Thursday, August 2, 2012

Lifeless Formalism vs. Living Economics


[Living Economics: Yesterday, Today, and Tomorrow. By Peter J. Boettke. Independent Institute — Universidad Francisco Marroquin. xx + 435 pages]
Living Economics: Yesterday, Today, and Tomorrow
This notable book collects 22 articles by Peter Boettke; 8 of these have been written in collaboration with others, including Peter Leeson, Christopher Coyne, Steve Horwitz, David Prychitko, and Frederic Sautet. (Boettke is a renowned teacher of economics, and Coyne and Leeson are former students of his.) Boettke is probably best known as an economist for his studies of Soviet socialism and for his work on development economics; but his interests range much wider than this. He displays a remarkable ability to portray sympathetically scholars of widely varying views; the book includes, e.g., valuable discussions of Warren Samuels, Peter Berger, Gordon Tullock, and Kenneth Boulding.

It is not too much to say, though, that two schools of economic thought have principally shaped his own outlook. These are the Austrian School and the Virginia Public Choice School. These two schools of thought provide Boettke with his main ammunition in a battle he wages through much of the book. As he sees matters, a great deal of contemporary economic theory is dominated by a mechanical, scientistic doctrine. This false doctrine ignores the realities of action, time, and ignorance, in a futile quest for the false god of static perfection.
No one could read this book without being impressed by Boettke's wide knowledge, but I do not always agree with his interpretations. I propose in what follows to examine three important elements of the book: the account of Austrian methodology, especially as found in the work of Mises; the use made of James Buchanan's appeal to the status quo as the starting point for policy proposals; and the criticisms of contemporary neoclassical economics.
Boettke rightly points out that Mises thought the propositions of economic theory were a priori true. "Mises pointed out that the aprioristic character of the pure logic of choice implies that economic theory can never be empirically validated or invalidated" (p. 207). So far, so good; but now the question arises, how did Mises regard the character of the a priori?
Boettke again is accurate when he says. "According to Mises, it is true that like the laws of geometry, the pure logic of choice is entirely tautological" (p. 209). But why does he also say, just before this, "Although Mises can be understood as building upon Kant, he ultimately goes beyond Kant by rejecting the traditional analytic/synthetic distinction altogether" (p. 209). Tautologies are analytic truths: how can someone who believes that the pure logic of choice consists of tautologies also deny altogether the analytic-synthetic distinction?[1]
If the principles of praxeology are tautologies, how can Boettke also think that
there is a [Barry] Smith-like "fallibilistic" element to Mises's conception of a priori knowledge, which though "true" for acting man at the present may ultimately be revealed to be mistaken (i.e., inconsistent with objective reality) with further developments in the evolution of the human mind. (pp. 205–06)
How can a tautology become false at some time in the future?
Boettke's account seems difficult to reconcile with this passage of Human Action:
The problem of whether there are or whether there are not a priori elements of thought — i.e., necessary and ineluctable intellectual conditions of thinking, anterior to any actual instance of conception and experience — must not be confused with the genetic problem of how man acquired his characteristically human mental ability. Man is descended from nonhuman ancestors who lacked this ability.… Hence the empiricist concludes that the foundational principles of reasoning are an outcome of experience and represent an adaptation of man to the conditions of his environment.… Reason, intellect, and logic are historical phenomena.… Nothing suggests that logic as we know it is the last and final stage of intellectual evolution. Human logic is a historical phase between prehuman nonlogic on the one hand and superhuman logic on the other.… But the problem of the a priori is of a different character. It does not deal with the problem of how consciousness and reason have emerged. It refers to the essential and necessary character of the logical structure of the human mind. (Human Action, Scholar's Edition, pp.33–34, emphasis added.)
Boettke has ascribed to Mises the exact empiricist position against which Mises argues.[2]
Unfortunately, this is not the only instance in which Boettke makes inaccurate remarks about Mises. He says,
Deployed as an ideal type, equilibrium analysis allowed economics to describe what the world would be like in the absence of imperfections such as uncertainty and change.… Equilibrium was used as an ideal type by such Austrian economists as Mises and Hayek. (p. 281)
Boettke's central point here is correct: Mises did not intend the evenly rotating economy (ERE) to be either a description of reality or a standard by which the world should be judged. Rather, it was an imaginary construction useful to the economist in developing economic theory.
The problem lies rather in Boettke's use of the phrase "ideal type." Mises expressly says that the abstractions of economics are not ideal types.
Ideal types are the specific notions employed in historical research and in the representation of its results. They are concepts of understanding. As such they are entirely different from praxeological categories and concepts and from the concepts of the natural sciences. An ideal type is not a class concept, because its description does not indicate the marks whose presence definitely and unambiguously determines class membership. An ideal type cannot be defined. (Human Action, pp. 59–60)
The ERE, of course, can be defined. The issue is not a mere matter of terms: by calling the ERE an ideal type, Boettke has elided a key distinction in Mises's epistemology.
Boettke's articles on James Buchanan convey very well his enthusiasm for that eminent economist; but I think that he has too readily agreed with Buchanan's embrace of the status quo as the necessary starting point for proposed changes in policy. In Buchanan's view, proposed changes must command a consensus among the interested parties. Starting with the existing situation, we may be able to arrive at proposals that everyone will accept as improvements.
But is there not an obvious problem with this view? What if we begin from a situation in which rights are being violated? Must slaves negotiate with their masters to secure their freedom? No doubt, it will often be prudentially rational for them to do so. But why are we debarred from saying that they ought not to be enslaved and that the masters deserve no compensation? People do not lose their rights because in the existing situation they are violated.
Boettke is aware of the problem:
[Warren] Samuels … correctly points out that while Buchanan's approach does not have any propriety save its existence, the unanimity criterion does privilege the existing situation.… It seems to me [Boettke] that Samuels is right; there is "conservatism" built into the analysis as Buchanan develops the approach. But what is the alternative?… A mutual-consent-driven model does not have to deny Samuels's points about either the nonneutrality of affairs … but it does suggest that we can strive to minimize the impact of nonneutrality. (pp. 119–120)
To see matters in this way, though, makes an undue concession to Buchanan. He is an ethical skeptic: for him, claims that something is "right" merely express personal preferences. One can attempt to impose these preferences on others; but if one wishes to avoid this, one must take people's preferences as they stand. Buchanan says in a letter to Samuels,
But my defense of the status quo stems from my unwillingness, indeed inability, to discuss changes other than those that are contractual in status. I can, of course, lay down my own notions and think about how God might listen to me and impose these changes on you, me, and everyone else. (p. 119)
The idea of an objectively true ethics is alien to Buchanan. If Boettke wishes to embrace ethical skepticism of this sort, he ought to have offered some considerations in its favor.[3]
As mentioned earlier, there is a central theme that unifies Boettke's book. Sound economics must take seriously time and change, and to do so the sterile models of the neoclassicals must be replaced. In his famous inaugural lecture at the London School of Economics in 1933, Hayek suggested that the main danger to economics came from the opposition to theory of the German Historical School and similar groups. Now the situation is entirely different. "Seven decades of disastrous formalization" must be abandoned and "the realities of economic life … [be] re-engaged" (p. 315).
This is an ambitious claim, and sometimes Boettke succeeds in striking decisive blows against neoclassical formalism. In the chapter that I found most impressive, "The Forgotten Contribution: Murray Rothbard on Socialism in Theory and Practice," Boettke aptly shows how the neoclassicals' models of socialism vastly overrated the ability of planners to cope with the concrete data of the economy. Here his thesis is exactly right: arid formalism occluded the need for realistic appraisal.
The equilibrium economics of Taylor-Lange-Lerner was unable to grasp the nature of economic calculation because it solves the problem by assumption, which in fact is no solution at all.… It is this real world of heterogeneous capital goods with multiple specificity where the ability to engage in rational economic calculation is vital to the success or failure of the economic system. Without the guideposts of market prices and profit and loss accounting, economic planners would be set adrift on the sea of possibilities. (p. 83)
That is well said indeed. But one wonders why, in the course of an insightful tribute to Rothbard's contributions to the socialist-calculation debate, he omits an important fact. He rightly says that "Rothbard's presentation in 1962 already implied the failure of equilibrium economics to adequately address the issues in the socialist calculation debate that was stressed in later contributions" (p. 82). He fails to note that Mises in 1949 already fully recognized the irrelevance of general-equilibrium solutions to the debate. The section "The Differential Equations of Mathematical Economics" in Human Action is here of decisive significance.
Although Boettke seems to me to be right in his protests against the excesses of formalism, at times his assault rests on assertion unsupported by argument. He says that Chicago School economists held that "real markets come breathtakingly close to approximating the efficiency properties of general competitive equilibrium" (p. 280), but he fails to show that all of these economists had been beguiled by their mathematical models into ignoring reality. Was this true, e.g., of Milton Freidman and Yale Brozen? These economists seemed rather to argue that many important markets consisted of large numbers of small firms and that claims that monopolies engage in predatory pricing are exaggerated. His case seems stronger for Robert Lucas; but even here, Boettke does not show exactly where Lucas's models fail. He acts rather as if it were enough to state Lucas's view to show its absurdity: the New Classical view is "obviously contrary to reality" (p. 301). Perhaps it is, but Boettke needs to prove it and not just say it.
Despite these criticisms, Boettke's book merits the attention of all students of Austrian economics. Boettke's enthusiasm and devotion to a free economy are everywhere apparent. He says that he often tells students
that humankind has demonstrated two natural propensities — to truck, barter, and exchange (as Adam Smith taught); and to rape, pillage, and plunder (as Thomas Hobbes taught us) — and which propensity is pursued is a function of the institutional framework within which individuals find themselves living and interacting. (p. 385)
There can be no doubt which of these propensities Boettke wishes to encourage.[4]

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