And that's why we have a stress in economics on the functional significance of property prices and profit and loss. And it's those mechanisms that makes up sort of the core discipline of price theory, and that's at the core of economics. We need to get that across the students. But the implication of that is that this functioning of property prices and profit and loss allow for this complex coordination and that excites the human imagination through a sense of awe in which as Adam Smith pointed out, how is it that a common woolen coat ends up on the back of the day laborer and he goes through and examines all the exchanges and whatnot that produce the spontaneous order of the market. And I think we have to develop in students an appreciation for the power of that of the invisible hand. And then three, that it's through this invisible hand and through the entrepreneurial actions, either at the level of individuals recognizing opportunities for mutually beneficial exchange or recognizing opportunities to come up with least cost technologies or recognizing opportunities to change the rules of the game under which we operate to improve our chances of engaging in productive specialization and mutually beneficial exchange, that we have hope, that there's hope that we can improve and have progress in economics.

And then the final thing is that compassion, which is that the compassion is that that hope falls on the least advantage the most, that when we have economic progress, the people who benefit the most are the ones who are the most vulnerable and the least advantage in the world. And so economics is a science. It attracts our attention because of the beauty and the awe, and it gives us hope for progress and it gives us discipline to our compassion so that we can actually improve the lives and repair the world around us through economic growth and development, which is a consequence of improving the rules under which we operate to unleash the entrepreneurial spirit that is part of the human psyche and human nature. So that's what I hope your generation starts to appreciate an idea of economics that's much broader than just the idea that it's this ruthless efficiency machine and instead sees it in this broader context.

This idea is so relevant to me, especially recently because not only am I about to start teaching, but also I was having a conversation last night with someone who was saying that economics is not beautiful, it can't be beautiful, and I was just so confused and you've just given me the tools to explain just why and how beautiful it really is and the power. It's just such a concise explanation. So thank you for giving me that.

I've been teaching economics now at the college level for over 35 years and 25 years at George Mason University this fall. And the thing is is that I've been married for over 40 years now and I've gone to lots of cocktail parties and different occasions with my wife and people will say to her, oh, what does your husband do? And inevitably she says, oh, he is an economics professor and they look like they had to drink sour milk. And I've always thought, man, they must've had a really bad economics professor because you shouldn't view learning economics like drinking sour milk. It should be in fact one of the most intellectually rewarding experiences of your college career. I had the good fortune to know Paul Heyne, the author of the Economic Way of Thinking, and when Paul unfortunately grew ill, he asked me to take over and join him in keeping the book in print, and I did that, but we kept it very much as Paul Heynes's book.

But Paul Heyne had great motto in there, which he said, teach the first class in economics as if it's the last class a student will ever take in economics, and it will be the first of many that they'll take. I've always understood that message from my very first class in economics because I had a great economics professor who really turned me on to the discipline, and I'm sure that you're going to have that experience as well. But that would be my one bit of teaching advice to you. Remember that to teach the first class students have an economics as if it's going to be the last time they ever take an economics class. And so you just boil it down to the essentials that you want them to walk away with, and it will end up by being the first of many that they'll want to take.

That's fantastic. I should keep that in mind. So let's talk a bit about mainline economics. You edited a book which is called Mainline Economics: Six Nobel Lectures in the tradition of Adam Smith. And I have to admit, I was afraid of this book. I've had it since I was a few years younger than I am now, but I avoided it because I was afraid of the word mainline. I thought it had something to do with very hardcore, very serious grad level econ or something about industry, and it was just very serious and very intense and it scared me. Obviously, I didn't read the subheading because it's about the tradition of Adam Smith and it's a collection of speeches. So that was silly of me. And now I can't believe I waited so long to read it because it was so eye-opening, and I think it's such an important way of looking at an intellectual lineage, especially of economics. So can you tell us what mainline economics is?

Yeah, so I should start out by giving two sort of quick biographical connections to that term. So I was very fortunate, well actually three points. My undergraduate education in economics entailed having to take a whole year, not just a semester, a whole year of history of economic thought. So one semester was kind of a general survey, and the other one great books. So we read the great books in economics. That was part of what it meant to major in economics at the college that I went to. So I went to graduate school and I was already very clued into the idea of learning economics through the study of the history of the evolution of economic thought over time. So the classicals to the early neoclassicals, to the more modern thinkers. I wanted to study that. And in the process of doing that between undergraduate and graduate school, probably my last year in undergrad school, I learned of an article by a professor named Kenneth Boulding called After Samuelson Who Needs Smith?

It was published in 1971, and I was very intrigued by this essay. And in that essay, he uses the term mainline economics. So that's the first time I ever heard of the term. And then it just so happens that when I went to George Mason to graduate school; after my first year in graduate school, Kenneth Boulding joined the faculty at George Mason. Now Boulding is a fascinating figure because he was the second John Bates Clark medal winner after Paul Samuelson. So he's a superstar in economics, but he was slightly out of sync. And part of the reason why he was out of sync is because he stood in opposition to Samuelson. He wrote a review essay in the Journal of Political Economy when Samuelson's Foundations of Economics came out in 1947. He wrote a review essay in the late forties criticizing the overuse of mathematics by Samuelson. And his argument was is that the vague and literary borderland between economics and sociology is going to be a more productive research program than the flawless precision of mathematical economics, but the economic, ship must be rolling right now.

But the economics profession, of course, went in the Samuelsonian direction even though Boulding was the second John Bates Clark medal winner even before Milton Friedman. Anyway, so Boulding came to George Mason. I had already known of him, and so I was very excited to learn more from him, and I ended up by studying with him very closely while he was here at George Mason, including taking a course with him on the great books in economics. Now, part of his argument about “After Samuelson who needs Smith?” was that Adam Smith still speaks to us because what Boulding argued was there's evolutionary potential to ideas, and we have an exhausted the relevance of Adam Smith for current economic thinking because we haven't exhausted all the evolutionary potential of his ideas. And so after Samuelson who needs Smith, we all do because there's still things for us to learn from Adam Smith. And I was very sympathetic to that position, and I had people like Jim Buchanan and Don LaVoie, who my teachers, Karen Vaughn and others who also shared this idea that the history of economic thought was not just a hobby that you study old thinkers or whatever, antiquarian thinkers, but instead that there's ideas that are there that haven't been fully exhausted, that we can in fact repair our intellectual path by reaching back to go forward in some sense.

The third aspect is that I got out of graduate school and I ended up by teaching at New York University, and New York University is at that time a top 10 department of Economics. Now, they had an Austrian program at the time, Israel Kirzner, Mario Rizzo and myself, and I was there; Larry White was before me there, and Gerald O’Driscoll was even before Larry White in there. And so they had a long history of various different faculty being there and postdocs and everything like that. And so we had a program, but I was hired as an assistant professor. I was teaching just like everyone else in a normal tenure track job there and the Institute for Humane Studies, which I am very grateful for. They hired me a lot to go and talk to students like yourself and others who were maybe going to go on to careers in classical liberalism or academic careers just in general.

And I used to get the comment all the time from people saying, well, but you're not mainstream. And at the time, you got to remember, this is in the 1990s, communism has collapsed. My dissertation had won the award from the Omicron Delta Epsilon, which is the Honor Society for Economics as the top dissertation. I'm teaching at a top 10 university two years into me being at NYU; I get to go to Stanford. I was a finalist for a position at Princeton at the Institute for Advanced Study. And so I was kind of a little cocky, and I didn't take very kindly the kids telling me I wasn't mainstream. And I studied with academic royalty. I studied with Jim Buchanan, who was a Nobel Prize winner, Gordon Tullock, who's a distinguished fellow of the American Economic Association, and Kenneth Boulding, the second John Bates Clark Award winner, former president of the American Economic Association, all this stuff.

And so I would look at these kids and I'd be like, incredulous. I'm like, what's your damage? I studied with academic royalty. I mean, who the heck did you study with? It's like you're telling me I'm not mainstream, but who are you to tell me that? And so I started to adopt this terminology, which is, I might not be mainstream, but I'm mainline. I sit in the seat of Adam Smith, which of course is a line from Lord Acton that Jim Buchanan adopted in his famous essay. What Should Economists Do? He starts with that quote from Lord Acton, which says that it's not the momentary policy debates of the day, but those who sit in the seat of Adam Smith that are worthy of our attention. And so I'm like, okay, so what does it mean to be an economist that sits in the seat of Adam Smith?

So from Smith and Hume to Bastiat and John Baptiste Say, to John Stuart Mill and others, Philip Wicksteed, and then going forward into the 20th century, Mises and Hayek and all the way up to Buchanan and then Vernon Smith and all of these. And so I started to actually really try to eventually try to put very concrete thoughts to this vague concept of mainline versus mainstream. And what I came up with is having to do with the invisible hand, and I'll shut up after this, but my basic idea is that mainline economics derives the invisible hand proposition from the rational choice postulate, but via institutions, whereas alternative types of thinking, let's say Keynesian economics, well, Keynesian economics is deny the invisible hand either because of weakness of will of the rational choosers or dysfunctions in the price system. So for example, there's a disjoint between the savings and investment decisions, so the price system in the Keynesian system.

And so as a result, you don't get the invisible hand. And this of course is basically laid out very clearly in Keynes's own essay in 1926 on The End of Laissez Faire, but then of course later in his other writings as well. So Keynes denies that you can derive from the rational choice postulate the invisible hand proposition. On the other hand, people that practice general competitive equilibrium and tend to focus too much on that, they collapse one to the other. So it's not institutions that serve the job of steering individuals from their rational choice to the invisible hand. It's that the cognitive capacities of the actors, the maximizing behavior is basically collapses into the equilibrium. So you go from a Ian to basically having the price of X over the price of all other goods, the indifference curve, tangently kisses, the budget constraint, and you have basically right there all the relative prices.

That would mean that social welfare function would tangibly kiss at the outskirts of the Pareto frontier. Alright, cool. Alright, that's cool, but that's another way to do it. But that's not what Adam Smith was doing. That's what Keynes was doing and the brew and that system and then adopted by aspects of the Chicagoans with Lucas and whatnot. And so the equilibrium always kind of crowd. So you have equilibrium, never equilibrium always. And then you have this mainline idea in which individuals are pursuing their self-interest, but they pursue their self-interest within specific institutional framework. Within the institutional framework of property contract and consent, you unleash the power, the functional significance of prices and profit and loss accounting to be able to guide individuals in their decision, lure them into new ventures, discipline them when those ventures are not the right speculations for them to engage in. And that's how you generate the invisible hand. And so the focus is on property prices and profit and loss. And then what thinkers throughout the history of economics put that emphasis on those institutions interacting with individuals, pursuing their self-interest to generate a situation where individuals can realize productive specialization and peaceful social cooperation through mutually beneficial exchange. And that's what mainline economics is all about.

So I mean this might seem like a silly question maybe, and it might just be me rambling a little bit, and then it has a question mark at the end. But I guess first, a lot of critiques I hear not of directly mainline economics, but it happens to be towards thinkers who I think fall within the mainline genre maybe, is that because they don't use math the same way that the rest of them do. They're not super rigorous, they're not science, and so they can't prove it. There's no equal sign, there's strength to the equal sign. But there's also this other piece which is we know that kss type mathematical economists do rely on prices and kind of implicitly seem to acknowledge the importance of these institutions. So I guess how do you compare them and how is the use of institutions different? I guess it seems that in mainline institutions are more at the forefront, but doesn't all economics kind of rely on these institutions? 

So I think this is a very interesting question. In the 1940s, fifties and sixties, the development of the neoclassical synthesis and formal of that explicitly strove to have a institutionally antiseptic economics, that was an explicit goal of theirs. Part of that is also in the justification for mathematics because think about the relationship between averages and marginals. That's a mathematical relationship. It holds whether or not we're talking about the year 1200 or the year 2,500. The relationship between averages and margins are going to be same. And it doesn't matter whether or not we're talking about a factory in Indianapolis or a factory in Beijing, the relationship between the average costs and the marginal costs are still going to be the same. And it doesn't matter if I think in terms of students taking exams in Oxford, in Adam Smith's time or taking exams in our time and in a time series, it doesn't matter the context, the abstraction of the math is the math.

The math is the math. And that was part of the belief of why we needed to move towards formalism was because the biggest ambiguity in economics comes about when you use the same words to mean different things or different words to mean the same thing. And so the belief was is that that just led to endless debates that we're recycling each other over and over and over again. We're not making any progress. And so science is about making progress. And so the idea was is that we substitute a universal language that we all agree on, then we get rid of all the ambiguities that are associated with natural language. One of the ambiguities is also historical context. So the formalism of a Samuelson or an arrow or whatever that was juxtaposed not only to the early neoclassical economist, but also juxtaposed to the historicist economists or the American institutionalist economists.

So the early neoclassicals as well as the older institutional economists, they all were wiped out scientifically close to it by the mathematical revolution in economics. What new institutionalism is, which is what in some sense these thinkers are all part of what they're doing is they're trying to bring institutions back into economics. And that's kind of hard for modern, your age students to appreciate because you grew up in an age where institutions got brought back in again by the top economists as Acemoglu or Schleiffer or any of these other people, they tried to bring those back in. So what these essays are trying to do, these Nobel laureates, they're all the ones who were the first movers on bringing that stuff back in. So then the question becomes now the modern question that relates to your last point is whether or not the way in which someone like as Acemoglu or Schleiffer bring institutions back into economics, does it actually do justice to the way in which Hayek and Buchanan and [Ronald] Coase and [Douglass] North and Vernon Smith and Elinor Ostrom wanted to bring institutions back in?

And part of my argument or part of the argument that we try to make in the book and in other books that I've done, like my book Living Economics or an applied book called Applied Mainline Economics, where I try to make these arguments is I try to make the argument that no, they're still missing aspects of what these individuals were trying to do. It's an advance above Francis Betor that we are no longer striving for an institutional antiseptic economics, but we often treat institutions either as we are trying to force fit it into some kind of variable in our regression, or it's part of it's too much of the explanation is built into the initial conditions. So if you think about a great work and Robinson's the narrow corridor, tell me what it is that the difference is between Myanmar and Denmark. How is it that we identify that?

Well, they build a lot of the explanation into the initial conditions. Myanmar ends up by being Myanmar, Myanmar, and Denmark ends up by being Denmark because it's Denmark. That's not much of an explanation, that's a description. And what we want as economists is explanations that in particular for development, we want explanations that explain to us how it is that a Myanmar could be become a Denmark. And that has to do with evolution of institutions and the modern economic modeling strategum and empirical testing. I would argue maybe I'm wrong, but this would be my scientific stake that I would put is that those approaches still miss that evolution of institutions, that endogenous evolution of the rules of the game that allow us to realize how to live better together than we ever could in isolation. And that's where the research program, I think, of mainline economics and political economy has to go forward because that's ultimately what is Adam Smith's book about, An Inquiry into the Nature and Causes of the Wealth of Nations. So he's trying to explain the evolution of the institutions that give rise to the wealth or the poverty of nations. And so that's where we're going with that.

There's a lot in that response, and I want to take it bit by bit. So first I guess, is there an example or an example of an economic phenomenon that you can kind of break down the different responses from maybe a mainline economist to a neoclassical mathematical economist and where mainline economics and that way of thinking actually gives insight that's essential, that actually succeeds over this other type of thinking?

So let me, because you work in the economic science lab. So let me use an example from experimental economics, which is that in our standard theorizing about the way in which markets operate, our techniques of simultaneous equation solving doesn't allow us to actually explain the path towards equilibrium. We can tell a story sometimes when we're teaching where we step out and we try to tell a story to the students to make sense, but the formal theory that we have on the blackboard just has a p and q, and then there's an exogenous change, let's say a shock to demand. That increases demand. Now we'll have a new P and q, right? And we get there like that, that I don't know if you're hearing my finger snap.

You heard it, and you go P pq not to PQ one, and boom, you're in the new equilibrium and you describe the different traditions here. And then you might tell a story about haggling and bargaining outside. That would be your appreciative theory, but there's no formal theory. But what Vernon Smith did in his double oral auction is to actually demonstrate through the simulation of the experiment the way in which markets come about and get cleared. So it's endogenous to the trading behavior of the individuals. And one of the things that Vernon was able to also do besides showing that was how sensitive the ability of that market to work was to changes in the rules under which the experiment is done. So you could easily end up by having experiments in which there is no market clearing because you change the rules and you still have the universal aspect of the individuals striving to do the best that they can given their situation.

So they're all trying to still buy low and sell high. So the individual aspect of economic theory is always still there, but the manifestations of their efforts to buy low and sell high and the consequences of that for their coordination abilities with others is going to be context specific. And in particular the context of a world of property contract. And as David Hume and Adam Smith emphasized, you have to have stability of possession, the transference by consent and the keeping of promises without property contract and consent, then individuals in striving to do the best that they can given their situation, are going to not pursue those same kind of trading opportunities that they otherwise would because they're insecure. The marginal benefit is less than the marginal cost of the risk of them getting bopped over the head and having someone confiscate their property. So instead they withdraw from engaging in those exchanges.

And so these are the kind of things that I would first stress is these kind of market experiments that the market itself, understanding how the market works is not very well done in a general competitive model. What the general competitive equilibrium model does is tell us the consequences of after the market worked, what would be the efficiency properties that it could generate. But it doesn't tell us how it generates those things. It doesn't tell us how the market works. And so I think the first thing is mainline economics is all about how markets operate, how does that exchange behavior? And so economics in this sense is not about equilibrium and states, but instead about exchange and the institutions within which exchange takes place. So that's one. The second one, and then I'll stop after that, is think about things like coasts. So a lot of these thinkers, Coase and Hayek and Buchanan and whatnot, they use the equilibrium construct as a foil to set up their study of the world of change and dynamics because what they want to study is verbs.

They want to study activity, nouns not states. And so C, and a lot of people get confused about this, they think Coase theorem is about the zero transaction cost world, but what Coase was really trying to do is study the positive transaction cost world. When Hayek says that in order that the problem with Keynesian economics is it begins in a world of I resources and therefore then explains that there's I resources, right? That's the unemployment equilibrium. We begin in a world of I resources and then say, oh, there's I resources. That isn't an explanation. That again, is just a description. So what Hayek said is you have to start in a world of full employment and then give rise to the unemployment. Then that would explain why it is that we get depressions. And so you see that the equilibrium is a foil against which we want to study the world of change, and that illuminates these other things like unemployment or entrepreneurship and profits or the importance of law, the importance of forming business organizations called firms. All of these kind of phenomena come about because we're outside of the de brew world. But creative and clever individuals are still striving to do the best that they can given their circumstances and the way that manifests itself is going to be dependent upon the rules under which they operate legally, politically, and socially.

So I guess I'm trying to find a very concise word for it. And then I just come upon the word institutions. And so I guess, I don't know institutions is a good word to explain my intuition.

I mean, I have a very broad and maybe two expansive definition. So it borrows a little bit from [Douglass] North, but it's going to put a little McCloskey-esque emphasis. Deirdre does not agree with this, but this is the way I would put it, which is that the institutions are the formal and informal rules of the game and the formal and informal sanctions for violations of the rules of the game. So this podcast begins with Adam Smith. And so Smith in The Theory of Moral Sentiments makes a major role in our social life of social approbation and disapprobation. That's part of the rules of the game, right? Because those are the social mores and attitudes and beliefs that individuals have that either will, let's say, support and encourage private property and freedom of contract, and as Deirdre would put it, giving it a go or discourage it and therefore make it more costly for individuals to give it a go and engage in entrepreneurial action.

So we want to study those informal norms, but we also want to study the formal legal sanctions. So when we have occupational licensing, that's going to be a restriction on individuals entering into a market that otherwise they could have more freely entered into. And so we want to study both the formal and informal rules of the game and the formal and informal governance structures that sanction or discipline various different behavior. And that's a research program that is opened up by these mainline economists bringing institutions back into economics, bringing away from the sterile kind of approach to economics, which dominated in the period from World War II through let's say 1970s into 1980s.

And that I guess a lot of people who criticize these thinkers criticize the over individualization. And this methodological individualism is the term that gets thrown around instead of focusing on societal aspects. So this Pareto optimal, what is the externality? How do we get unemployment to the natural rate very focused on equilibriums, and this is, I guess that is what these sterile economic equilibrium people are saying. So I guess what is the response to that? What is the defense for this individual approach instead?

So I just have a paper on this. It's coming out in one of these handbooks, but it's available on SSRN. It's on methodological individualism and Austrian economics, and it's a defense of methodological individualism. A lot of modern Austrians that are very influenced by Hayek have tried to distance themselves from mythological individualism precisely because of the criticisms that you're raising. And they want to point out that Hayek wasn't such an animistic individualist, blah, blah, blah. I actually tried to defend methodological individualism by pointing out that all the way back to Carl Menger, he was never anatomist, nor was mees, nor was Hayek, that they always in fact saw methodological individualism as that you are relying on this agent as the sort of foundation of your causal explanations. But that agent is always embedded within social context influenced by social context. And you're trying to explain through the self-reinforcing behavior of individuals why it is that these social contexts have such staying power and whatnot, but what it isn't isn't like a position that denies society.

Again, we are individuals striving to do the best that they can given their situation, their situation is defined by a legal structure, a political structure, and a social and cultural structure within which they find themselves embedded and their embeddedness within society, within legal structures, within political structures that invites us to study those things. So again, think about these mainline I should mention. The Nobel lectures that are reprinted in the book are Hayek’s 1974, Buchanan’s, 1986, Coase 1991, North 1993, I think [Vernon] Smith 2002 and Ostrom 2009. And those are the quintessential examples. And if you notice in those, each and every one of those individuals has stresses law, politics, society, and the interaction effect with that, with individuals striving to do the best that they can follow the marginalist principles and whatnot. So the analogy that I use in an essay that I wrote about Menger recently as well as in this essay on methodological individualism is it comes from [John Stuart] Mill.

Mill described economics as the inexact science and example that he uses is the law of tides. And so the way in which we can predict high tide and low tide in the ocean, and that's based on a fundamental law of gravity, and those are, that's a universal law law of gravity. It's based on the gravitational pull as the earth rotates. And we can make predictions about all of that. And that's like science, that's like holding up a pencil and dropping it. It falls to the ground and saying, look, the law of gravity, but if I build a harbor, okay, now what I'm going to do is I'm going to put manmade construction of rocks and other kinds of things, and that's going to affect the way in which the law of tides manifests itself within my particular harbor and what we want. And that's going to affect the way in which boats can go in and out of the harbor and travel safely or not so safely is going to depend on how it is that I build the harbor.

If I build the harbor poorly, I could end up by actually damaging the boats and having them not be able to get in and out very safely. If I build the harbor correctly, then they can move in and out and everything like that. The law of tides is not affect it in the sense that the institution says that now demand curves don't slope downward. Of course, they always slope downward, but the way in which, in the slope of which they are, whether or not they're relatively inelastic or relatively elastic, it's going to be affected by the various different institutions within which individuals engage in their trading behavior in the same way that the boats going in and out of the harbor are going to depend on how the harbor is constructed, but the law of tides is still there. So economics is still universal, but the application applied economics is going to be institutionally contingent.

And so we as applied economists have to put a lot of attention on the interaction between the institutions and the rational choosers. And so again, just to try to communicate this, pure economics is the logic of choice, the logic of individuals choosing against constraints. And we can understand the marginalized principles and everything that guide that the law of the market axing, that is going to be individuals all following those individual logic of choice, but they're engaged in situational logic of them interacting with each other and against a given context of rules of the game. And so we as economists, when we do applied economic theory, we have to take our pure theory and meld it carefully as an art with the actual applied context of the, now we can do that context abstractly that is theory like, oh, imagine these auction rules versus those auction rules, or we can do it concretely, which is look at those auction rules that were held in that market for horses in that example over there in Iowa versus this market that's over here.

So we can study the Chicago Board of Trade versus let's say the New York Stock Exchange and study how those different rules might impact. And this is part of learning what applied economics is, and then the combination of that applied economics and pure economics. Then we use that to form a framework, which then we then do empirical economics with when we actually go and study and try to understand the operation of things. Let's say for example, why it is that California had the blackouts, even when they had deregulation of the electricity markets, why was that deregulation not done so well? Right? What was the cause of that? What caused the dysfunctions that led to that? Well, it was in the design of the rules, not in the behavior of individuals. It was in the design of the rules. And so this is the way I would like to think about these kind of questions.

So something that I found super interesting about these speeches and just learning about Nobel lectures generally is that actually a lot of economists and a lot of people maybe generally in other, I don't want to call them in other disciplines, I don't know a ton about the other disciplines. I focus a lot on econ, which I guess is maybe not the most political economy, classical liberal thing of me to do, but I'm getting into it. It's okay, is that a lot of the time you're either talking in your speech about your accomplishments and what you've done or you're talking about sometimes and what a lot of these thinkers in this book have done is talk about the problems in the profession and where they want it to go. So could you give us an overview of what these thinkers, where they wanted economics to go and what their fear for the discipline was? I know they all had different issues, but they generally being mainline had similar fears, I think. And then have we accomplished that? Do we now as a whole discipline of economists, is there kind of adherence to their way of thinking in a way that there wasn't at the time?

So I think that there's a few things going on with these thinkers that I think is important to keep in mind. One way to get a good handle of this is going to be a very weird suggestion to people, which is to pick up Elinor Ostrom's Governing the Commons, which is her most famous book, has well over 40,000 citations and read the last four pages of the book. So most people pick up that book and they think, oh, this is all about common pool resources and how it is that small communities can come up with rules that will allow them to manage their common pool resources more effectively than a one size fits all approach. That is true, that is a major part of what she studies. However, you should keep in mind that she studies successes, she studies failures, and she studies transitions, and she lays all of those out in the case studies throughout the book.

So it's not just a simple success story. She also identifies where it is that they're fragile and they break down and like that. But if you get to the very end of the book, she stops talking about common pool resources and starts talking about the challenge that her approach represents to social sciences and what the implications are. And that's where she gets to this broader political economy point. She's really trying to identify conditions of self-governance or self-regulation where you don't need a monopoly central power to determine how to allocate resources effectively because individuals and their communities can come up with rules to outperform the central dictator. And then she sees the broader notions of that going all the way back to Adam Smith and David Hume all the way up through these speakers that you're talking about and their ideas. And so she sees herself in this very strong tradition and her main ideas that we have to stop seeing the economic world as if we have a unified state.

And instead we have to see the world like citizens in which we have a plurality, a multiplicity, excuse me, of interest that have to be reconciled with one another through various decentralized mechanisms. And that's what she's going to study. So the key idea here that's an implication of that is that these people are practicing economics from the inside out, not from the outside in these individuals practice economics as students of society, not as saviors of the society. Remember that the second volume of Keynes's biography is titled The Economist as Savior. When you think of economics as a savior, you step outside the economic system as an economist and you fix all the problems that these poor little people can't fix themselves. But if you study economics from the inside out, economists have no special status. We don't have any privileged position in society to fix other people's problems.

And in fact, the people are clever and creative and resourceful so much more than the theorists that we're going to give priority to the clever and creative and resourceful individuals that populate the worlds that we're studying and look at how they solve their problems. So again, to link it back to Adam Smith, keep in mind that Adam Smith's, baker, butcher, and Brewer we're already making your dinner before Adam Smith philosophically reflected on it. The common woolen coat is already on the back of the day laborer before they as a theorist thinks about the connections that make possible that common wool and coat that's different from a Keynesian inspired economics being in charge of maintaining full employment in the economy, or the idea of, I'm blanking now on the name of the machine, but the bathtub and the idea of the savings and investment and the leakages and all of that, and the idea that the economist is at the levers turning the levers to make sure that they maintain full employment levels of output.

And so all these individuals feared this takeover of economics by social engineering and the disregard of economics of social understanding. That was the grand tradition of political economy from Adam Smith to John Stewart Mill. And so they wanted to have the modernist economics of marginal economics, early neoclassical economics, but they also wanted to practice economics as done in political economy tradition from Adam Smith all the way up to John Stuart Mill. And so they were afraid that that discipline was being purged, and instead we were getting economics as a tool of social control rather than economics as a tool of social understanding. And so the question back to you since you asked at the end, do you think today that we have an economics of social control or do we have an economics of social understanding? And I would contend with you that even when it comes to institutions, we still have people trying to force fit institutional analysis into an economics of control rather than an economics of social understanding.

And so we have not abandoned the quest to have economics as a tool, which allows us to basically be that man of system that Adam Smith made fun of in this idea, and instead, we're still stuck in that Keynesian mindset of the Economist a savior. This is why Bill Easterly's work, I don't know if you're familiar with it, but Bill Easterly's work, like does his book, The Tyranny of Experts, or the earlier book, the White Man's Burden, or even earlier, the Elusive Quest for Growth. He's building up this argument, which is much more in the mainline tradition and against the kind of mainstream idea of economics of social engineering. And in fact, the book that he's working on right now, it's a development book, it's basically called Saviors versus Skeptics. And his argument is that the great classical liberal thinkers like Adam Smith, they were skeptics of the idea that I, from the outside could fix other places. So that's why Adam Smith is a great skeptic about colonialism. He's a great critic of slavery, these kinds of positions, whereas the saviors believe that they can fix these poor countries and these poor populations by stepping in and bringing our paternalistic, saving graces to them. And these individuals all stand in juxtaposition to that position, if that makes any sense.

No, I do think it makes a lot of sense. It's funny, even if you look at Ostrom, for example, the fact that she uses case studies and she observes in her work is exactly this. She's not asserting so much that this should be the rule and we should change it in this or that way. She's more presenting observations almost.

Yeah, her husband [Vincent Ostrom], they shared a very, it's a wonderful academic love story. So I recommend everyone to watch this PBS movie about them, which is, I think it's Actual World: Possible Futures is the title of it. Excellent. But Vincent is older than her, and Vincent had a chance to advise Alaska when they became an independent state to be able to help them with their constitution. But when Vincent went up there as an expert and they asked him, how should we design the Constitution? His first question to them is, what is it that you guys want? Not what do I think is the ideal constitution that I impose on you? And this is their attitude all the way along is that it's all about allowing the bottom up constitution making from the bottom up as opposed to constitutional imposition. They were never imposing order on the world.

They were trying to understand how it is that that order emerges out of the individual communities that are trying to resolve conflicts. And so conflict becomes a major part of the story because that's where we begin. We begin in a world of conflict and we have to bargain our way out of conflict through finding rules that allow us to live better together. And so in my book, the Struggle for a Better World, I try to use this analogy of sharp objects where society is filled with sharp objects, and the question is, can we find institutions which stole the edges of those objects so that in our bumping and bopping into one another, we get bruised and maybe scraped a little bit, but we never get mortally wounded. But if we live in a world where our discourse and everything else sharpens those sharp objects in our social interactions, we're going to end up by having mortal wounds and we won't be able to realize peaceful social cooperation.

And so how is it that we build cultures of peace and cooperation in one another so that you can realize the great benefits of the great society? I think that's Adam Smith's major thing. That's why in Adam Smith's work, the development path is one of escaping the violence trap, right? It's getting beyond the violence trap so we can realize social cooperation and the division of labor. And so again, going back to what I was saying before, the thing to be explained is social cooperation on division of labor, the mechanism of explaining is individual pursuit of self-interest, and the mechanism is the institutions that allow us to coordinate and cooperate with one another rather than to stay in conflict with one another.

Well, two questions, but I guess what can we do and what should we do to take away from these mainline economists as students, as teachers, as policymakers and just thinkers generally?

So I think the first thing is to stress the rule level of analysis like Buchanan did and whatnot. And the second thing is that the devil is always in the details. And so what we have to do as economists is we actually have to study details of contracts. So when Coase won the Nobel Prize, he took his money and he gave it to try to set up a center that would study the history of contracts. And so it's an embracing of a different style of research rather than creating a large scale data set, which by the way, those are very valuable too. One of my favorite examples of this is right now Stefan Voight over in Germany is part of a project that is studying constitutional compliance, and they are developing this huge data set on constitutions throughout the world and basically their acceptance or their rejection by their populations.

And so that's going to be a very useful resource for a lot of people studying constitutional compliance questions because we might not comply with the Constitution incentive incompatible, but we also might not comply with the Constitution because it doesn't fit our local knowledge. And sorting through those things is a great research program. But what we can also study is things like the following. One of the really fascinating stories in the history of institutional economics is Stephen Chung's story of the fable of the bees. So there's an externality between the bee farmer and the orchard grower. And so there's this externality and Chung points this out. And then Chung highlights the fact that, hey, well, they developed a contract so that they could internalize the externalities and realize the benefits of their mutually beneficial exchange. Okay, that's cool. I'm all with Chung on that. What's fascinating though is the history of that contract, there must have been a period of time in which the contract wasn't formed.

It hadn't been invented yet, and therefore there was this conflict that needed to be resolved, which is why they get the constitution, I mean, the contract in the first place. So I think our study would be one Chung wants to study what are the efficiency properties of a contract that's already in place? Okay, that's cool. I get it. But isn't it even cooler if we study how it is that the creative and clever and resourceful actors in the economy overcame the difficulties to come up with the idea of that contract in the first place and how it is that they negotiated that and worked it out. And that's all has to be in a deep, deep dive case study history in which economics is interacting with very specific historical context, legal precedent, all of those kinds of things. And that's a different kind of research program. It is a research program that will not give us scientific controls because we're doing economics in the wild. So we're giving up the kind of controls that you strive for when you're in the layup, right? But what we do when we give up the controls is we lose predictability, but what we might gain in understanding, and that's where the burden of proof falls. I have to show you that I gain more in understanding through this deep dive then I give up in my predictive control.

Thank you so much for sharing your wisdom and all this knowledge with us. I wish we had more time, but I have one last question for you.

Yes. Great.

What is one thing that you believed at one time in your life that you later changed your position on and why?

Oh, so related to this, I used to think that the universal aspects of economics stretch farther than they do. So what I mean by that is I thought that if you understood that the man curve slope downward than you could pretty much say everything that you ever wanted to say about the world. But I learned, especially after reading Hayek's 1937 paper, that the pure logic of choice gets you only so far. And then what you have to have is you have to have propositions about learning. And those learning propositions are going to necessarily talk about how we learn under alternative institutional environments. And so I became more convinced about the research program and economics being about comparative institutions and focusing not just on the comparative institutional impact, on the incentive structure, but also on how we learn. So the social epistemology of different institutional environments.

And I think that's the ongoing research program that I hope young people that are getting excited about economics jump into with both feet and get really excited. I think that leads us back to my earlier four points about the power of the science and understanding scarcity and trade-offs, the beauty and awe of spontaneous order, the hope that comes from entrepreneurship and the compassion that is giving as the least advantage are the ones that are lifted up the most by modern economic growth and development. And I think if we can teach that and communicate that and excite people about getting involved and contributing to that, mainline economics will have a chance to actually be mainstream. And that's what we hope is that mainline economics is being taught at all of the mainstream hubs of economics. Those are the scientific centers of our discipline, rather than existing on the periphery of the discipline instead being at the core of it. And I think that's going to require some very creative and clever and resourceful work by scientists to pull that off. But I hope that young people get excited about and do it.

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great antidote@libertyfund.org. Thank you.