Extras: Pete Boettke on Mainline Economics

Okay, what does it mean to be an economist that sits in the seat of Adam Smith?... what I came up with is having to do with the invisible hand. Mainline economics derives the invisible hand proposition from the rational choice postulate, via institutions… individuals are pursuing their self-interest, but they pursue their self-interest within a specific institutional framework. Within the institutional framework of property contract and consent you unleash the power of prices and profit and loss accounting to able to guide individuals in their decisions, lure them into new ventures, and discipline them when those ventures are not the right speculations for them to engage in. That's how you generate the invisible hand. 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.

I try to defend methodological individualism by pointing out that Carl Menger was never an atomist, nor was Mises, nor was Hayek, but they always saw methodological individualism as the foundation of causal explanations. But that agent is always embedded within social context and influenced by social context. We’re trying to explain, through the self-reinforcing behavior of individuals, why it is that certain social contexts have such staying power? But it isn't a position that denies society. Individuals are striving to do the best that they can, given their situation, defined by legal structure, political structure, and a social and cultural structure within which they find themselves embedded. It's their embeddedness within society that invites us to study those things.

So, if you think about a great work like Acemoglu and Robinson's, tell me what is the difference between Myanmar and Denmark, and how is it that we identify that? Well, they build a lot of the explanation into the initial conditions. So, Myanmar ends up being Myanmar because it's 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 tell us how it is that a Myanmar could be become a Denmark, right? That has to do with the evolution of institutions, and modern economic modeling, stratagem, and empirical testing. I would argue that those approaches miss the evolution of institutions that allows us to realize how to live better together than we ever could in isolation. That's where the research program of mainline economics and political economy has to go forward, because that's ultimately what Adam Smith's book is about, An Inquiry Into the Nature and Causes of the Wealth of Nations. He's trying to explain the evolution of the institutions that give rise to the wealth or the poverty of nations.

So, a lot of these thinkers: Coase, Hayek, and Buchanan, use the equilibrium construct as a foil to set up their study of the world of change and dynamics. Because they want to study verbs. They want to study activity, not nouns, not states… Hayek says that the problem with Keynesian economics is that it begins in a world of resources and therefore then explains that there are 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, right? And then give rise to unemployment. Then that would explain why it is that we get depressions. The equilibrium is a foil against which study the world of change, and that illuminates other things like unemployment, entrepreneurship, profits, or the importance of law, and forming business organizations called firms.

These individuals are practicing economics from the inside out, not from the outside in, 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, creative, and resourceful so much more than the theorist that we're going give priority to the individuals that populate the world that we're studying and look at how they solve their problems.

Keep in mind that Adam Smith's baker, butcher, and brewer were already making your dinner before Adam Smith philosophically reflected on it.