I have debated many times renaming this blog --- There is Only Good Economics. I honestly believe that --- Good Economics and Bad Economics. This, of course, were the infamous words of Milton Friedman at the IHS conference in 1974 that is often marked as the birth of the revival of the modern Austrian School of Economics.
Friedman was right, but not for the reasons he thought. The ideas of the Austrian school are necessary (though I would argue not sufficient) to doing Good Economics. There are many ways to tackle this topic, but I want to emphasize the identified deficiency in mainstream models. Milton Friedman's review of Abba Lerner's The Economics of Control is a good place to start. Friedman argued that Lerner's book, while brilliant in many respects, was flawed because it deal with the world of policy administration as if it was in a vacuum. In short, Lerner's work suffered an "institutional deficiency" that had to be repaired.
The problem as the German sociologist and ordo-liberal Hans Albert identified is that neoclassical economics will not be able to repair its institutional deficiency until it repaired its behavioral deficiency. This is the critical point in my opinion. When we deal with an economics of robots, we do not have to deal with institutions, because lightening calculations permit the transcendance of the institutional environment. Omniscience knows no bounds in other words. But omniscience is denied to men.
Fallible men and women are a different animal and require a different framework of analysis. Re-enter Mises, who was repairing the deficiencies in economics before these statements by Friedman and Albert were made. Since the 1920s, Mises saw clearly that the Austrian school was a branch of neoclassical economics, but that branch that had distinguished itself by not focusing on equilibrium states, but on the market process. In the 1930s, as Mises was embroiled in debate with market socialists on the one hand and rising Keynesianism on the other, his views sharpend. When he published the German language edition of Human Action, Mises was already focused on the idea of clearly distinguishing between the econoimcs of human actors versus the mathematical representations of economic agents. The logical method of economics had to proceed from a different starting point --- that of fallible man, caught between alluring hopes and haunting fears. Man of limited cognitive capability, but pursuing his passions and striving to improve his position in life. A purposive human actor who believes he can change his future course, but that is because the future is openended and not completely determined. The future is unknowable, as Lachmann used to say, but not unimaginable.
In short, those first 100 pages of Human Action set the stage for Mises's comparative institutional analysis. To use Albert's language again, Mises's version of neoclassical economics sought to repair the institutional deficiency of mathematical neoclassicism by grounding the analysis in the behavioral foundation of humanly rational choice rather than mechanical optimization by omniscient agents.
This is why I have been so attracted to the work of Elinor Ostrom over the years. She too has sought an alternative behavioral foundation for rational choice theory of collective action. She builds out from that behavioral foundation to an institutional analysis which respects diversity and unique cultures and history.
Consider the following from Elinor taken from the Postscript of Aligica's and my book:
Q: Considering the analytical challenges posed by the study of polycentricity and complex adaptive systems, it seems that an interdisciplinary approach is not just one option among other, but unavoidable. In your own work, it looks like your interdisciplinary efforts went well beyond the social sciences:
EO: In a sense, your observation is correct. For instance, in the case of the CPR work published in Governing the Commons, I combined the strategy used by many scholars associated with the “new institutionalism” with the strategy used by biologists for conducting empirical work. The institutionalist strategy is based on the assumption that individuals try to solve problems as effectively as they can and also try to ascertain what factors help or hinder them in these efforts. When the problems observed involve a lack of predictability, information, or trust, as well as high levels of complexity and transactional difficulties, then the efforts to explain must take these problems overtly into account rather than assuming them away.
The biologists’ scientific strategy involves identifying for the simplest possible organism in which the process under investigation occurs in a clarified, or even exaggerated, form. The organism is not chosen because it is representative of all organisms. Rather, the organism is chosen because particular processes can be studied more effectively using this organism than using another. These cases are in no sense a “random” sample of cases. Rather, these are cases that provide clear information about the processes involved.
My “organism” for much of my work has been a particular type of human situation — the common-pool resource situation. Colleagues and I have studied this situation using game theory and agent-based models, in the experimental laboratory, in single case studies, in small-N, comparative studies, and in large-N statistical studies. We have deployed multiple methodologies in order to develop a series of reasoned conjectures about how it is possible that some individuals organize themselves to govern and manage common-pool resources while others do not. We hope that these conjectures contribute to the development of an empirically valid general theory of self-organization and self-governance.
However this discussion about interdisciplinary and general theory shouldn’t be misleading. In my view, there are important specific differences between social sciences and the natural sciences. Complex adaptive systems involve learning. The role of knowledge, conditional action, and anticipation are fundamental. In this respect I might say that the work that we have done at the Workshop is deeply rooted in the central tradition of human and social studies. There is no better testimony for that than the questions that structure our work: How can fallible human beings achieve and sustain self-governing entities and self-governing ways of life? How can individuals influence the rules that structure their lives? Similar questions were asked by Aristotle and other foundational social and political philosophers. These were the concerns of Madison, Hamilton and de Tocqueville. Today these central questions unite political scientists, economists, geographers, sociologists, psychologists, anthropologists, and historians who study the effect of diverse rules on human behavior in various institutional contexts, countries or at different geographic scales.
one of our greatest priorities at the Workshop has been to ensure that
our research contributes to the education of future citizens,
entrepreneurs in the public and private spheres, and officials at all
levels of government. We have a distinct obligation to participate in
this educational process as well as to engage in the research
enterprise so that we build a cumulative knowledge base that may be
used to sustain democratic life. Self-governing, democratic systems are
always fragile enterprises. Future citizens need to understand that
they participate in the constitution and reconstitution of
rule-governed polities. And they need to learn the “art and science of
association.” If we fail in this, all our investigations and
theoretical efforts are useless.