Coordination Problem

Ceteris Never Paribus Podcast

|Peter Boettke|

I recently did a podcast about my book on Hayek and Hayekian ideas more generally.  I loved the conversation with Erwin, who is a knowledgeable and careful readers.  So much more I could have done in that book, but authors must make choices in what to pursue.  Hopefully, the book achieves what I wanted to do in presenting the evolution of Hayekian ideas and in so doing prods others to pick up on themes in Hayekian inspired research that I didn't pursue and develop arguments in those directions.  If you do, please remember to register your contributions on A Living Bibliography of Works on Hayek.

 

Reinvention and Renewal in Personal Destiny

|Peter Boettke|

When I was still an undergraduate at Grove City College (1979-1983), I read David Norton's Personal Destinies (1977) and it had a big impact on me and in my reading of the argument made me realize I was the author of my own life story.  But I was prepared to read these arguments this way from my experience in sports and the consistent message I always heard from my father since I was a little kid playing sports.  My love of sports always exceeded my ability to play, but I learned early on that to compete in sports you had to put in long hours of hard work.  From the time I was little I was always dealing with mixed messages -- great successes followed by crushing defeats, not just in terms of wins and losses, but assessment of my talents by various coaches.  My father's message from the time I was 8 years old and starting to play Little League baseball was if you aren't getting selected, or you are getting to play as much as you want there is only one response, work harder at getting better so that no coach will not want to select you and play you.  Not succeeding was nobody's fault other than your own.

Typical of my era, when I entered HS I played football, basketball and baseball.  But by that time, my love of the game of basketball was solidified.  And, starting in 8th grade I would spend my summers practicing basketball everyday up to 10 hours a day working on individual skills and playing pick up games at various playgrounds always seeking out the best competition that would let me play -- first by bicycle and then when older by car.  I followed that path until I was 20 years of age.  Along the way, I stopped playing football and baseball (though after my junior year of HS I missed playing baseball so I played on an American Legion team through the summer except when I was away at basketball camp).  I did well enough at basketball camp to win awards and to get invited to be a camp counselor in-between HS and college. My HS team was the most successful team in the history of my school when we graduated.  But between the age of 17 and 19, I repeatedly suffered severely sprained and even broke my ankle 3 times, and this probably impacted my confidence even more than my skills (which were limited to begin with).  Anyway, my aspirations as an athlete were crushed during this time (though I would end up switching sports from basketball to tennis and finish out my college athletic career playing tennis and eventually working as a tennis pro).  Reality had caught up to me -- I was not as athletic or as skilled as I had hoped to be, and my body and my mind were more fragile than required to achieve what I wanted as an athlete.*  Thank god I had already found my soul-mate in Rosemary, because this experience devastated me at a very vulnerable age, and left me completely lost as to who I was and what I was going to do with my life.  I almost quit college in the fall of 1979 after I got hurt again, but thankfully Rosemary talked me through that. 

I mentioned Hidden Brain podcast in the last post, and I am drawing on it again (I promise I will not do so for a while now, though you should give it a listen).  In December 2018, there is a great podcast discussing loss and renewal that really hit home and reminded me of my clumsy efforts to grapple with my 17-19 year old frustrations.  My Aunt Lol, who had various stages in her own life, often said you need to learn to close one chapter and move to the next.  What happened to me during that time is I got introduced to academic pursuits, including economics and philosophy.  In many ways I really had no preparation for this, but it happened and my life went in a different direction than I had planned.  Listening to this episode on a plane ride yesterday, fascinated me because we all must face down frustrations, disappointments, and dashed plans.  In response, we must reinvent and renew our life purpose.  We are in control of our personal destiny -- perhaps not 100% -- but it is the only variable that is under our control, so we should behave as if it is 100% under our control.  We are entrepreneurs of our life.

As I entered graduate school (1984-88), I was completely enamoured with James Buchanan's essay "Natural and Artifactual Man" even more so than G. L. S. Shackle's presentation of the agony of choice because while I agree with Shackle's depiction of our choice situation in the face of radical uncertainty, Buchanan's depiction stresses our creativity and our aspirational hopes.  We can, in essence, fake it until we make ourselves better than what we currently are.  So when I read in 1987 Loren Lomasky's Persons, Rights and the Moral Community when it was first published, I interpreted in light of Norton's work and Buchanan's subjectivism, and to be honest, Kirzner's theory of entrepreneurship.*  I didn't focus so much on "rights" speak, but on persons and their projects in Lomasky's presentation, and thus the idea that we must behave entrepreneurially in the construction of our own lives, and the political and legal and cultural background must give us space to be architect of our own destiny.

This is also how I read the recent book by Agnes Callard Aspiration -- a work that explores our volition and our efforts to be architects of our own destiny.

I realize that many parts of my interpretation are idiosyncratic and perhaps "forced", but it is how I make sense of these arguments in light of what I consider critical stage in our lives when we face down adversity and must bob and weave, adapt and adjust, and reinvent and renew.  We must be creative architects and alert entrepreneurs throughout our lives.  And critical to that, the political, legal and cultural background must give us space.

Anyway, I do think it is important to distinguish between methodological individualism (a scientific proposition) and epistemological individualism (a philosophical position) and normative individualism (a political/legal/moral theory).  The position I have just laid out are in the area of normative individualism, though I am using tools of thinking I learned from the pursuit of a methodologically individualistic approach to social science.

 

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*In a recent interview, my colleague Tyler Cowen was asked about his early chess career and he emphasized the discipline and focus he learned in pursuing that endeavor.  I learned that same thing, I'd argue, through basketball.  But my failures were great teachers.  In basketball in retrospect, I would say I worked very hard, but not smart.  In tennis, I would say I worked smart, but not hard.  In economics, I hope I can say I worked very hard and did so with some smarts.  I guess ultimately how smart will be an assessment others pass rather than one I can make.

**Lomasky was well known to my era of economics students because he had spent time at the Center for Study of Public Choice in the year right before the move to GMU, and Buchanan at that time (prior to Nobel) was very much pushing the ideas summed up in his New Palgrave Dictionary of Economics entry on Political Economy and Social Philosophy.  So Lomasky's work was just part of the common knowledge of those of us trying to learn from Buchanan.

 

Creativity and/or Alertness -- the Value of Diversity in Science, Art, and Business

|Peter Boettke|

I regularly listen to NPR's Hidden Brain podcast.  A recent episode explores the value of diversity in background and in perspective for progress in science, for artistic expression, and business innovation.

Listening to the episode I was obviously drawn to thinking about the work of Joseph Schumpeter and Israel Kirzner, but it also made me remember some of the brilliant work my colleague Tyler Cowen did in the the field of cultural innovation with his books In Praise of Commercial Culture and Creative Destruction. Tyler is so prolific and his work is so varied ranging from social choice theory to business cycle theory to philosophy that it is easy to forget that he also produced a deep dive ethnographic work on cultural products with Markets and Cultural Voices. But he did, and for those who read these works, they are intellectually richer because they were exposed to this world that Cowen so vividly describes and dissects.

Anyway, the Hidden Brain podcast provides a fascinating discussion of how much we can learn from pushing out from our comfort zone and to think creatively about possible new combinations, of blending, and of bending, ideas which previously we thought of as existing in isolation and as so clearly linear in presentation. So we need to praise the distorters and the disrupters in science, in art and in business for they are the source of creativity and vibrancy in life and in thought. 

Police Services, Local Public Economics, and The Theory of Fiscal Attention

|Peter Boettke|

Two of my close colleagues and research partners -- Jayme Lemke and Liya Palagashvili -- have a great video out on the issue of community policing.

 

We have been working on these issues of community policing, local public economics, and the theory of fiscal attention together for well over a decade.  There is an old idiom that goes as follows: "He who pays the piper calls the tune."  This basic idea is critical to understanding the rise and fall of community policing, and was developed in a paper that Ennio Piano, Liya and I published in the Arizona State Law Journal.  Of course, the fundamental issue -- as the Ostroms both identified in the 1960s-19970s in their work on local public economics -- is the pricing and provision of public goods and the public choice logic involved.  And, their unique twist in the Ostromian research program, as Jayme, Liya and I argued in our 2015 RAE paper, was to explicitly tie this logic to the problems and prospects of a self-governing democratic society.   And critical to this idea is their idea of co-production.

Jayme, Liya and I published a paper in 2013 dealing with this issue of co-production of public safety and community policing titled "Riding in Cars with Boys", where we talk about Lin Ostrom's field work on police services. This was followed up with our 2016 publication on "Re-evaluating Community Policing".

The consolidation debate is addressed in my work with Chris Coyne and Peter Leeson on Quasimarket Failure.  And, in the particular context of community policing it is vital to consider the consequences of the drug war on this discussion, as addressed in my paper with Chris Coyne and Abby Hall.

Many of these themes are also discussed in my Southern Economic Association Presidential Address -- Economics and Public Administration. And, of course, the Ostroms and their contributions to public administration, political economy, and social philosophy has been a constant theme of my work with Paul Aligica and Vlad Tarko from the 1990s to our forthcoming book -- jointly and separately.

These issues are foundational to understanding the frustration experienced with progressive efforts to professionalize local public economics and can when combined with various normative commitments lead to a deep appreciation of self-government, democratic deliberation, and liberty.

 

Some New Books To Add to Your List This Spring

|Peter Boettke|

The series I edit with Timur Kuran at Cambridge -- Cambridge Studies in Economics, Choice and Society -- will be adding two new books this spring -- Humanomics by Vernon Smith and Bart Wilson, and Persecution and Toleration by Noel Johnson and Mark Koyama.

While neo-classical analysis works well for studying impersonal exchange in markets, it fails to explain why people conduct themselves the way they do in their personal relationships with family, neighbors, and friends. In Humanomics, Nobel Prize-winning economist Vernon L. Smith and his long-time co-author Bart J. Wilson bring their study of economics full circle by returning to the founder of modern economics, Adam Smith. Sometime in the last 250 years, economists lost sight of the full range of human feeling, thinking, and knowing in everyday life. Smith and Wilson show how Adam Smith's model of sociality can re-humanize twenty-first century economics by undergirding it with sentiments, fellow feeling, and a sense of propriety - the stuff of which human relationships are built. Integrating insights from The Theory of Moral Sentiments and the Wealth of Nations into contemporary empirical analysis, this book shapes economic betterment as a science of human beings.

And,

Religious freedom has become an emblematic value in the West. Embedded in constitutions and championed by politicians and thinkers across the political spectrum, it is to many an absolute value, something beyond question. Yet how it emerged, and why, remains widely misunderstood. Tracing the history of religious persecution from the Fall of Rome to the present-day, Noel D. Johnson and Mark Koyama provide a novel explanation of the birth of religious liberty. This book treats the subject in an integrative way by combining economic reasoning with historical evidence from medieval and early modern Europe. The authors elucidate the economic and political incentives that shaped the actions of political leaders during periods of state building and economic growth.

 

I should also point out that my book with Paul Aligica and Vlad Tarko will also be out in 2019.

 

 

Classical liberalism entails not only a theory about the scope of government and its relationship with the market but also a distinct view about how government should operate within its proper domain of public choices in non-market settings. Building on the political economy principles underpinning the works of diverse authors such as Friedrich Hayek, James Buchanan and Vincent and Elinor Ostrom, this book challenges the technocratic-epistocratic perspective in which social goals are defined by an aggregated social function and experts simply provide the means to attain them. The authors argue that individualism, freedom of choice, and freedom of association have deep implications on how we design, manage and assess our public governance arrangements.
The book examines the knowledge and incentive problems associated with bureaucratic public administration while contrasting it with democratic governance. Aligica, Boettke, and Tarko argue that the focus should be on the diversity of opinions in any society regarding "what should be done" and on the design of democratic and polycentric institutions capable of limiting social conflicts and satisfying the preferences of as many people as possible. They thus fill a large gap in the literature, the public discourse, and the ways decision makers understand the nature and administration of the public sector.

 

 

 

Demsetz: Competition, Property Rights, Nirvana Economics, and Barriers to Entry

~ Frederic Sautet ~

We are mourning the passing of one of the greatest economists of all times who influenced me a great deal: Harold Demsetz. I met Demsetz at a Mt Pélerin's meeting in 1992. He was a joyous fellow and was totally available to speak with me (a student at the time). I'll never forget his smile when I explained to him how influential his work was. It is because of Demsetz, Kirzner and Alchian that I got interested in competition, firms and entrepreneurship. So I have a great intellectual debt!

As Pete explains in his post, Demsetz's work is unique in the history of price theory and market process, as he offered responses to difficult questions and showed the relevance of his solutions. Just look at the number of key issues he addressed in his oeuvre: competition (monopolistic and otherwise); ownership, control, production and firms; property rights (theory of origin and role in economics); public goods (and their private provision); transaction costs; regulation (antitrust and other); contract theory; advertising; etc. The list is long! It’s fair to say that in every topic listed, his contribution was remarkable, top-notch; and it moved the needle. Economists and others gained insights about the real world. Demsetz also belonged to a generation of economists who was interested in theory and made, primarily, theoretical contributions. Today, economics has moved away from this approach: discussions are more about empirics than about theory. Demsetz also knew the legal field and was a pioneer in law and economics (following Ronald Coase and Armen Alchian). He often brought legal references into his work. In that sense, Demsetz belonged to a class of intellectuals who thought about the world, as much as confronted their views to the world.

Even though I listed him among those who influenced me along with Kirzner, Demsetz was not, ironically, a friend of the idea of entrepreneurship in economic theory. In his paper, "The Neglect of the Entrepreneur" (published in 1983 in a book entitled Entrepreneurship, Ronen ed.), he vigorously attacks Kirzner's work. While I never agreed with this paper of his, I still think that, to this day, it represents the best critique of the idea of entrepreneurship in market theory. Yet, I think he implicitly recognized (in spite of his saying) the importance of entrepreneurship in the dynamics of markets. This is was, after all, a key theme of his view of competition!

If there is one or two papers from Demsetz to add to the Pantheon of econ papers (other than his famous Towards a Theory of Property Rights (1967) and Production, Information Costs, and Economic Organization (1972), the latter is co-authored with Alchian and on the list of the Top 20 articles published in the American Economic Review, both are exceptional papers), it would be: Information and Efficiency: Another Viewpoint (1969) and Barriers to Entry (1982). In his 1969 paper, Demsetz discusses what he calls the nirvana approach to economics, which implicitly assumes an ideal institutional arrangement in economic theory. He compares this to a comparative institution approach in “which relevant choice is between alternative real institutional arrangements.” This is an utterly important insight, one that Austrians, especially Hayek have also used in different ways, but that has been lost on the mainstream of economics for decades (probably less today than in 1969, Demsetz had some influence). This came to be a distinguishing mark of the law and economics movement in the 1960s, as Coase and others also pursued a similar line of thinking. His Barriers to Entry paper provides probably the best discussion of the notion in the economic literature. Demsetz carefully shows the limits of such notion and how it articulates with property rights for instance.

I learned so much about competition, firms and organizations, property rights, and comparative institutions analysis studying Dr. Demsetz's oeuvre. So thank you, Harold, for your exceptional contributions to economics and social science. Requiescet in pace.

Harold Demsetz (1930-2019) -- a champion of price theory and the Economic Way of Thinking

|Peter Boettke|

Harold Demsetz speaking at GMU 2009

I received the sad news this morning that Harold Demsetz has passed away.  

A lot of folks who think in terms of "fresh water" and "salt water" economists, or "free market economists" versus "interventionist" economists, get confused about the economics taught at places like UCLA (1950s, 1960s and 1970s), University of Washington (1970s), and UVa (1950s and 1960s), VPI (1970s) and George Mason University (1980s--).  UCLA was not Chicago West Coast, as folks sometimes suggest, just as UVa, VPI and GMU were never Chicago East Coast.  The UCLA and GMU type economics is influenced by an Older Chicago School of Knight no doubt, but also so many additional strands including LSE and Hayek.  Listen carefully to Alchian's interviews with Hayek as part of the UCLA oral history (or Leijonhufvud's interviews with Hayek as well) -- the influence goes back far in their personal educational history, and its not about people or ideology.  It is all about the analytics of price theory, and in particular the role that relative prices play in guiding exchange and production decisions.  It is wrong to insist the position articulated in economics so perceived is one that continually asserts that whatever is, is efficient (that is the tight prior of Stigler and Becker), as opposed to an insistence that individuals are not persistently stupid, that they will be creative and clever in seeking out the mutual gains from trade, and thus that there is always in operation an evolution towards a solution that must be appreciated and studied.  The mantra, if there is one, is not "efficiency always", but "where are the deals?; what bargains can be struck between actors?"  Economics in the hands of these economists is about exchange and the institutions within which exchange takes place.  Prices are never merely a sufficient statistic that is reflected in a unique vector in a deterministic system of competitive equilibrium.  Prices are not a parameter in this work, prices are instead continually adjusting and communicating to economic actors critical information that guides them in making the appropriate adaptations required to realize productive specialization and peaceful social cooperation.

Harold Demsetz was a practitioner of UCLA price theory par excellence.  He challenged the prevailing orthodoxy in microeconomic analysis and public policy that was emerging in the wake of the Samuelsonian revolution in economics. He developed a dynamic understanding of market competition, putting emphasis on conditions of entry and exit rather than on market structure. In addition, his work constantly drew attention to the creative adaptations and adjustments that economic actors engage in throughout a competitive economy, the multiple margins of adjustment that individuals, as buyers and sellers, engage in through the market, and how alternative institutional arrangements impact competitive behavior.

Demsetz was named the Distinguished Fellow of the American Economic Association in 2013.  But I personally believe he should have been awarded the Nobel Prize in Economic Science, along with Alchian, many years before that.

Demsetz from the beginning of his career tackled issues associated with monopoly power, externalities, and a variety of deviations from the textbook ideal of perfect competition. His contribution did not consist of reasserting the perfect market ideal.  Instead, Demsetz demonstrated that deviations from the textbook notion of the ideal perfect competition model did not necessarily prevent the price system from coordinating economic activity. He demonstrated how the market process coordinates the productive activity of some with the consumption patterns of others such that the invisible hand explanation of market theory follows from the pursuit of self-interest within a certain set of institutional conditions. Those institutional conditions are established by the rules of property and contract that are established and enforced. 

Governance matters and context matters, both theoretically as well as empirically.  This is particularly relevant at the present moment, when many within the economics profession and the public policy community are stressing the potential monopoly problems associated with the “platform economy”. Traditional definitions of industrial structure underestimated the role of competitive forces and entrepreneurial innovation by focusing on concentration and firm size rather than the conditions of entry and exit in any market. As the work of Demsetz illustrated, even giant firms currently in possession of a large market share will behave as if they were in a competitive market when a market is contestable.

Demsetz’s was not an abstract theorist, his contributions are more to be found in the application of economic theory and in persistently and consistently deriving the implications of viewing competition not as an end-state, but as an ongoing set of rivalrous activities that entails multiple margins on which creative economic actors can adjust and adapt. Starting with his work in the late 1950s, Demsetz began challenging the then prevailing orthodoxy concerning monopolistic power, natural monopoly, and industrial structure. In his 1968 paper “Why Regulate Utilities?”, for example, he made the critical point that: “we have no theory that allows us to deduce from the observable degree of concentration in a particular market whether or not price and output are competitive” (Demsetz 1968: 59-60). This paper would argue that we do not need to regulate utilities to curb monopoly power provided that there is vibrant competition for the field among potential providers of the service.

In his 1973 paper on “Industry Structure, Market Rivalry, and Public Policy”, he would develop this point in a more subtle way and show that even in the presence of short run monopoly power, the rivalrous behavior of individuals and firms in the market would erode this power. “There is no reason to suppose that competitive behavior never yields monopoly power, although in many cases such power may be exercised not by creating entry barriers, but through the natural frictions and ignorance that characterize any real economy. If rivals seek better ways to satisfy buyers or to produce a product, and if one or a few succeed in such endeavors, then the reward for their entrepreneurial efforts is likely to be some (short term) monopoly power and this may be associated with increased industrial concentration. To destroy such power when it arises may very well remove the incentive for progress” (Demsetz 1973: 3). And, in his most cited paper (co-authored with Armen Alchian), Demsetz argued that: “Conceiving competition as the revelation and exchange of knowledge or information about qualities, potential uses of different inputs in different potential applications indicates that the firm is a device for enhancing competition among sets of input resources as well as a device for more efficiently rewarding the inputs” (Alchian and Demsetz 1972: 795).

As already mentioned, the relevance of the work of Demsetz is as critical to understanding the dynamics of marketplace today as it was when he first approached the study of industry structure and competitive behavior. If you look at the emerging market structure of the past decade, one would certainly have to recognize the near-monopoly status of Amazon, Apple and Netflix, yet one would also have to recognize the great level of consumer satisfaction associated with these firms. Despite their dominant market share, these firms provide quality goods and services at low prices. And there is no expectation that these firms will have any ability to behave differently than continuing to strive to provide high quality products for the lowest price. This is because they compete in a contestable market. Consider the classic browser wars with Microsoft and competitors from a decade ago. How monopolistic can a firm behave if its product can be used to freely download its competitors product? The standard Structure-Conduct-Performance paradigm in industrial organization simply is incapable of providing a clean explanation for the competitive marketplace in the age of the internet. Market leaders will fall by the wayside unless they keep moving forward faster to further satisfy consumer preferences. Amazon and Netflix know they better keep innovating or Hulu, or some other streaming service, is right there to better satisfy the demand of consumers.

I hope you will spend some time today reading these papers I have mentioned, or sampling several other fundamental contributions to economics and political economy that Harold Demsetz made throughout his career -- see The Organization of Economic Activity, Vol. 1 and 2, or just do a search for his name on EconLit, or the Liberty Fund produced Intellectual Portrait DVD of a conversation with him.  There are great intellectual gains to be had for the modern student of economics spending time reading Demsetz.  He was a clear writer and thinker.  I had the privilege to meet him several times, and always had very pleasant conversations with him about economics and its practical application to understanding real world phenomena.  

The economics profession has indeed lost one of its most insightful practitioners of the subtle and beautiful art of applied price theory.

 

Logic and contingency in politics

|Peter Boettke|

A few projects that I am involved with at the moment have brought me back to my original research and teaching interest in political economy -- comparative economic systems and the political and economic history of the Soviet Union.  One of those projects is that I am teaching my graduate course in comparative systems this spring, but I have changed the course once again so in preparation I have been reading some new books and articles.  In the process I turned to the website of Political Economy Research in Soviet Archives at the University of Warwick.

Inside that link you can find an interesting paper by Paul Gregory discussing the logic and contingency in the political struggle between Bukharin and Stalin in the 1920s.  There is much to learn, I would argue, in the lessons of the 1920s from the Soviet experience -- obviously from the collapse of War Communism in 1921, but also in the contradictions of the New Economic Policy as well as the power struggle that was going on as the background to the Industrialization Debate that culminated in the adoption of the Stalinist command economy.

Such a tragic legacy, but so much to learn about economy, polity and society is we are just willing to listen to the millions of lost souls.

 

Holcombe's _Political Capitalism_

|Peter Boettke|

During the run up to his election as President in 2016, candidate Trump often bragged that he knew full well about the pay to play schemes in politics because he was a master of using them to advance his own business interest.  It was time, he said to clean out the swamp. But no swamp cleaning is going on.

What was unique about Trump was his brazen admission of his own complicity in the entanglement of business and politics that characterizes the rent-seeking society.  Most politicians see the rent-seeking going on, and condemn it, but that is because it is the other side, not their side. Their side does politics right, and keeps business in check.  Politics isn't about profits, but about doing good.  Those other guys though, they do politics for profits.

In the extreme cases we get corruption charges filed against those in office, or formerly in office, but for the most part, pay to play politics is just part of the ordinary business of politics.  Dollars and votes on one side, politics and policy on the other, and rationally ignorant, rationally abstaining, and specially interested voters mediating the process.  The logic of politics is to concentrate benefits on well-organized and well-informed voters (the specially interested ones), and disperse the costs on the unorganized and ill-informed mass of citizens (the rationally ignorant and the rationally abstaining), and to do so in the short-run rather than in the long-run.

So unless this logic is countered, this is how political life is played out.  Trump's depiction of politics as pay to play emerges as bi-partisan and rather ordinary, though his rhetoric was (and remains) of course unusual.  He is politics in the raw.  Imagine Boss Tweed in NYC, Huey Long in Louisianna, James Michael Curley in Boston, and Richard Daley in Chicago rolled into one embodiment and given modern technology and the social media platform.

But the political economy project from Smith and Hume was to find a set of governing rules that would constrain the abuse of power.  Hume argued simply that in designing the institutions of governance we must presume that all men are knaves.  He did not argue that men were knaves -- it was not a description of humanity -- but that in designing robust institutions of governance, we would be wise to presume they were so we could guard against the downside risk of a knave grabbing power.  And, wouldn't the most knavish of us all be really good as convincing us he wasn't the knave, but others were?!

Knavery comes in the form of opportunism and arrogance.  Smith argued that power to dictate economic decisions could not be trusted in the hands of any governor, but also would be nowhere as dangerous as in the hands of a man who thought he could be so trusted.  Arrogance can do us in just as much as opportunism with guile. Let that sink in a bit. And, then think through what that might mean for standard public economic assumptions of stable social welfare functions that are being maximized by benevolent and omniscient planners.  What could possibly go wrong? Again, LET THAT SINK IN.

So we search for constitutional rules that bind the hands of the rulers, while also empowering the rulers to govern effectively.  To translate into more modern times, James Buchanan sought to establish a system of governance that empowered the protective state (law and order) and the productive state (public goods), yet constrained the predatory state (the redistributive and rent-seeking state).  How well does his intellectual effort fare?

Well, Buchanan was an academic and never was a political actor, and his ideas are actually far removed from any practical policy changes one can reasonably connect in any sort of historically responsible account.  John Maynard Keynes and Milton Friedman are different stories altogether, but even there Keynes was far more directly involved in policy architecture than Friedman.  Even John Kenneth Galbraith would be someone far closer to the role of policy architect than either Friedman (mildly close) or Buchanan (far removed).  BUT, Buchanan asked philosophical and analytical questions that went to the heart of the interaction between positive economics, welfare economics and political economy. So as academic economists trying to understand the world of political capitalism, his ideas are critical.

Among his direct students, Richard Wagner (UVa) and Randy Holcombe (VPI) have probably pursued Buchanan's unique research program in public finance, political economy and social philosophy more thoroughly than others -- at least that would be my judgment call.  I consider Richard Wagner's book on Buchanan to be the most definitive discussion of that research program yet penned.

But Holcombe's understanding the strengths and limits of the constitutional political economy project is right there with Wagner's.  In this new book, Political Capitalism, Holcombe explains how cronyism, corruption, capture all follow from the political economy of the interventionist state. And, he demonstrates how this was tided to an alliance forged due to changes in ideology and the interest groups that formed.  It is required reading for all students of political economy.

A few weeks ago, Mercatus hosted a book panel discussing Holcombe's new book and that is now available for your listening.  I hope you enjoy it and explore more deeply by reading his book.  We live in a world of entangled political economy and political capitalism --- this is true of the military industrial complex as well as the financial industrial complex -- and more careful and critical thought needs to be devoted to thinking through the implications and the possible reform measures that could potentially address the most pressing problems this creates.  The important Buchanan lesson to learn -- institutional problems demand institutional solutions.  Lets get thinking. 

Paul Romer's Nobel Lecture

|Peter Boettke|

The tension between the restraining force of scarce resources and the positive force of discovery and innovation.

 

Economics must shift the balance, I'd argue, from allocation to exchange, from maximization to choice, from equilibrium conditions to processes of adaptation and adjustment, from the constraints given by nature to the constraints we choose in terms of institutions that evolve, that we craft, that we adopt. This is not to deny the intellectual discipline provided by allocation, maximization, equilibrium, and constraints, but it is a question of foreground and background as my brilliant colleague Richard Wagner discusses in his book Mind, Society and Human Action (2010).

Romer's work, I want to argue, can be a fresh gateway into this conversation for the new generation of economists -- a conversation that was forged in our discipline by Adam Smith, and by F. A. Hayek, by James Buchanan, by Elinor Ostrom -- all fellow Nobel Prize winners.  His work exhibits the tension, but his message about the possibility of progress is on the side of discovery and innovation.  David Warsh's Knowledge and the Wealth of Nations provides a great introduction to Romer's work and its emergence out of the allocation, maximization, equilibrium, and the constraints given by nature conversation, but he misses the stream of mainline economics from Adam Smith to F. A. Hayek that was conducting this very conversation as well, let alone how the economics of ideas could be productively married with the economic history work of Deirdre McCloskey and Joel Mokyr to explain the "Great Enrichment" and the "Enlightened Economy".  That GREAT FACT of human existence was a consequence of the positive force of discovery and innovation.

Anyway, Romer by stressing how ideas and in particular the combinatorial innovations in ideas demonstrates the powerful insights of Julian Simons on population and that people are the ultimate resource, and once again Hayek's brilliant insights in The Constitution of Liberty, and the chapter on the creative power of free civilization.

Don't misunderstand me, Romer doesn't make these connections.  But we can, and we should use this moment to stress the message.  As he says, there is a revolution in thinking associated with progress -- from what we have to who we are (sound familiar to any reader of McCloskey) -- and its all about finding rules that enable us to live better together, and allow us to enjoy the company of strangers.  So think about that for a minute and the Enlightenment project of liberalism -- from Smith's analytical egalitarianism as reflected in his street porter and philosopher example to Kant's "strangers nowhere in this world" to Hayek's generality of the rules and the "Great Society" to Buchanan's striving for a political order that exhibits" neither discrimination nor dominion" to Ostrom's emphasis on "constitutional craftsmanship", and "self-governing democratic societies".

As Romer says in his lecture --- the economics profession today is ready for the exploration of the "broader notions of progress, the broader side of human nature."