constitutional project? It's also the project that James Madison cared about, right? Madison said: If men were angels there'd be no need for government, and if government were run by angels there'd be no need for constraints. But it's precisely because men are going to rule over other men, we must empower--that would be the protective and the productive. But then constraint--which would be tighten up the redistributive. And so it turns out that Buchanan's effort, while we might say that it hasn't proven to be as effective as we would like--let's say trying to constrain the fiscal side of the state or the redistributive side of the state--the way he thought about it is the way that I think all of us should be thinking about it, to try to examine these kind of questions. Especially in light of this. And then if you think about it, our current situation, our debate in Washington, D.C., in my opinion is completely misdirected because it's all about the revenue side, and really it has to be on the spending side. Or you think about it this way: it's all about the scale of government--you know, what's the size of Gross Domestic Product (GDP) in relationship, the size of government debt in relationship to GDP. When I think what we should be thinking about is questions about the scope of government. Russ: I totally agree. Guest: And, if you fix Keynes--this is probably the last time I'll say something good about John Maynard Keynes here today--but Keynes had a great quip, which was he said: You cannot make a fat man skinny by tightening his belt. You have to make a fat man skinny, and then his belt is looser. Right? And then he can wear a smaller belt. Those are questions of scope, not of scale. Russ: Those are two fabulous metaphors--that one and then--metaphor is not the right word but that framework we're thinking about the state as productive, protective, and redistributive. That's a good way to organize your thinking. Guest: The last thing about Buchanan, he's a classic example of how right-thinking in economics, they tend to have long and productive lives--Buchanan was still writing papers. I saw him give a paper this summer, in August, which many of my colleagues were at as well. And he said: I don't really like the way it looks right now; I have to keep working on it. He's 93 years old and he's still fresh in his mind and still working on that stuff. And it was just amazing to hear him talk. The metaphor that he used--I think that's the right word here, or analogy he used to explain the budget deficit was he said: Imagine that you belong to a lunch club and you go out to eat for lunch; and then what goes on is that you agree to equally split the bill. And how is everyone going to decide how they are going to do things. All of a sudden that cannoli that you might have thought a little bit about, now all of a sudden you spread it between 12 people--hey, it only cost me 50 cents. Russ: I've never heard that coming from Buchanan, but I wrote a piece with the same logic. We'll put a link up to it. Also the right way to think about our problems. Guest: His whole thing, and here's what he was thinking about; this is what I'm saying: He's 92 years old and he's thinking, how can I get back to a Constitutional rule which will not decouple the spending decision from the taxing decision? So, instead, the taxing and spending decisions are closer coupled with one another, like user fees. How can I do that? Buchanan is thinking through that at 93, and the rest of us are in the room; we're like: Wow, that's a novel idea, wouldn't that make sense? And the thing of a genius is someone who, when they say something, it seems so obvious after they say it. Before they say it, you never thought about it. Russ: It's ironic because I was doing the dishes this morning and actually thinking about that metaphor, and being depressed about it. And how, when you go out with your friends and you split the check because it's convenient, you don't order the fancy champagne for yourself or the expensive steak because you don't want to impose the cost on your friends, if they are all getting hamburger with coke. When it's 330 million people in the room and most of them are just strangers, you need some cultural restraints on overeating. But if you think everybody else is overeating and taking advantage of you, because they are going to be able to pull money out of your pocketbook, you think: Well, I'm a sucker if I restrain myself. So you need something to restrain that redistributive force. It used to be culture. It used to be the Constitution. I think we've lost both of those. I was thinking about it because I was reading about the fiscal cliff "resolution." The idea that there would be pork and earmarks in that bill is just--on one dimension, it's repulsive, and on the other, it's just business as usual. And the fact that the people who put that in there weren't ashamed of it at a time when we are running trillion dollar deficits tells you everything you need to know about the current state of American political economy.
15:08Russ: But let's go back to your book. One of the themes that runs through the book--you open with this--is you make a distinction between mainline and mainstream. And that distinction you take from Kenneth Boulding. Talk about that distinction, what it means, and why it's important. Guest: Well, one of the things that has always struck me in my career, again going back to Buchanan and Boulding and us, part of what Buchanan taught us is to dare to be different. We were doing good economics. There's an old quip by Milton Friedman: There's no Austrian economics, there's no Chicago economics--all there is is good economics and bad economics. And you can agree with Friedman on that--we want to just be good economists. We just happen to think that a lot of the themes that are in Austrian economics constitute what it means to do good economics. Or public choice or whatnot. But the reality is that I've always found it strange when people say: Oh, your view isn't mainstream. Well, it's the view that Adam Smith had, or Jean-Baptiste Say. Russ: And Hayek, and Buchanan, and Ronald Coase. Guest: All these other Nobel Prize winners. Russ: It's not a bunch of kooks. Guest: And so I hear people say this all the time, this language that Boulding used all the time to talk about Adam Smith. He has an essay called "After Samuelson, Who Needs Smith?" And his argument is: We all do, because Adam Smith is part of our extended present in the conversation. Meaning that there are still fruitful things to learn from Adam Smith for the way that we do economics today. And I think if you look at someone, as you mentioned, Hayek, Buchanan, Coase--these people all viewed themselves as being in the seat of Adam Smith. The men who sit in the seat of Adam Smith. So then what I try to do in the book is: So, who are the men, or women, who sit in the seat of Adam Smith? And their ideas. What is it that substantively captures that idea? And I think it's this idea of the self-interest postulate--which does not mean selfishness, and it doesn't mean lightning calculators of pleasure and pain. It simply means that individuals pursue what they want to pursue as best as they can given their situation. Russ: And are a little bit more focused on themselves than on other people. Which is undeniably true. You can still be an altruist; you can still give to charity; you can still be nice to your wife; you can spend time with your family. But you care mostly about yourself and the people near you than you do about other people. Guest: And so that's one postulate. And then the other one is the invisible hand, the self-regulating aspects of the market. And mainline economics is: How is it that I square this--one proposition, self-interest proposition--with the invisible hand? Russ: That things sort of work out pretty well most of the time. Guest: And the way that we do it, what we find, is that all of those economics that I mentioned do it by way of institutional analysis. It's the private property, market economy. And the key thing is there--it's the private property, market economy. They don't say: Adam Smith never said individuals pursuing their self-interest under any conceivable set of circumstances will generate a publicly desirable outcome. Russ: And as you said in the book, he had lots of examples where things came out badly. Just mention a couple of those--teaching, religious activity. Guest: Yeah. It's funny the way he does it, especially in the context of this book, which talks about teaching, is that Smith contrasts the teachers in Scotland, who were actually paid by student fees directly, versus in Oxford, where they were paid based on the endowment and they were tenured. And he talks about how the professors that were tenured at Oxford would get up in front of the class and literally read the book. Whereas the professors in Glasgow and Edinburgh would actually respond to the students, try to make sure they were teaching them the right things, and like that. And with regard to religious education, he uses the issue of whether or not you have a state-sponsored church or a voluntary contribution church. And his argument is that religiosity rises much more when you have voluntary contributions to the church. Russ: Because they respond to the consumer. Guest: Yeah. And his friend, David Hume, who was non-religious, had the same analysis but he sponsored state churches-- Russ: Because he wanted to make them less effective. Guest: Whereas Smith thought religion of value and so he wanted a free market in religion. So it's a kind of very fascinating-- Russ: I'm just going to add one more, which you mention in the book. He believed that people in business would often pursue their own self-interest in the harm of others, that they were allowed to conspire or had a natural tendency to do that. He also saw lots of negative things about politicians without restraint. I'm interrupting because I think it's such an important point that people who share our ideologies and philosophies, and our opponents, get wrong. Which is: I don't believe--and I don't think you believe--that anything that's spontaneous must be good. Spontaneous is a fact--that there are emergent forces that shape outcomes in the world around us. That's a fact. That's not something you believe in or don't believe in. But what you can believe in or don't believe in is: Which are the right institutional forces that make spontaneous outcomes look good or not good? And how might they be improved, and what makes them different? But this idea somehow that Adam Smith, because he was in favor of "laissez faire," means that he thought all government was bad or that all spontaneous, invisible-hand-like stuff was good, is not true. Guest: Yeah. So, mainline economics--so you have the self-interest, the invisible hand reconciled through institutional analysis. So that's a substantive set of propositions. If you go to an economist that is a mainline economist in France in the 19th century--let's say, J. B. Say, and you ask him, you translate, and you say: Okay, so what is it about it means to think like an economist? And he would say: Oh, well, you have self-interest, you have the self-regulating aspects of the market that are achieved within a private property, market economy. So that's in the French language. If you go to German language and speak to the early Austrian economists--Carl Menger and Eugen Böhm-Bawerk and Friedrich Wieser, and whatnot--they'd say self-interest, invisible hand reconciled through private property, market economy. So much so that Ludwig von Mises highlights the market economy as an essential characteristic for being able to engage in economic calculation; that the absence of that institution eliminates the ability to do that. Which is how the system operates. And so it's this emphasis. Now think about how, by the time we get to 1950, 1960s, you have people like Francis Bator, who were famous economists at the time, you know, Samuelsonian economists, say things like: Our goal as economists is to have an institutionally antiseptic theory. So, in a large part, mainline economics stretching all the way back to Adam Smith and coming forward is a tradition of economics which emphasizes these various rules of the game. Russ: Which could be legal; they could be cultural. Guest: And political. And that the economy is always structured, so political economy as such. As opposed to 'economics,' which is this purely technical science disembodied from institutions. And so a large part of the post 1950s resurgence of economic thinking-- Russ: I think you mean post 1948. Guest: Okay, yeah. Russ: Because that's when Samuelson published the Foundations of Economic Analysis, which was the beginning--not the beginning but a local high point of mathematical sophistication about human behavior. Guest: Well, it became the bible of how to learn, what it meant to be a serious economist. Russ: Right. Guest: Was to speak in the language that Samuelson spoke in and the way that he spoke. And it still exists in our profession to this day. Russ: Well, not just still exists. That is the mainstream, as it contrasts to the mainline.
23:46Guest: Right. And so now let me go back to the main stream, which is: Note that you can't really put a finger on what the substantive propositions are, because in the mainstream you can have Joe Stiglitz, who no one would deny is a mainstream economist. Russ: He's a Nobel Prize winner. Guest: A Nobel Prize winner, Columbia, Princeton, Stanford; he's taught all the main places. Paul Krugman--right? Has been at all the top places, in the top journals, things like that. But you also have, on the other side, Bob Lucas. Russ: Right. Guest: And Bob Lucas and Joe Stiglitz couldn't disagree more about substantive economics. Yet the agree completely about the style-- Russ: The tool kit. Guest: The tool kit of economics. And so what happens is mainstream becomes a sociological moniker for people that believe, methodologically, what they believe at the top 5 schools. And they use and they speak in that language. Whereas in the past, if you were a Smithian economist, you could speak in English, French, German; you could speak with math, you could speak with just pure natural language, and what mattered was whether or not you believed the substantive propositions of economics. In modern economics, mainstream became: Are you using these tools? And it didn't really matter as much what the substantive propositions are, per se. Russ: I think that's a little strong. Let me challenge you on that for the mainstream. The mainstream folks do have their substantive propositions. They require rationality. They require some dimension of equilibrium--although there's some, you know, fudging or hedging about--you can be out of equilibrium, but equilibrium analysis, because it's mathematics, needs some equalities there--is a huge part of it. There's some attempt to formally model expectations; they can't ignore them. I think they share a lot more than just the language of mathematics. Guest: I think that what happened is that one of the things that mainstream--neoclassical tools are much more absorptive than anyone might have thought. So if you come along and a critic comes along and says: If you don't deal with expectations you are not going to be able to model this, the model is able to absorb the expectations in. But what it does is it absorbs it in a way that isn't necessarily an enhancement to the original idea. So let me give you an example on this reconciliation of the rationality postulate and the invisible hand. What I argue in the book is that a lot of what happens in modern economics is that the people who are quote-unquote "free market," they collapse one onto the other. Russ: Why are you putting that in quotes? Guest: Because they don't really explain the rules under which a free market operates. Russ: Right. There's hand-waving. Guest: They explain the technical apparatus by which I can prove an efficiency proof. And so then what happens, so rationality, what are the conditions for rationality hypothesis. And those feed directly right into the invisible hand conditions. And so then we get looking at a world where agents have to have full and complete information; they have to have complete omniscience. So rational expectations becomes perfect foresight, rather than the idea of people having divergent expectations. Or we get these puzzles in economics--which are very brilliant puzzles, don't get me wrong here. These are amazing intellectual puzzles that people have worked on. And Samuelson--since I've been going around talking about the book, people ask me about: Why is it that Samuelson had such a big impact? Well, when you are the brightest guy and you are young and you are able to do all this stuff, and everyone--it's quite clear that Samuelson was really, really brilliant. And people coalesced around him, because you know, like they do. But I think he sent economics in a direction which took it farther away from its Smithian roots than brought it closer to it. And that part of the post-Samuelson kind of period of what things that we at, say, George Mason care about in economics, sort of the law and economics revolution, the public choice revolution, the sort of property rights theory of the firm revolution, new institutionalism in general, entrepreneurship and market process theory--all of those things are things that classical economists more or less hinted at, and sometimes explicitly talked about. Like we were mentioning about with Adam Smith. Russ: Sure. Public choice, skepticism about the motivations of politicians. Guest: Yeah. I mean, Adam Smith talking about religious leaders--you could also say that about politicians under democratic election. All these kind of things. We had to recapture a lot of the basic propositions in economics, because we squeezed them out with our formalism, is the claim in the book. And that relates, to go back--so the book is divided into three parts. The first part is basically about, so I have three meanings. The cover of the book has a growing tree on it. And it's a healthy tree. And the name, Living Economics is to indicate three different things. The first image that you should have in your mind is that economics is a living body of thought. It's constantly evolving, constantly improving. We should be excited about it. It's an invitation. I want my book to be viewed not as a catechism but as an invitation to inquiry to young people who are embarking upon economics as a career. That's who the book is targeted at. And so that's the first thing. Russ: If I can adjust your marketing pitch--it's targeted to those people, but anybody interested in the history of economic thought and the ideas of modern economics will be interested in this book. It's not just written for graduate students of economics. Guest: Sure. But that's who I had in my head as the primary. The second meaning of that, if you look at the tree, it's a healthy tree because it has deep roots. Right? And so what we have to do is to see these roots and see where we came from. And that's the reaching back to Adam Smith and these great teachers of economics as I sort of lay them out. And then the third one is basically that if you understand economics in the way that these people have taught economics, then you can't stop thinking about economics. It becomes an obsession for you, 24-7. As David Friedman was visiting with us last year, one of the things that David said, which I completely agree with him, he said: The difference between economists like us and other economists is that we are not 9-to-5 economists. We are 24-7 economists; we think about it all the time. Russ: Well, it's not just that. We don't turn off the economic way of thinking when we go home. It's not like we are working on our research at night when we are with, say, our children. But we think about incentives and we think about unintended consequences and we think about spontaneous order.
31:25Russ: But I want to make sure we don't lose one stream of thought of what you were just talking about. It was interesting what you said about your book, the cover, I love that. But you were about to say something else and I don't want to lose that, which is: When you think about mainstream economics, the current or formal side of economics, they do have propositions, as you said, that link self-interest and rationality to invisible hand and self-regulatory processes that emerge and are not controlled or designed by anyone. But then because it's formalized, they often say: Well, these formal conditions don't always hold, and therefore leaving things alone is fraught with market failure, all kinds of other problems that require government intervention. And I think, for me, that is the--you can make a lot of criticisms of the formal approach. I think one of the subtlest and most important of that formal approach is its tendency to confuse you and to deceive you into thinking you have isolated, because it looks scientific, all the relevant factors. And therefore what you discover is fact. The truth. And I think those of us in the mainline tradition, Smith, Hayek tradition, they never said--Smith never said, Hayek never said, you and I never say--Oh, people are perfect. And that's why we believe that markets are good. We believe in fact almost the opposite: Because people are imperfect--they do the best they can, they learn--but because they make mistakes, because markets are constantly changing, and outcomes are constantly changing, that's the reason to favor, often, a more laissez faire approach. And the mathematical apparatus I think masks that in a very unhealthy way. And for all the graduate students listening out there: It's always a good idea to keep in mind that your model is to help you understand the world. It's not the same as how to get a rocket to Mars. Getting a rocket to Mars is a very formal, mathematical process. If you get the numbers right the rocket ends up at Mars; if you get them wrong, it doesn't. Economics for a whole bunch of reasons doesn't work that way. Guest: Yeah. If I can follow up on that--in the book, I sort of make the argument that the formal apparatus highlights behavioral assumptions, right? And that the focus is on those behavioral assumptions being at such a thick condition that they make the invisible hand possible. As opposed to having very thin behavioral conditions, meaning that man is fallible but capable. Russ: Yeah. Guest: That man is caught between alluring hopes and haunting fears rather than this idea of being this calculator, lightning calculator-- Russ: machine. Guest: Yeah, robots. And that what reconciles our ability to do this is the institutional conditions, not the behavioral ideas. And so that the heavy intellectual lifting in economics is done by institutional analysis, not the behavioral things. Just to follow up--Hayek in the essay "Individualism, True and False," has a great summary of what Smith is talking about. And he says that there's no doubt Smith and his contemporaries were trying to find a system where bad men could do least harm, rather than finding a system where perfect men could rule, you know, justly. Russ: A utopia. Guest: Yeah. Russ: Heaven on earth. Guest: So it's all about finding--he summarizes the classical distinction as: We're trying to deal with men as they are, sometimes stupid, right? Sometimes smart, you know. Sometimes evil. We're dealing with the men as they are, and then we are trying to find that institutional environment which will marshal their base motivations in a direction which will generate the best outcome for the group as a whole. And he says the great discovery of the 17th century philosophers, 17th and 18th century philosophers, was that it was the private property, market economy.
36:06Russ: So, let me challenge your distinction between mainline and mainstream. Basically, you have a couple of essays in the book that look at that evolution from a more, you might call it descriptive, narrative, non-mathematical, imperfect way of studying human behavior, which is the mainline, Smith, Hayek way--versus the more formal structure that has become the dominant force in modern graduate training and modern scholarship. Two things strike me about that. One is, while it's true that mainstream has "won" and it dominates the modern economic way of modeling behavior and outcomes as dominating our profession, our guys win a lot of Nobel Prizes. That's number one. And number two, if our approach is the right approach, which I think it is, why don't we do better? Why is our side--why is it that when you go to the top 5 places, graduate programs in America or you look at the top 20 most influential economists in various ways you can measure that, why is that most of them are mainstream and not mainline? Guest: It's a fascinating question. I do think that I am more optimistic even in the sense that we have a lot of young superstars that are emerging in the economics profession. They are not that young any more, but they were young when they started and made this move in a direction towards a more institutional analysis. So you think about Andrei Shleifer in the legal origins work that he did and bringing institutions to the forefront. Daron Acemoglu and James Robinson. I mean, there's differences between these various different people and I don't want to suggest it as a homogenous group. Russ: And they may not want to be in the mainline. They might sort of consider themselves mainstream. Guest: Yeah. But what's fascinating to me is if you look at, sort of, what's one of the most popular books in economics for 2012, well it would be Why Nations Fail. Russ: By Acemoglu-- Guest: and James Robinson-- Russ: Which we did a podcast on. Guest: And so you have Robinson and Acemoglu running around explaining that there's this thing called 'inclusive institutions'; there's 'exclusive institutions,' there's predation, there's all these concepts which are concepts that Mancur Olson talked about, which Jim Buchanan talked about. Russ: And Adam Smith. It's very much in the Smithian tradition. Guest: Right. And so you can draw so much--and that's not true just for them. I mean, Tim Besley just wrote a book a few years ago called Pillars of Prosperty which also goes into what are the institutional conditions. And he was a former editor of the American Economics Review; he's a professor at the London School of Economics. So we have a lot of people that are around that are in the professional elite that are now focusing attention again on institutions. A lot of this derive from--again, Bob Lucas is a genius. When he wrote his paper, after the Rational Expectations revolution, called the "Mechanics of Economic Development" he set off a lot of people thinking about why are some nations rich and some nations poor? Russ: An old question. Guest: Yeah. An Adam Smith question. Related to the nature and causes of the wealth of nations. So that's why I--I'm speaking too much at some level here. But Smith's title of his book was called An Inquiry into the Nature and Causes of the Wealth of Nations. Acemoglu and Robinson's book, so many centuries later, is called Why Nations Fail--which is really a modern inquiry into the nature and causes of the wealth of nations. We are dealing with Smith's questions. This is Boulding's point about the extended present. And so I think the economics profession is widely open to a lot of the ideas here. What I find problematic in this sense is that, so for example, public choice. If I went and I talked to any of the mainstream people-- Russ: Public choice being the application of the economic way of thinking to the political process. Guest: They would understand rent-seeking. Joe Stiglitz, when he did his interview with you for the podcast, he knew his audience, right? And he focused on rent-seeking. Russ: Yeah. There's some rent-seeking in there. I'll leave it at that. Go ahead. Guest: Yeah. So he has the rent-seeking story. As does Krugman when he decides to write "Is Free Trade Passe?" He recognizes there's an interest group problem associated with giving protectionist legislation for firms, and whatnot. Russ: Rent-seeking being that use of the political process by special interest groups to extract money from the rest of us. Guest: But it's not in their DNA. It's like a footnote. Whereas if you go back to my point I was mentioning about Buchanan in the beginning, behavioral symmetry is not an afterthought. It's not: Oh, I work out the model when I have behavioral asymmetry and then I say-- Russ: there's a possibility that-- Guest: Yeah. Instead it's from the get-go. Russ: It's a foundational principle. Guest: It's a foundational principle. And so I think we still have work to do, but it's so much easier because of the great work that was done by the people that I mention in the book--the Jim Buchanans, the Ronald Coases, the Armen Alchians, the Harold Demsetzes, the Israel Kirtzners; of course the F. A. Hayeks and whatnot. These people were so groundbreaking in pushing forward the ball that the conversation--and that's why I think-- Russ: Lin Ostrom. Mises. Guest: Yeah. I think the reason why we can have this conversation today is because of people like Buchanan, who cleared the way in a professionally responsible way to talk about older ideas in a new context that made them seem fresh again.
41:53Russ: Yeah. 1955 would have been tough. 1942 would have been tough. And I think it's--well, I'm like you. I'm optimistic. I always like to think it's up for grabs. Guest: Yeah. And the financial crisis is a horrible thing for families that are suffering and everything like that. The economics profession has seemed to not really change much. Russ: Yeah, that's one of my later questions: why is it? Guest: Still, it's an opportunity for us to sort of talk about these ideas. Me, the only part of the economics issue about the mainline versus the mainstream is that mainline economics is totally non-Keynesian. And the top essay of the book was my Adam Smith lecture from 2010. Keynes is the main target of my criticism in there. But it's really not Keynes. It's aggregate thinking in general. And I want to get us back to an economics which is focused--even though I am talking about why some nations are rich and other nations are poor, which might seem like I'm talking about aggregation--but our explanation is a microeconomic explanation. And so it's about relative prices; it's about incentives that individuals face, the profit-loss calculus that they engage in in their decisions. And so it always traces back. So the way to think about the main theme in the book is that while there may be macroeconomic questions, there are only microeconomic explanations and solutions to these issues. And so we want to understand underlying microeconomics of why nations are rich and nations are poor. And that's why Acemoglu and Robinson are again important. Because when they start talking about the incentive effects that are generated by extractive institutions in politics, well that affects my decision to how much I invest, how much I work, and things like that. On the recession, one of the things we have coming in at George Mason in the beginning of this semester, we have Casey Mulligan coming in to talk about the Redistribution Recession, because again, that is a microfoundations of what the problems are that we are dealing with here. And I think that's a capturing, and the fact that Casey Mulligan is out there making that kind of argument in this day and age when the dominant approach has been an aggregate demand deficiency argument--we need Casey Mulligan. Russ: It puts him in the mainline. And see his podcast of a month or so ago if you want to learn more about that. He's very much saying: We forgot about this; here's a different approach. It's orthogonal to the sort of standard mainstream arguments you hear.
44:30Russ: I want to go to a particular point in the book that I found fascinating. I don't totally agree with you but your book forced me to think about it in a way I hadn't thought about it before. You have a fascinating quote from George Stigler. And George Stigler was a teacher of mine, had a big impact on me. If I had to summarize George Stigler's view of political economy, it would be: Don't look at what they say, look at what they do. And if you want to know what somebody's intention is, look at what they do. Not what they say. And you quote him in there saying something a little more complicated than that, but that's the basic idea. When we think about political outcomes, don't think of them as how people describe them in lofty terms. Look at who wins and who loses. There are mistakes, obviously, in politics. But Stigler's view, which you quote in there, is that we get the outcomes that we want. Which I'd say is a rough--sorry, that's not fair. Don't treat the outcomes as random. Don't treat them as how they are described. Look at who wins and who loses and if, whoever wins, if that was the goal--to help those people. The problem I have with that--it's interesting--is that I think that's true at the individual level. I think when you want to figure out what somebody cares about--if somebody says: I care deeply about my children, my family. The football coach who quits his job or is fired or he resigns because he says: I want to spend more time with my family. And then 6 months later he's got a new job--as a football coach. And there are very few jobs that allow you to spend less time with your family than football coach at the major college or professional level. And so I would look at that, I always think, well, maybe after he spent more time with his family, he realized he didn't want to spend more time with his family. But maybe from the beginning it was just something he said, and you choose football coach as a career, you are not going to be very family oriented. It's too hard to do. So at the individual level I think that's a powerful thing. Your friend tells you that he cares about you but he doesn't return your calls, he doesn't care about you. So: Don't look at what people say; look at what they do. That's a huge part of, I think, the economic way of thinking. But at the political level, I think one of the biggest fallacies that we have considering government policy is to assume it's designed by somebody. When, in fact, I think it's often emergent. And so I find it interesting that we have this tradition in economics, skeptical, hard-nosed tradition that you don't look at what politicians say, you look at what they do. But what they do, the 'they' there is a big soup of competition. The institutional constraints are very different than the institutional constraints that exist among, say, car companies. But there's competition there. So, I was struck by how, even though I think that Stigler philosophy or whatever you want to call it, methodology, is useful, I think it misses a key part of what we have learned as mainline economists. Guest: Yeah, I agree with you on that. Though I think that I get Stigler doing is we infer intentions from outcomes. Russ: And my response is: I don't know what that means. Because I don't know what intentions are. When people say the government wants to do x, that's a dangerous shorthand. That's a different form of aggregated thinking that misleads. Guest: Well, I think the way Stigler was using it was that, let's just use minimum wage laws--or rent controls. Let's just use rent controls, because one of his classic essays, you know, with Milton Friedman was on "Roofs or Ceilings", 1946, that everyone should read. At an ideological level it's a fantastic analysis of the effect of government controls on the housing market. On a methodological level it's outstanding because it's a perfect example of an event study before we had techniques of doing event studies. Friedman and Stigler just do this fantastic thing: Compare San Francisco in 1906 and 1946, where you have a demand shock on the one hand and a supply shock on the other hand, and vice versa. Russ: Earthquake. Guest: Earthquake, supply shock. People coming home from WWII, demand shock. In the case of the earthquake, there's no rent controls. There's no evidence of shortage of housing. People lend out rooms; they do all kinds of things like that. Whereas in 1946 there are price controls on housing; there are shortages, all kinds of things. That's why it's called "Roofs or Ceilings." Outstanding essay. What's interesting about it from this point of view is that Stigler is asking--Okay, Let's infer intentions from outcomes. So, I might say, as a politician: Oh, I want to pass a rent control because I want to have the least advantaged in society taken care of. And what the rent control does is it disproportionately hurts the least advantaged. And it benefits this other interest group. And what Stigler says is it benefited that other interest group because that group wanted that policy to benefit them. That's what he's trying to do. Russ: They lobbied for it. Guest: Yeah. They lobbied for it; they did all that stuff. And then his method flips back on us by saying that if we could have found a lower-cost way to bid them away from getting what they wanted, that would have been a more efficient thing. So we kind of get the government that we want. We infer intentions from outcomes, but the outcomes are in fact we get the kind of government that we want. Russ: Again, I need to interrupt, because the 'we' there is problematic. Guest: Sure. But the alternative, people did not form together--if I say to you the reason why that happened is because we face a collective action problem getting together; he says, oh, you've got to include those costs involved in your calculations. And it's not stupid to not pick up a $20 bill lying on the sidewalk if it costs you $21 to bend down and pick it up. And so this is where like Stigler pushes the argument in the end. And I think my colleague, Bryan Caplan, has addressed a lot of these issues. I'm an older-school public choice person than this. I think that we don't get the government that we want. Because we have voter preferences, and they get fed into a machination[?] of politics. And the machinations of politics--I'm much more like Friedman rather than Stigler in this regard--distort what it is that the voters prefer; and we get policy outcomes which are wildly at odds. And so this is sort of--like in a more modern guise of Friedman's position, this is like Arthur Brooks in The Battle, where he says that 70% of the American populace would like to have a vibrant free-market economy; 30% would like to have a massive redistribution, more heavy government. But we end up by getting the more heavy government rather than the 70% that want the other one. And I kind of think--you know, there's incoherence in the answers that people give, and it's hard to infer all that stuff. But I think Arthur Brooks says this kind of laid-out kind of thing, that we don't get exactly what it is that we want. Russ: Yeah but I just think that's the wrong way to look at it. I don't even know--as I tried to say before, I don't know what that phrase means: 'what we want.' Seventy percent of us--I don't agree with him, by the way. But let's take it as given. Let's say 70% of the people do want a vibrant free market and 30% want a highly restrained, a highly redistributive state imposing its will on the so-called market or on private choice. I have no reason to think--it's not a majority rule. It's not a referendum. I don't expect--what I think--I just think that's the wrong way to think about it.
52:38Russ: Let me give you a different perspective. And we'll close with this, because I think it's another issue that runs through the book. I think in some dimension--it makes me uneasy to say this but your book created this thought in me. So I'm just going to lay it out. We get the economics we deserve. One way to think about the evolution of economics from what Dan Klein describes as a presumption of liberty, which is basically: things work best when they are left alone, but sometimes there's a justification for the state for intervening; but we start with the presumption that leaving things alone generally works well. And we've come to a different place now. We've come to a place I think in economics where there's a presumption of intervention. Of course, the market usually--and you talk about this in the book: Of course the market usually fails so we've got to make sure that the government is heavily involved; of course sometimes it's okay to let the market do its thing. Maybe for no-iron dress shirts. Maybe for that you can have a free market. But these other places you've got to have intervention--education, health, blah, blah, blah. Guest: All the big ones. Russ: All the big ones. Everything is important. So, how did that happen? You could argue that the interventionist-presumption, that group, their work looks more scientific because they use more math. There are a lot of different things--and the academy is not very competitive. There are a lot of ways to justify it. But let me try this one. The average American likes intervention. More than the average American--most Americans. You and I who are skeptical of intervention, we are very much in the ideological minority. Yes, there's a long trend of individualism in America and skepticism about government, but a lot of people are captured by this idea, you know, keep government's hands off my Social Security. They live in this schizophrenic world where the benefits that they get, those are the good ones. What other people get, those we need to fix and clean up because it's wasted, or it's horrible. So, what happens is that economics evolves to make those people happy. Economics responds--how do be popular? How do you capture attention? What are the incentives we face as economists? Well, those of us like you and I who stay government should stay out of the business cycle mostly and has caused a lot of the business cycle problems we have through Federal Reserve policy or fiscal policy, we're not very popular. Because we tell politicians and everyday people there's not much we can do. It's best to leave things alone, and even then we're going to make mistakes. That's a tough sell. People don't want to hear that. They would much rather hear from the expert who can run the economy well. So those people, the people who create the economics that can justify that, they are the ones that thrive. And so John Maynard Keynes--I don't think there's a lot of scientific basis for his views. He might be right--I'm not saying he's wrong. But I think you'd be hard-pressed to prove that he's right. But he triumphs, to a large extent because people want that. Guest: Well, Russ, think about Hayek, who says that the curious task of economics is to demonstrate to men how little they know about what they imagine they can design. And if we take that as sort of the purpose of economics, that runs right counter to the intuitive way that people want to have things: there's a problem; you need to fix it. Right? And we're going to sort of counsel this other idea. So part of this argument that I give in the book is that economists' counsel would be much more humble in their approach toward these kinds of solutions, and we wouldn't be caught up in trying to provide answers to questions that we as a discipline can't answer. Which is one of things, the incentives, that are set up in the system here. So, I'm not denying at all this issue that you raise about the incentives that economists face, that the change that has taken place--in fact, what I'm trying to do to a large extent is explain how it is that we moved in that direction. I have an essay in there which is on the limit of economic expertise. And it tries to argue that the economists can be divided up into their self-image as either a student of society or they can be viewed as a savior of society. By the way, the term 'savior'--in the second volume of Skidelsky's biography of Keynes is titled "The Economist as Savior". And then I divide the state into a world where you have basically a night-watchman state, so the state is a referee for the economic game, or the state is an active player in the economic game. What I argue in there is that the mainline economists who thought of themselves and emerged their ideas in a world where you had the state as a referee, the economist as a student, is at a disadvantage in a world where the state is viewed as an active player and the economist is viewed as a potential savior. And that that battle, those equilibria, I argue in the book, are the two equilibria; and any move outside of those equilibria is unstable. Because let's say that I find myself as an economist who is agitating for the economist to be a student in a world where the state is demanding that we need a savior. The economist is out of luck. Right? Russ: That's a fancy way of saying what I was saying. Guest: Yeah. Russ: And a nice way. Guest: And so I think we want to be able to understand that puzzle. But if you step back and think about our task as economic educators, one of the things I rely on in the book as motivation is sort of other lines by Frank Knight and Henry Simons, where they try to talk about what the role of the economist is an educator in society. Henry Simons in the Simons syllabus, which all the great Chicago economists had read and trained up on, you know, he says that the primary task of economists is to be a prophylactic against popular fallacies. Frank Knight, in his Presidential Address to the American Economic Association in 1951, it's called "The Role of Principles in Politics and Economics"--and he basically argues that economics is applied common sense and that its message should be easily translated to anyone who has the ears willing to listen to it. And when they choose to not listen to us, we have to put on ourselves: this is your area; how do I communicate? We must be failing as communicators. Yes, we face difficult incentives. But we also fail on our own right in our ability to communicate and resonate with people. And so, like Friedman, like Hayek, like Mises, I believe that you have a linear relationship between ideas--ideas generate institutions. Those institutions generate economic outcomes. The institutions do that by having an effect on incentives and information. But ideas are ultimately what it's all about. And so when we talk about why it is that we believe, since 2008, that we need to do certain steps, I think one argument is that, well, interest groups are gathering together and they are making sure that the policies are done in a way that is directed to flow resources in their direction. I have no reason to doubt that or believe it. But I think that our first reason is that people believe that that's what the right thing to do is. So, we have a sincere error that's being done intellectually, and that's where we come in as economic educators, where we have to take the burden of the responsibility of trying to communicate to the next generation, the basic principles of economics so that they can become informed participants in their own democratic process of collective decision-making. And make those decisions. Because most people are making those decisions uninformed about what the consequences are of the policies. So I have a very, like, almost religious calling of the-- Russ: You're proselytizing-- Guest: teacher of economics. Russ: Or evangelizing. Guest: Not the science of economics, which is totally different. That's an invitation to--like I said in the beginning, the book is really about an invitation to inquiry, not a catechism about subtle doctrine. Right? It's an invitation; you know: do this, start thinking in the economic way of thinking; it opens up all kinds of questions and exciting avenues. But, I am evangelical about people teaching economics. Right? And improving economic literacy. And improving economic literacy in my mind is that the mainline teachings of economics have to be taught. So, one of the things I think we do a really poor job at as economists, teachers, is that our emphasis on technique has crowded out an understanding of the substance of what it means to be an economist and to think like an economist. And so I try, you know in the beginning of the book I have a whole thing about what the tasks of economic education are, what are the main principles. The biggest idea here, without repeating myself, is just that if you teach a course where you emphasize all the time the exceptions to the general principle, then what students walk away thinking about is the exceptions, never the general principle. And so I think we over-teach, in our principles of economics, because we are obsessed with trying to make sure the students are prepared to go get a Ph.D. But only 1% of them ever go on to get a Ph.D. And so as a result we kind of lose the love of the discipline. So, Paul Heyne, who I had the good fortune to be close with and ended up jumping on as the co-author of his book after Paul died too early in life. But one of his mottos is: Teach economics as if it's the last class a student will ever have, and it will be the first of many that they will take. We Ph.D.-ize our principles of economics. And instead what we should be doing is teaching the principles of economics with love and excitement and intellectual curiosity so that young students, whether or not they major in English to music to whatever have some appreciation of economics and the economic way of thinking so that when we have acute public debates like the fiscal cliff or the role of monetary policy--which has become a public debate; it's not just a debate among experts--that they have some sense of understanding about what's going on. And being able to reason and come out with reasonable positions that they hold that may not be the same positions I would hold but we would have a shared understanding of the substantive propositions so we could understand where one another is coming from.

COMMENTS (25 to date)
Nick Lyell writes:

I think a lot of what is discussed in this podcast could be summed up by a trouble with the ability of special and wealthy interests to capture the tools of government.

An appropriate podcast would be an interview with Lawrence Lessig on the topic of campaign finance reform. Though not an economist, he is a man who understands incentives very well. If we place the incentives of politicians back with the average voter, we would see much less government waste, and more properly align the costs of government spending with the benefits.

I hope to hear a podcast on this in the future!

TQ Senkungu writes:

Could you get George Mason to put your courses on iTunes U? I'm in California and see what Stanford and Harvard are doing and would like to see the same from an economics program like yours. It also promotes Boetke's thesis of this book.


Can you get Thomas Sowell on your program. His conflicts of visions book dovetails with this talk nicely and is pretty timeless?

What are a list of some other Econ programs like yours across the country besides Chicago?

David writes:

The analogy Russ used about the rocket to the moon is very true. People are led to believe that if economists can just get the numbers right it will fix everything. The one thing that is taught in economics classes is that people will act rationally but I've always thought that acting rationally doesn't mean people will act predictably. Ive become more convinced that economics, as a major in college, should moved out of business schools.

Urstoff writes:

Nick,

One of the major insights of public choice economics is that the voting process of democracy itself results in special interest politics regardless of the finances of campaigns. This is not to make an argument for (or against) any type of campaign finance laws, but simply to say that special interest politics will result from any representative democracy with even marginally rational voters (rational in the sense that most people are uninformed about most things simply because it is to costly to spend 80+ hours a week reading about policies, local and national, that will either not effect you at all or only effect you a tiny bit).

Jim Feehely writes:

Hi Russ,

Was this a religious broadcast for free market economic theory? It sounded like that.

My position remains that, whilst economics has and continues to provide insights into economic behaviours, economics does not explain human life or society. It does partially, but falls a long way short of even attempting to explain the human condition.

It seemed to me that this podcast was very much based on the premise that economy is life and that markets ought be allowed to 'self regulate' all aspects of social and political life. Certainly, and disappointingly, economics and corporate lobbying seems to have convinced most politicians that the role of politics is purely economic. And that has become the great flaw of democracy. That approach leaves politics open and vulnerable to powerful corporate lobbyists that lean on government using purely conventional economic arguments. That is what causes much more irrational policy than does advocacy for socially interventionist policy.

But economy is clearly not life. All the evidence available to me shows that people do not act rationally. Nor do people act in their own self interest. Corporations do, but people do not. That, I think, is the essence of the cause of social inequity. If people act dominantly in their own self interest, how does one explain altruism? How are charitable NGOs explained?

We desperately need more political action on social equity (ie stop simply accepting, on purely economic grounds, that society must produce losers), environmental conservation, and international equity. These are all things that market economics does not fix and has, in fact, made steadily worse. So, if government is to intervene less, are we not abandoning any hope of better social equity, an improving natural environment and more international cohesion and cooperation?

Regards,
Jim Feehely.

Raja writes:

"We get the economics we deserve." So true, and depressing, as the comment by Jim evidences. (Although honestly that reads like a propaganda talking point.) Dismal science indeed ...

I wonder about the moral complicity of the Krugmans, Stiglitzes, Samuelsons, et al, in this regard. Surely these people are smart enough to grasp the simple arguments of economics which contradict everything they preach, right? Or have they really taken the blue pill ...

A writes:

Russ, I found your comments on how political outcomes are emergent quite interesting.

I agree with much of it, but I wonder about the following: you seem to move quickly from "no single person determines the outcome" to "we can't say anything about what voter groups want because it's just such a complicated thing."

Barring mistakes, I think we can confidently say three things about political outcomes:

1) Given political outcome A, a politician must have offered it to a coalition of voters because a majority-sized part of that coalition would vote for outcome A.

2) The majority-sized part of the coalition may have voted for the outcome so it could grant a benefit to itself, as a bargaining tool to satisfy other parts of the coalition, or as a payment to the entrepreneurial politician who offered the outcome.

3) It is right to say that the majority coalition wanted outcome A, because in forming the coalition each member gave up less than he gained when he made the choice to become a member (else he would not have joined). [Note: I make no claims about welfare being positive or negative as a result -- just better than the next best alternative.]

Do you disagree? If you do, I'd like to know why, because that seems pretty compelling to me!

Russ Roberts writes:

Jim Feehely,

You may have some religious issues of your own.

Self-interested does not mean selfish. See Adam Smith's book The Theory of Moral Sentiments or the six-part series I did with Dan Klein on the book.

Nowhere in this conversation did Pete or I suggest that people are rational in the sense that most economists use the word--calculating machines of cost and benefit. Of course, people are human--they make mistakes all the time.

You also, I think, confuse "the market" with "voluntary." Allowing solutions to various problems to emerge from the bottom-up rather than imposing from the top-down is not about making things a matter of profit and loss or assuming that everything will turn out perfectly. Those of us who favor allowing voluntary solutions to emerge via privately created institutions and organizations believe that such solutions are preferable to solutions imposed by politicians who have imperfect knowledge and imperfect incentives. We don't think there is anything magical about it. That "belief" is not a religious one but one based on what we take as the evidence and our understanding of the incentives facing political actors as Pete discussed in this conversation.

Finally, I share your concerns about the power of corporations to manipulate the political process. That was the whole point of Pete's discussion of Jim Buchanan and the field of public choice--centralizing power in the government even in a democracy does not guarantee that the average person can compete with corporations and other special interests in manipulating the levers of power. It is precisely for this reason that I and others favor smaller government. A smaller government makes me less vulnerable to the political power of corporations and those other organized special interests.

Greg G writes:

I enjoyed this podcast a lot. This is what you do best: laying out ideological disputes in a way that makes the differences of opinion clear and places everything in a historical context.

Despite the fact that I often think that the Austrians take these insights to extremes, I am glad we have you to warn us of the dangers of relying too much on mathematical modeling and the dangers of relying too much on debt.

I do think that the Founding Fathers of this country would be astonished to find that two hundred years later, someone could win the top prize in economics for discovering the very thing they worried about full time - the fact that, like everyone else, political leaders act in a self-interested way. It seems like within the GMU community this insight is regarded as something akin to the discovery of fire or the wheel. Everywhere else it it pretty much seen as something we have know all along.


Has there ever been a time in history when most people didn't think their political and ideological opponents were behaving in a self interested way? And that they they themselves were advocating the policies that would be of the most benefit to society at large?

People have been freaking out about the public debt and predicting doom since Hamilton assumed the debts of the states when our nation was first founded. Russ makes the point that there used to be something in our political culture that limited politician's willingness to take on public debt. This is true. We have always been willing to take on staggering debt in wartime. As a percentage of GDP, the massive debt taken on during WWII was about 2/3 paid off when Buchanan wrote Democracy in Deficit.

What changed after that was NOT a resurgence of Keynesian economics. That trend of debt SHRINKING as a percentage of GDP occurred during the height of the influence of Keynesian economics.

It was Supply Side Economics and starve-the-beast thinking that blew out all the restraints on deficit spending. It was Reagan (not Keynes) that Cheney cited as having "proved deficits don't matter." That was the change in the political culture that really took the lid off spending. And that is why Buchanan's warnings about Keynesian thinking do not have the influence that you think they should.

Starwatcher162536 writes:

Interesting discussion, thanks.

Some of this discussion however seems to be predicated on how to curtail the redistributive state. Just want to add here that this is not a unanimous goal. I for one have no problem with a more redistributive state. The only reason any of us succeed is because of this society we live in. If society wants to have a higher participation fee for people who gain more for participating in society, society (through our representative democracy) is fine with doing so. If society wishes for lower participation fees for the aforementioned that is fine also.

Now we can go back and forth arguing about the effects of this or that regulation has on growth. This means though that I very much suspect economics will be dragged back into this quantitative place which neither speaker is terribly happy to be in. I would not be terribly surprised if the ongoing quantification of economics has a major driver behind it being neoliberals attempting to show that it is against the longterm interests of the electorate to vote for more redistribution.

Starwatcher162536 writes:

I'm moderately surprised inflation is downplayed so much on the left. Even to the point a few (outliers sure, but still) are advocating for this trillion dollar idea. If you debase the currency doesn't this have much the same effect on equality as a flat tax does? It might drive the gini coefficient up even more then a flat tax since the very poorest are not big debtors. They can't get much credit in the first place.

Chris writes:

Let's not throw out the baby with the bath. There have been great contributions by mathematical economists that have revolutionized several fields, in particular Micro. Just think about J. Tirole’s and others work in Finance/Capital Markets and J.-J. Laffont/J. Tirole’s work in regulatory economics in the 90s. The true problem, however, is that these two held/hold degrees in applied mathematics and knew/know what they are doing. Too often, “mathematical” work in economics has true (applied) mathematicians go into a state of ROFL (Rolling on the Floor Laughing). A case in point is the hype on real options that flooded the profession a couple of years ago. It took two applied mathematicians to point out that the necessary stochastic calculus runs into severe problems of solvability once the economic problems analyzed become truly interesting/relevant.

emerich writes:

Great discussion. Lots of insights from Boettke. I too thought Russ's comment about political solutions being "emergent" an enlightening twist. Legislation is an outcome of multiple individuals (politicians) with various motivations, but mostly--all?--self-interested. The end product is emergent. Which is perhaps a fancy way of saying, "laws are like sausages. It is better not to see them being made" (Bismark, according to Brainyquote).

And economists love math. Neat, clear solutions are overpoweringly seductive.

Starwatcher162536 writes:

Funnily enough my natural inclination is opposite of Russ'. That is my gut reaction of which type of method would lead one to more often incorrectly think one has captured all the variables is not the highly "mathmatized" quantified economics but the qualitative Adam Smith type of economics. Neat stories are neat. Messy Monte Carlo simulations are messy.

Scott Campbell writes:

[Comment removed for rudeness. --Econlib Ed.]

Casey writes:

On the topic of getting the government we want or the economy we deserve:

Perhaps a significant factor in long term emergent organization, are decisions that are hard to undo? So the sticking point isn't just popularity, or special interests, but logistics. In order become addicted to smoking for life, you only have to really think smoking is a good idea for a few weeks. You might wake up every morning thereafter not particularly fond of yourself for smoking, but the addiction still wins nonetheless. Smoking might cause cancer years down the road, but quitting isn't certain to work, takes tremendous, consistent effort, and patches and gum are expensive.

The costs to start are lower than the costs to quit. The same could apply to the social infrastructure process. Once a federal reserve, Medicare, or EPA hang around long enough, the society grows comfortable with it, and it becomes an integral part of expectations -for better or worse. Maybe that's obvious, but it takes more than a simple majority or perhaps even a 70/30 majority to overcome . Any transition away from those organizations would require a herculean logistical effort. It is however, less difficult to create - for example: a consumer financial protection bureau. At this stage, it might be equally simple to terminate, but for now the CFPB is popular to the people that matter. Whenever that fades, it will likely already be entrenched.

That trend can be turned around I imagine, just as an addiction can be overcome, but it all comes down to cost.

Greg G writes:

Like several other commenters, I thought that Russ made a very insightful point when he said that spontaneous and emergent processes do not always produce desirable results. It is more common to hear the terms "emergent," "spontaneous," or "bottom up" simply used here as compliments for processes whose results the speaker approves of.

Just a few weeks ago Don Boudreaux was doing that as he tried to defend Hayek's distinction between law and legislation. Law was characterized as spontaneous, emergent, bottom up and desirable. Legislation was characterized as top down and much more likely to be something pernicious that messes up the spontaneous emergence.

But millions of different people vote for thousands of different political representatives, who then hire thousands more public employees. And all of them compete and cooperate to varying degrees motivated by their own self interest and what they take to be the public interest. The result is unpredictable and quite obviously emergent.

I agree with commenter A who questioned the claim by Russ that "We can't say anything about what voter groups want because it is such a complicated thing."

Whether we are looking at the outcomes of market transactions or elections, the outcomes are emergent and contain much useful information although it is easy to go wrong in interpreting that information.

Pat James writes:

Loved the shout-out to Paul Heyne at the end.

I feel fortunate to have encountered Paul first as the lecturer for Econ 101 at the University of Washington, an experience that inspired me to major in Economics and take an additional course he taught where a small group read The Constitution of Liberty.

savings and loan crisis writes:

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David Zetland writes:

I really liked this podcast (and recommend Madmen, Intellectuals, and Academic Scribblers as a complement to Boettke's book), but I think that you guys lost track of the question on WHY mainstream continues to dominate economics education. It's not enough to claim that "our guys" win nobel prizes when "their guys" dominate Econ 1, 101 and 201 (PhD) classes.

It's a fact that mainstream domination of "top" departments, journals and textbooks (e.g., Mas Collel et al. 1994 for PhD students) reinforces the message that they are "right" when it's obvious that they are so wrong. I HAD to go outside my PhD classes at UC Davis to learn about institutional, experimental, behavioral, and public choice economics; few of my fellow students did. I attended heterodox summer schools; few of my fellows did. The fact is that they took PhDs under mainstream advisers and they will teach the same to their students.

The lack of a "market test" (i.e., relevance in a competitive world) means that mainstream institutions will continue to dominate, and continue to mislead the majority of economists (and their students) down the path of irrelevant theories and conclusions.

You guys need to go a little harder on the mainstream guys (George Mason is really doing well at that, picking up public readers, etc), since they are driving the ship into the iceberg.

William writes:

Good discussion. I listened to it this morning, and only just today saw a headline on housing here in Ireland that illustrated the divergence between intentions and outcomes:

Warning that more people will be made homeless because of new landlord laws

Chris writes:

Russ,

First thanks for your podcasts. I eagerly await each one.

"The average American likes intervention."

I think the quoted idea is a key piece in the discussion of outcomes of type, size, and influence of government. I would think, however, that it's less about "liking" intervention as much as action or internvention is instinctive. When we get hungry we solve the problem by eating. A flat tire gets air. A market failure is solved through government action.

Is intervention an extention of human instinct? If it is, non-interventionist ideas are the ones that require significantly more thought and energy. For good reason, I don't think "most" American's care enough to think it through even when the conclusion of that thought is to do nothing.

Jonathan Shirley writes:

I teach economics at a community college, and I remind my students that one of the most powerful implications of Darwin was that the environment dictates who survives or "what works". Both self interest and property are extremely powerful incentives for organizing behavior and society and surviving. Property is a store of value; it provides for future needs, either directly or by allowing us to finance the acquisition of things needed to survive, which requires some degree of civilization (in hunter gatherer societies where movement is required, property can be a liability). Having a lot of property -- wealth - can distort behavior, however, at least from the perspective of the natural environment, because it insulates us from basic survival type behaviors. This is not to criticize private property rights-- I strongly advocate private property rights, but it does explain behavior that often seems irrational.

These interviews are priceless. I especially liked this one because an understanding of economics, properly taught, will transform one's view of the world. It is its own form of enlightenment -- learning to identify the currents of self interest, etc. and interpreting behaviors accordingly.

Got to run to work. I love these lectures. I look forward to them each week.

Jonathan

Amit writes:

There seems to be a very strong opinion against goverment program for the old, and the word for this is re-distribution.

It is also re-distribution of my blood when people like me who are formerly poor join the military to get out of poverty and when people of known means do not serve the nation in protecting it. It is also re-distribution of cops blood when rich people's children do not serve in public safety or fire departments.

Dear Professor, next time please note wealth is not just digits on a bank statement but also a loss (or a threat of loss) of family member. That is a redistribution of blood from the poor to the rich.

SaveyourSelf writes:

In this interview, Peter Boettke said: "So Buchanan's puzzle, Constitutionally, is: can I empower the protective and productive state without unleashing the redistributive state? And it turns out, in the 20th century we haven't been very successful at doing that. And that becomes our puzzle."

This statement communicates the widely held belief--even among economists--that there is a productive element to government activities. This is false.

The word productive, according to Webster’s dictionary, is an adjective that contains a duel consideration for both the act of producing goods and services and the efficiency by which that production is accomplished. I do not dispute that the government can produce goods and services. It is the efficiency portion of the definition where government institutions fail demonstrably.

In the interview with Peter Boettke, Dr. Roberts cited "Roads and Bridges" as an example of productive enterprise performed by the government. This is forgivable because roads and bridges sometimes seem like public goods, but they are not public goods, so that statement is false. A public good is one that is both non-excludable and non-rivalrous. Road can and are both excludable and, at times, rivalrous. Because they are not public goods, we can comfortably forecast that roads and bridges can be built better, cheaper, and faster by private companies. Relatively speaking, therefore, roads and bridges built by the government DECREASE the overall productivity of society by displacing the roads and bridges that WOULD have been built by the more efficient private actors. This decrease in overall productivity through displacement is true of all fields where the government invades, which is nearly all fields of business. Education comes to mind as a particularly stark example.

For completeness, it is important to note that there are a few exceptions. Certain government activities can improve the productivity of PRIVATE enterprises, and are therefore desirable from a societal perspective. These desirable government activities are: 1) Protect citizens from outside invasion; 2) Protect citizens from each other; 3) establish and maintain the institutions and environment necessary for free-markets to naturally ration "public goods”.

Basic-economic assumptions combine to form a behavioral model where human decisions and activities are largely predictable by the rewards, and to a lesser degree the punishments, for any given set of choices. The generalizable differences in outcomes between private enterprise and government business activity follows naturally from this behavioral model. Government employees lack incentives for efficiency. For example, it is illegal for government employees to produce or benefit from profits. A government construction worker receives no reward for finishing a job early or under budget. In fact, he may be out of a job at that point. He is far better off, therefore, performing the job at a leisurely pace. Additionally government employees are insulated from any penalty for inefficiency—they are, after all, protected from competition by the armed forces. Finally, Government workers' wages are drawn from taxes--not payments for services rendered--so no amount of poor performance is likely to result in firing or wage cuts. In total, the lack of benefit for efficiency, lack of punishment for inefficiency, and the disconnect between the customers’ money and the workers’ compensation predicts that Government actors are VERY unlikely to generate efficient enterprise. This is not to say that they are incapable of producing anything. It simply means they are unlikely to produce anything efficiently. The tremendously rare exceptions—if there ever are any--are pure statistical anomalies/outliers, and exceedingly—almost impossibly—rare. Thus it is safe to say with great confidence that all government efforts to produce, instead reduce, societal productivity.

For completeness it is worth mentioning that not all private actors have the correct incentive structures to produce efficient activity either. But they sometimes do have the correct incentive structures whereas Government actors never have the correct incentive structures to produce efficient outcomes.

In summary, there really is no puzzle as to how to "unleash the productive state without unleashing the redistributive state." They differ only in their label. The “productive state” is the “redistributive state.”

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