Coordination Problem

Hayek's Intellectual Portrait

|Peter Boettke|

Hayek's emphasis on knowledge put him in direct confrontation with the two major trends in economic thinking of his time: socialism and Keynesianism.

 

 Also see my essay at Liberty Matters on Hayek's Epistemic Liberalism.

Leland Yeager and Austrian Macroeconomics

Steve Horwitz

As most CP readers probably know, Leland Yeager passed away at age 93 on April 23^rd. Many prominent economists with connections to Austrian economics have written very laudatory obituaries of a man who I think was the most underappreciated monetary theorist of the 20^th century. I’d like to say some words about Yeager’s contributions as well, focusing on the way in which his work is central to a broader Austrian-oriented macroeconomics. This post will be personal, in the sense that my own work is heavily influenced by Yeager and many of the themes I address below are fleshed out in depth in my Microfoundations and Macroeconomics: An Austrian Perspective from 2000.

Let me start with a story. In the acknowledgements of that book, I wrote “Although [Yeager] has long been a sympathetic critic of Austrian economics, it is my personal mission in this book to convince him that Austrian macroeconomics is more than its business cycle theory, and that it can be rendered consistent with his own work.” I will add that Yeager was indeed one of the imagined audiences looking over my shoulder as I wrote that book. I also meant what I wrote there very sincerely. When Yeager first read the book, he was unpersuaded, even though he wrote a largely positive review. I was disappointmented. However, in classic Yeager fashion, I got a letter from him sometime later where he said that he went back and reread some or all of the book, and told me that he was too harsh in that judgment the first time around. I had mostly persuaded him of the large-scale compatibility of his approach and that of the Austrians. Being Yeager, he still found things to disagree about, but this little story is indicative of his immense intellectual honesty and integrity. He was honest to a fault, which is a quality too often lacking today, but one I very much appreciated while interacting with him as a younger scholar. (I would say exactly the same thing about my friend George Selgin as well, even though his intellectual honesty was a source of much more direct discomfort when I was a very young scholar!)

So why should Austrians pay attention to Yeager’s work? The key is his understanding of the role money plays as a medium of exchange. His “Essential Properties of the Medium of Exchange” is the piece to read if you only read one of his journal article contributions. Once we understand money as the generally accepted medium of exchange, several important insights follow.

First, money is one half of every exchange. All purchases of goods and services are sales of money. This point has a further implication that is even more important: because money is half of every exchange, every market for goods and services is also a market for money. It is even more helpful to see this from the other side:  if every market is a money market, money has no market or price of its own. This last insight leads us to what I think is the most important conclusion to draw from this line of reasoning. If money has no market or price of its own, there is no single place where excess supplies or demands for money can be cleared by market processes. When the market for shoes is out of equilibrium, we expect that responses by market actors will change the price of shoes in a way that tends to clear the market. What Yeager’s argument suggests is that no such single-market mechanism exists for monetary disequilibria.  I will return to this point in a moment.

A second part of Yeager’s work on monetary theory is the importance of the difference between people’s desired and actual money holdings. This is an idea that goes back at least as far as Mises’s cash balance approach to the demand for money, which can be found in its earliest form in The Theory of Money and Credit. Because we “routinely” accept money in the belief that we will be able to spend it later, we can find ourselves with more of our wealth in the form of money than we would prefer. If we assume, with Mises, that the demand for money is a demand to hold real money balances (i.e., a stock of purchasing power, not just nominal dollar amounts), we might find our actual money holdings diverging from what we would prefer given the current array of market prices. Notice that this conception of the demand for money is like any other demand: it’s a set of plans at various prices/values of the good in question. The only difference is that the “price” of the good in the case of money is the inverse of the price level, or the purchasing power of money. And that, in turn, depends on the prices of the countless goods and services available for purchase.

What do people do when their actual and desired money balances diverge? They attempt to get them back in line by adjusting their actual holdings. The case that concerned Yeager the most was where actual holdings were less than desired holdings, or where money was in excess demand. Given the influence that the early American monetarists such as Harold Davenport and Clark Warburton had on him, plus being aware of the work of Friedman and Schwartz on the Great Depression, it’s not surprising that he would focus on the economics of an excess demand for money. In his “Individual and Overall Viewpoints in Monetary Theory,” he stressed the point that while each individual can attempt to adjust his money holdings in the face of an excess demand, it was impossible for everyone to succeed in doing so without either a change in the price level, to make the existing nominal money supply grow in real terms to satisfy the demand for real balances, or a change in the nominal money supply that provided more purchasing power at the existing price level.

When we understand money’s role as a routinely accepted medium of exchange, it’s also clear that the most effective way for individuals to bring actual money holdings up to their desired level is for money holders to restrict their consumption expenditures. It is the one thing that is completely under their control. Trying to earn more income or find a buyer for an asset requires that some other party is willing to part with money. Facing an economy-wide excess demand for money, finding such a willing partner will be nearly impossible (at least not without a dramatic price or wage reduction). So excess demands for money lead to a fall in consumption expenditures.

And this is where the earlier point about money having no market of its own becomes relevant. Monetary disequilibria are resolved by adjustments in the prices of each and every good in the market, not by one price in a “market for money.” As people restrict their consumption, this puts downward pressure on prices across the economy. For a variety of reasons, sellers will not respond immediately by lowering those prices, nor will that pressure on prices be equal in every market. As a result, the excess demand for money will be mirrored by an excess supply of goods as prices temporarily are above market clearing levels by varying degrees. Eventually prices unstick and fall, and set into motion the return to monetary equilibrium, but only after a wrenching process of adjustment that includes rising inventories, rising unemployment, and an increase in idled capital. This process is often referred to as the “Wicksellian rot,” after Knut Wicksell who first offered this sort of story at the turn of the 20^th century.

What we end up with here is a story that in many ways mirrors the Austrian business cycle story. If we understand the Austrian conception of prices as knowledge surrogates and the role they play in facilitating the entrepreneurial actions that lead to economic coordination, then we can see how both excess demands (deflation) and supplies (inflation) of money wreak their havoc by distorting individual prices. The relative price effects of the Austrian cycle theory are produced by the same process of people adjusting their actual holdings of money to their desired holdings as we see in the Yeager excess demand for money story. The inability of prices to respond instantly and smoothly to monetary disequilibria sets in motion an adjustment of real variables that constitutes either the deflationary recession in the Wicksell-Yeager approach or the unsustainable boom that characterizes Austrian cycle theory. What Yeager’s work on the foundations of monetary exchange does is give us a consistent theoretical approach to understand the similarities of those two stories.

The other point of commonality between Yeager and the Austrians is the shared lineage from Wicksell. A key difference, however, is that when Mises first put together the rudiments of his cycle theory, he did so by bringing together Wicksell’s work on the market and natural interest rate with the Austrian theory of capital he adapted from Bohm-Bawerk. The issues of capital use and malinvestment have always been central to Austrian cycle theory and are absent from the Yeager-type story on the deflationary side. The reason, of course, is that Yeager has long rejected Austrian capital theory. Even at the time of his death, he had just finished up a co-authored book with Steve Hanke that offers an extended version of his own approach to those questions, which focuses on “waiting” as a factor of production. In my 2000 book, I attempted to sketch out a version of the deflationary story that integrated Austrian capital theory, and I tried to extend that analysis in a book chapter a few years later. I’m still a little unsatisfied with the details of that argument, but I do think the general approach is right. And I suspect that Yeager’s admission that I’d persuaded him was a recognition that such an approach was at least possible, even if he wasn’t fully persuaded it was the right one!

What is especially attractive about Yeager’s approach is that it rests on a solid foundation of microeconomic choice. Another goal I had for my book was to make the case that while there are “macroeconomic” phenomena in the sense that things like monetary disequilibria (or regulation-generated distortions of the interest rate) have economy-wide effects, the ways in which those effects manifest themselves are always through changes in individual prices. Those price distortions lead to microeconomic discoordination that undermines the effectiveness of markets at producing widespread prosperity.

In the end, as Roger Garrison has said, there may be macroeconomic questions, but there are only microeconomic answers. That insight is what unites Yeager’s approach and that of the Austrians. And it is an insight with significant implications for policy, as it points us toward thinking about the kinds of monetary institutions that do best at providing the knowledge and incentives necessary to avoid monetary disequilibria and correct them when they do occur. Avoiding inflation and deflation matters not because of their effects on the economic aggregates that have grown out of what Yeager called “The Keynesian Diversion,” but because they undermine the price-guided microeconomic process of entrepreneurial discovery that produces economic coordination, social cooperation, and widespread prosperity. Understanding this point can help us avoid errors in theory and policy that make monetary disequilibria and their prosperity-destroying consequences more likely.

Leland Yeager’s work was central to this project, even if its importance was not sufficiently appreciated by the economics discipline. Thankfully, as they will for all of us, his contributions live on past his death. The upcoming generations of scholars neglect them at their own peril. Rest in peace, Professor Yeager.

Bruce Caldwell talk at Ohio University on F. A. Hayek: Life and Legacy (March 2017)

|Peter Boettke|

Bruce Caldwell has spent the better part of 30 years studying as a historian of ideas the thought of F. A. Hayek, and more broadly the arc of his career as a way to understand the history of 20th century economic thought.

 

 I just sent in my own book -- F. A. Hayek: Economics, Political Economy, and Social Philosophy -- to the publishers.  In the process of researching and writing up this book, I worked with my wonderful graduate students to start collecting what I am calling a Living Bibliography of Works on Hayek and I hope you will consult this document and contribute to its ongoing evolution.

Interactive Teaching as Research Productive Teaching

|Peter Boettke|

This video clip is from the Special Collections Oral History of GMU.  It discusses Buchanan's approach to teaching, and his shift of focus from his journeyman years of teaching at Tenn and Florida State to his graduate course in Public Finance and Welfare Economics at UVA and his effort to involve the students in his research process.  Also note his discussion of the difference between Jacob Viner and T. W. Schultz in their approach to teaching.  Buchanan embraces the Schultz approach and rejects the Viner approach, and in my experience that is 100% accurate.

 

 I had the good fortune to have some great teachers of economics in my formative years -- as I discuss in Living Economics: Hans Sennholz, James Buchanan, Gordon Tullock, Robert Tollison, Kenneth Boulding, and Don Lavoie (to name only those who are unfortunately no longer with us).  They had different styles and methods of engagement.  I learned from all. But Buchanan and Lavoie had the deepest impact on me and my eventual professional path because of this issue of active engagement with their research program.  Sennholz changed my life trajectory, but Buchanan and Lavoie taught me how to pursue that new trajectory and give shape and meaning to it.  

This is all about learning, and life long learning at that.

Reconnecting Economics with Moral Sciences

|Peter Boettke|

INET and Michael Sandel will be starting a new video series on what money can and cannot buy, and in the process reconnect economics with moral philosophy.

 There is much to learn from his musings. But I believe he also has some serious blind spots.  Since I began my career focused on the history of ideas on socialism, and history of practice of socialism, these issues of what was science, and what was normative theorizing was critical to my enterprise.  See, e.g., this paper published with a certain sense of irony in Faith & Economics. But my own thinking on this can be seen in a series of essays throughout my career -- hopefully reflecting both coherence and growth -- can be found here, here and here.  Kaitlyn Woltz and I have recently contributed a paper to Mark White's Oxford Handbook on Economics & Ethics as well that should be published in the next year.  

Yes, Virginia, Economics is a Science, but Political Economy is an Art.  And the worldly philosophy is best practiced when we remember this, and practice our craft in the tradition of Adam Smith to John Stewart Mill.  Someday I am going to write a book dealing with the fate of moral philosophers in the age of economic scientism.

Art, Science and Political Economy*

|Peter Boettke|

John Neville Keynes (1852-1949), the father of John Maynard Keynes, famously divided economics into positive economics (study of what is), normative economics (study of what should be) and the "art of economics" (applied economics where the lessons of positive economics are utilized to address normative economics).  It is in the "art" that J. N. Keynes (and Marshall and Pigou) thought that the science of economics will bear fruit.

James M. Buchanan (1959) similarly argued that "positive economics" and "political economy" could be reconciled in a way that the zeal of the idealistic reformer could be satisfied while the discipline of the science was maintained.  Suggestions for change (what should be), Buchanan argued, would be limited to changes in the structural rules, and the suggested changes should be treated as hypotheses to be tested in the democratic process of collective decision making.  Buchanan's process is guided throughout by a true (not hypothetical) compensation principle and the ultimate test is agreement.  In making his argument, Buchanan was also affirming an important democratic principle -- we economists have no privileged position in the conversation with our fellow citizens.

Of course, this insistence on the democratic principle as a constraint separates Buchanan from others in this discussion of the science and art of economics and political economy.  Keynes, and more famously his son, held fast to the commitment that economics must bear fruit and provide "expert" advice on how to address social ills -- be that poverty, ignorance, and squalor, or instability, idleness and inequality.  Those trained in economics can design appropriate solutions to society's problems and fix the world in the service of democratic polities.  The "experts" can effectively govern over, not govern with, their fellow citizens.  This was, and remains, the "Harvey Road" presumption, or in the US the "K Street" presumption, that dominates progress thought.

Buchanan's negative reaction against this is evident from his first paper, where he challenges the idea of the "fisc" (1949) and it is obviously there in his Nobel lecture where he invokes Wicksell -- as he did throughout his career -- to argue that economists must cease proffering advice as if they were employed by a benevolent despot. (1987)  His argument has roots not only in Wicksell, but in Knight and Hayek.  Knight once states that when he hears an economist say "I want power to achieve X, Y, Z", he stops listening after the first 3 words because those are the only words you can believe.  Knight also repeatedly argued that appeals for expert rule where fundamentally non-democratic in nature.  Now imagine what a hard pill that was for Knight to swallow because he also believed economics was little more than applied common sense and that fellow citizens would see the points being made by sound economic theory if only they would open their eyes.  But even given this reality of a citizenship often composed of individuals suffering from ignorant prejudices, the economist has no privileged place in democratic deliberation.  He cannot impose his will on fellow citizens, he can only attempt to persuade them through thoughtful deliberation to see his point.  To Knight and Buchanan the idea of government by discourse is critical to understanding their system of thought.

From Hayek, on the other hand, Buchanan drew inspiration not only about the spontaneous ordering of affairs within a specified institutional framework, but the necessity of, and importance of, the institutional framework as a subject of serious study.  Buchanan called for a "genuine institutional economics".  "The standard procedure," Buchanan argued, "of assuming competitive order is not acceptable.  Appropriately thorough analysis would include an examination of the institutional structure itself in a predictive explanatory sense.  The economist should not be content with postulating models and then working within such models.  His task includes the derivation of the institutional order itself from the set of elementary behavioral hypotheses with which he commences." (1965, 5) In short, institutions matter.  And, for economic analysis to be meaningful, institutions must be endogenous to the analysis.

Buchanan differed in a serious way from Hayek in how he went about endogenizing institutions, and his various analytical moves effectively meant that constitutional craftsmanship for him would take on a sort of top-down character.  But a genuine institutional economics need not proceed in that fashion.  Elinor Ostrom's various studies of collective decision making and constitutional craftsmanship, for example, are more or less all bottom-up explanations.

The point I want to stress is a methodological and analytical one. If the "art" of economics and political economy is to be found in the rule-level of analysis -- as I believe it is -- then how best do we study the emergence of institutions and analyze the maintenance, and perhaps deterioration, of institutions using the tools of basic economic reasoning (positive economics)?  We cannot be content with what Barry Weingast has recently called the "neoclassical fallacy" where institutions are acknowledged but not analyzed.  Our goal must be, as Buchanan once put it, to use "the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men.  Yet political economists go further and frankly try to bring out into the open the philosophical issues that necessarily underlie all discussions of the appropriate functions of government and all proposed policy measures."

Thinking in our discipline cannot be done in splendid isolation.  This was a core motivating idea behind the Public Choice Society, and its predecessor The Committee on Non-Market Decision Making.  Vincent Ostrom used to suggest we needed a new science of politics, a new science of sociology, and a new science of economics so we can realize the "art and science of association" appropriate for a democratic society.  This necessitates a return in our teaching and our research to the modes of thinking and habits of thought one finds in moral philosophy and moral sciences from Adam Smith to John Stuart Mill.  During that period Philosophy, Politics, and Economics were blended seamlessly together, not just a smorgasbord of classes patched together to meet degree requirements. And, the empirical testing ground was to be found in history and anthropology and archeology, and not in data analysis per se.

We must be prepared today to wrestle with the same problems that Mises/Knight/Hayek faced and which Buchanan/Tullock/Ostrom faced -- the fate of moral philosophers in the age of economics scientism.  And, we must recognize that if we fail in this task, as Hayek warned in his Nobel lecture, we don't just condemn economics to intellectual bankruptcy, we actually commit ourselves to standing idly by as those self-anointed economic "experts" become potential tyrants over their fellow citizens and destroyers of civilization.

The stakes we might say are quite high.

 

-------------------

*Remarks read at the 2018 Public Choice Society meetings in Charleston, SC.  

The Surveillance State is Developed Abroad But Perfected at Home

|Peter Boettke|

Randolph Bourne famously said "War is the health of the state."  He easily could have said, War is the Bringer of Tyranny.  We often hear that War and Military interventions is what protects us from Tyranny.  But if you look at the blow-back both in terms of enemy combatants AND in terms of the loss of our domestic liberties that are sacrificed both to fight the wars and with the traveling back home of practices learned overseas to keep populations under military control.  War, what is it good for, absolutely nothing -- is perhaps an even more poignant phrase than Bourne's famous words.

See the first video promotion of Chris Coyne and Abby Hall's Tyranny Comes Home.

What Could Possibly Go Wrong?

|Peter Boettke|

Watch this very important video lesson from Tyler Cowen on How the Fed Works.

 

 Now, go read Milton Friedman's 1947 review essay of Abba Lerner's The Economics of Control in the JPE.  Are the "administrative costs" being taken into account in this evolving Fed and the public policies chosen?  Those administrative costs include both incentive alignment issues and information processing issues, let alone more subtle issues having to do with knowledge and learning.  In short, any institutional regime that presupposes for its operation omniscient and benevolent public servants is going to have issues in practice.  As Friedman warned in Capitalism and Freedom, any institutional arrangement for monetary policy where a sincere error by a few can threaten the long-term performance, and perhaps even viability, of the economic system is perhaps an institutional arrangement we cannot afford.

So Cowen's depiction of how the Fed operates seems to nicely capture the way monetary policy was followed in the wake of the Great Recession, but I personally would always place in juxtaposition George Selgin's rather damning portrayal of Fed policy in "Operation Twist the Truth." All the parts Cowen describes are there, but the purpose and the consequences are interpreted in a more critical light.  Selgin's views in general can be found in his collection of articles Money: Free and Unfree. Roger Koppl's From Crisis to Confidence also provides an excellent primer on macroeconomics after the crisis, and one that takes seriously the problem of "expert failure", especially failure by an monopoly expert, which of course the Fed is institutionally established as in the realm of monetary policy. See Koppl's new book Expert Failure for a general discussion of these points of social epistemology and public policy.

Larry White, of course, has long asks us to consider whether our monetary policies are being pursued according to the Rule of Law, or by the Rule of Central Bankers?

Dan Smith and I have written about the evolving views of Hayek, Friedman and Buchanan on monetary policy because of their frustration to effectively bound the discretionary authority of the Fed.  Fed discretion, on the other hand, has continually meant historically that political influence impacts monetary policy in a counter-productive manner, as Dan and I also argue in a separate article.

The video is a great teaching tool, but the political economy question is whether such tools of monetary policy bring sound money to the economic system, or represent simply the latest evolution of the techniques for creating the illusion of prosperity in the short-run while distorting economic relations, and in fact, deforming the economic system in the long-run.  If you include in your analysis of "macroeconomic policy" also fiscal policy, then you get a sort of perfect storm that has bothered economists since the time of Adam Smith -- unsound money and irresponsible fiscal policy, which has been the hallmark of the government "juggling tricks" from ancient times to modern times.  Juggling is all well and good, but even master jugglers sometimes fail.

 Perhaps we better think hard about the downside risk of monetary mismanagement for the economic health of the economy when contemplating the evolving powers and responsibilities of the Fed and the central bankers we entrust with the system. 

You Just Lack Training ...

|Peter Boettke|

As a graduate student I took 2 PhD seminars with James Buchanan -- Philosophy and Economics, and Constitutional Economics.  In the Philosophy and Economics class he periodically would ask us very basic but technical questions about economic theory -- opportunity cost being a favorite, but sometimes he asked more specific questions about the models -- inframarginal, or increasing returns were particular topics of interest.  As I have said on several occasions, Buchanan was the opposite of Tullock in the classroom in my experience.  Tullock was intellectual jiu jitsu, where you are always on guard and he was always trying to knock you off balance.  Buchanan was a guiding hand that was trying to get you to think seriously about economics and the ethical/moral dimensions of political economy.  He would make even the most lost student seem to be a vital contributor to the ongoing conversation.  But, on these issues of the technical principles of economics if you goofed up, he didn't cut you to the ground like Tullock, though he would just utter something along the lines "It's not your fault, you just lack training."  Which I guess for a grad student is pretty damning, so you would run home or to the library and try to correct your misunderstanding.  Since he emphasized very subtle points in economic reasoning -- see for example Cost and Choice -- this was not an easy intellectual exercise, but one that took serious effort and contemplation.  I am still learning 30 years later when I think about the questions he asked us to think about in class and in our short essays.

I just returned from the Association of Private Enterprise Educators annual conference, I was part of a panel that discussed "Enduring Contributions of James M. Buchanan", and I presented a paper "James Buchanan and the Properly Trained Economist."  You can find the draft of this short essay below.

 

James Buchanan and the Properly Trained Economist

Peter J Boettke*

In his essay on “Economics and its Scientific Neighbors,” Buchanan argues that the properly trained economist must have the principles of the discipline always by their side. The task of the political economist is to use the technical principles to assess how alternative institutional arrangements encourage or hinder the ability of individuals to realize the gains from production specialization and peaceful social cooperation. "As a 'social' scientist,” Buchanan argued, “the primary function of the economist is to explain the workings of these institutions and to predict the effects of changes in their structures. As the interaction process that he examines becomes more complex, it is but natural that the task of the economic scientists becomes more intricate. But his central principle remains the same, and he can, through its use, unravel the most tangled sets of structural relationships among human beings” (1966 [2001]: 7).

Economics properly understood makes sense out the complex web of human relations that constitute reality. “The economist,” Buchanan continues, “is able to do this because he possesses this central principle – an underlying theory of human behavior. And because he does so, he qualifies as a scientist and his discipline as a science. What a science does, or should do, is simply to allow the average man, through professional specialization, to command the heights of genius. The basic tools are the simple principles, and these are chained forever to the properly disciplined professional. Without them, he is as a jibbering idiot, who makes only noise under an illusion of speech” (1966 [2001]: 7).

So, the first task of the properly trained economist is to avoid becoming a jibbering idiot. What might lead someone astray in the discipline of economics and lead us not to enlightenment, but to mistaking noise for sense? Buchanan’s consistent answer from the beginning of his career was a methodological one, and is best exemplified in “What Should Economists Do?” when he worries about the practice of nonsensical social science when the pure logic of choice and the allocation of resources is given the primary place in economics as opposed to exchange and the institutions within which exchange takes place.

As we have been processing the Buchanan archives at GMU, it has been fascinating to get a window into Buchanan’s world. This collection -- which now runs 192 linear feet -- reveals a surprising consistency in Buchanan’s writings and his academic entrepreneurship and his private correspondence.[1]. Critical to understanding Buchanan’s system is that he is a liberal political economist in the tradition of Hume-Smith and Knight-Mises-Hayek, he is a methodological individualist in the tradition of Knight-Mises, he is price theorist in the tradition of Marshall-Knight, and he is public finance theorist in the tradition of Wicksell. All these elements are wrapped up in his economics. Furthermore, he has a deep commitment to government through discourse, and perhaps an even deeper commitment to the relatively absolute absolute. No one individual or group of individual is privileged either by nature or in deliberation over others. No one, and no group, have unique access to TRUTH. In fact, any claim in politics to TRUTH leads to tyranny plain and simple. All we can have in politics is consensus, and since there is no unified scale of values for society as a whole, all we can ever reasonably expect to get a consensus over is not ends, but the acceptable range of means by which we each pursue our separate and often desperate ends and how we relate to one another in our efforts to pursue those ends.

In the late 1970s, all these issues are brought out I would argue in a exchange of letters with one of his former students -- Richard McKenzie. McKenzie had just recently published with Tullock, The New World of Economics, which is a relentless application of the economic way of thinking to all walks of life. He is also working on a paper dealing with the constitutional moment in the US, which challenges the public spirited interpretation and pursues instead a pure private interest explanation. This particular exchange of letters runs from May 29, 1979 to June 25, 1979 and consists of 2 letters from each party. McKenzie begins the conversation by asking for Buchanan’s reaction on his work on constitutions. He references Charles Beard’s economic interpretation of the constitution, and asks Buchanan the following: “I recognize that Beard may not be right in his analysis; but if he is, does my analysis follow?”

Buchanan’s response is harsh, but also framed with a self-effacing “quasi-serious” quip and informing McKenzie that he probably needs to be constrained as a scholar to keep his very good talents “from running to excess.” He informs McKenzie that he does not like his paper, and in fact considers his paper to be profoundly immoral as it violates the norms of the civic religion with the over-extension of the logic of economics. He then says that he “felt a bit the same way about some of your applications in “New World”.” There are limits to economics analysis, Buchanan insists, “beyond which it is inappropriate to do go, for to do so will undermine myths, sacrosanct objects, concepts, ideas, that have intrinsic value in their own rights.” Buchanan ends that paragraph by informing McKenzie that the mythology that the founders were disinterested public servants “has served us very well for two centuries, and, quite literally, I think it is a sin to destroy this mythology.”

The reason, the social order of the liberal society, its stability and its viability, is intimately connected to the maintenance of this civic religion. Destroy the civic religion, you destroy the social order. He ends his letter chiding McKenzie to be more reflective of his position, one that steers a path away from a strict interpretation of “New World” and more toward one that recognizes the ethical-moral cement of the social order.

McKenzie responds immediately, and says that while the comments from Buchanan were not totally unexpected, he pushes back or seeks to clarify his position, especially as it relates to The New World. He “defends” the extreme examples as a method to capture the imagination of the students, to shock them out of their complacency so they may see the power of the principle being illustrated. He ensures Buchanan that he is not completely serious in the choice of examples. And then he adds that he believes that students get this, but that perhaps some instructors don’t.

Buchanan’s response brings us back to our theme here. As he says to McKenzie in a letter of 25 June 1979, “I think that you can appreciate my own position, which places very heavy weight on ethical-moral constraints, and on noneconomic explanations generally. But yet you can also see the power of the simplistic economic explanation, and you, like me, recognize that these explanations are, after all, our own stock in trade.” But our discipline must resist the scientistic urge, “Our raison d’etre is not to act like, or to ape the scientists at all. And we would not like the world of the economic scientists at all.” Here Buchanan lays out his position, which has been developed throughout his writings, that our role as economists is “basically didactic”, this is not a preacher, but the teacher that cultivates in their students an appreciation and understanding of the spontaneous ordering of the market economy.

But once he makes this standard claim of his, Buchanan stresses that there are multiple windows into the world through which one can look, and that “we should all come to accept the fact that politics involves talking pure and simple”. Buchanan had with his own public choice analysis attempted to pierce the romantic veneer of modern democratic politics, but once the romance is no more, Buchanan fears that if we “become generally convinced that politics is pure transfer” then all that is left is fighting over each others’ shares.

            When Buchanan took up the task to describe what he and his colleagues were hoping to accomplish with the establishment of the Thomas Jefferson Center for Studies in Political Economy, he argued that the idea was to continue in the grand and honorable tradition of political economy, and that the task of the political economist was first and foremost to utilize the technical principles of economics that are necessary to access how alternative institutional arrangements enable or hinder the pursuit of individuals to pursue productive specialization and peaceful social cooperation. However, the second aspect of the task of political economy is to bring into the open the moral and philosophical investigations of the questions dealing with the scale and scope government in all deliberations concerning public policy.

            This remains the task of the properly trained economist. Others that fall short in this question, are not evil or dim, but they perhaps just “lack training.”

 

* University Professor of Economics & Philosophy, George Mason University, MSN 1A1, Fairfax, VA 22030 pboettke@gmu.edu

[1] See https://scrc.gmu.edu/finding_aids/buchanan.html

 

Costs, Benefits, and "Boomerang Effects" in Defense Economics

|Peter Boettke|

On April 4, 1967, Martin Luther King delivered one of his most important speeches at the Riverside Church in New York -- "Beyond Vietnam: A Time to Break Silence."  The speech was delivered exactly 1 year prior to King's assassination, and while it was universally panned at the time by the mainstream media such as NYT and Washington Post, many of his close associates remember it as perhaps his best speech.

King spoke out courageously about the hypocrisy and moral bankruptcy of "the most powerful nation of the world speaking of aggression as it drops thousands of bombs on a poor, weak nation more than eight hundred, or rather, eight thousand miles away from its shores."  But while King was giving "voice to the voiceless in Vietnam", he was also concerned with the erosion of morality at among our troops and thus at home. "We are adding cynicism to the process of death, for they must know after a short period there that none of the things we claim to be fighting for are really involved. Before long they must know that their government has sent them into a struggle among Vietnamese, and the more sophisticated surely realize that we are on the side of the wealthy, and the secure, while we create a hell for the poor."  In short, the bombs we were dropping over there, were shattering communities over here.

My colleague Chris Coyne (along with Abby Hall) has developed the "boomerang effect" to explain how foreign interventionism results in a loss of domestic liberties.  They develop the thesis in their vitally important new book, Tyranny Comes Home.

I have a lot to say about this book.  But for this post, I just want to stress that Coyne and Hall's work in defense economics challenges not just the "defense brain", but the nature of the cost/benefit calculus that supposedly decision makers engage in when deciding to intervene abroad.  They should include in the calculation the full costs of the military action, and that includes also the costs associated with this boomerang effect.  Once we include the full costs in the decision calculus, the case for restraint becomes even stronger.  Just consider the current predicament over the past 17 years.

 

 On this day, as we remember the life of Martin Luther King, let's remember the power in his voice on this issue and both the social scientific analysis of boomerang effects and the the moral erosion of war.  Quoting the Buddhist leaders in Vietnam, King stated: 

Each day the war goes on the hatred increased in the hearts of the Vietnamese and in the hearts of those of humanitarian instinct. The Americans are forcing even their friends into becoming their enemies. It is curious that the Americans, who calculate so carefully on the possibilities of military victory, do not realize that in the process they are incurring deep psychological and political defeat. The image of America will never again be the image of revolution, freedom, and democracy, but the image of violence and militarism.

How true, how sad.