New Buchanan Paper

Steven Horwitz

Tyler Cowen links to a new James Buchanan paper entitled "Economists Have No Clothes," which is a largely devastating analysis of Keynesian aggregative thinking and a call for a more catallactic and constitutional perspective in the profession.  The paper, however, does end with a call for a series of policy changes that I think are misguided (e.g., some form of 100% reserves, re-instatement of Glass-Steagall type rules, etc.).  Even so, it doesn't get much better than this:

Unfortunately, economists, generally, failed to understand that aggregate variables that may be measured with tolerable accuracy ex post may not be variables subject to control, directly or even indirectly. The fundamental misconception here lies in the understanding of what ‘the economy’ is. The ‘economic problem’ is not (despite Lionel Robbins) an engineering problem that may be defined simply as the allocation of scarce resources among alternative uses. The economy, in some inclusive definitional sense, is perhaps best described as an order that consists of an interlinked set of exchanges, simple and complex, from which outcomes emerge that may in some respects be meaningfully measured but that cannot be chosen, and thereby controlled, by concentrated decision takers.

The false conceptualization here is, of course, exemplified in the failure, both in theory and in practice, of the grand socialist experiments of the twentieth century. What remains missing, however, is a general recognition by economists themselves that their mind-set, when confronted with challenge, has not escaped from the engineering mentality. There has been little or no spillover from observation of events to the analysis by the putative scientists in the academies. It is not, therefore, surprising that the policy objectives and implementation are basically the same as those advanced by the Keynesians of midcentury.

Economists do not really understand what they are doing as they seem forced to make efforts to control aggregate variables that are not controllable in any direct sense. For example, the rate of employment (or unemployment) cannot readily be shifted by governmental mandate. At best, small and peripheral changes may be made while the emergent aggregate generated by the working of the large and complex economy remains stubbornly immune, or worse, to wrongly conceived reform efforts.

Comments

[Jerry O'Driscoll]

Glad to see Jim writing about this and look forward to reading it. It is a little annoying that he lumps all economists together, and ignores those who have been writing about the crisis and offeringa dissenting diagnosis.

[James H]

Nice find, Steve (via TC). This, I think, is the real gem:

"[A]ggregate variables that may be measured with tolerable accuracy ex post may not be variables subject to control, directly or even indirectly."

Meanwhile, at Think Markets DeLong wrote: "You can argue that it is a *bad idea* to create jobs for people right now by boosting government spending–that if they stay unemployed until private enterprise recovers and hire them that they will get better and more productive jobs."

DeLong thinks this is wrong, of course, but if he and like-minded colleagues can at least recognize this as part of a coherent argument against "stimulus" (something he acknowledges), then I'd say that we have a starting point -- a starting point for closing some of the gap between the pro-stimulus arguments and what Buchanan points out above.

In other words, someone of DeLong's ilk would still argue for deficit spending in order to boost certain aggregates, but the key issue is getting the "other side" to acknowledge the degree and kinds of uncertainty involved. Until that happens, there is no debate.

[Greg Ransom]

"The ‘economic problem’ is not (despite Lionel Robbins) an engineering problem that may be defined simply as the allocation of scarce resources among alternative uses."

This is really key. Robbins -- under the influence of Mises -- really damaged economics when he persuaded the profession to misunderstand the explanatory problem of economics. The central explanatory problem of economics is NOT a problem of explaining individual behavior or individual action -- the central explanatory problem is to explain the production of over-all economic order produced without a designing mind (along with explanations for some patterns of disorder within this overall order). I.e. Hayek & Smith, not Robbins & Mises.

Note that this account of economic science provides a scientific problem similar in structure to that Darwin's combined problem of a causal explanation for the patterns of adaptation and speciation without appeal to a designing mind.

[ADA]

Greg Ransom said: "The central explanatory problem of economics is NOT a problem of explaining individual behavior or individual action --- the central explanatory problem is to explain the production of over-all economic order produced without a designing mind "

Oh really? And what is this "economic order" comprised of if not individual humans purposefully acting? The only way to explain the "economic order" is within the framework of human action.

And I guess Austrian price theory and the Calculation problem is not an explanation of this "economic order"?

And how exactly do you read your Hayek? upside down? Where are these strange dichotomies such as Hayek vs Mises on these issues coming from?

[John Papola]

Rothbardian 100% reserves and narrow banking surely aren’t libertarian or optimally efficient. But I wonder if, in the face of anti-banker populism, such an approach might be a second best solution in an era where ending the Fed is not in sight.

It would certainly leave more capital idle than real, honest free banking, but if it could theoretically end or dampen the business cycle and it’s waves of Higgsian crisis/leviathan ratcheting, maybe it’s not such a bad halfway house.

Is there legitimacy in that line of thinking?

[Jerry O'Driscoll]

John Papola,

It is absolutely legitimate to be asking these questions.

I don't think there is any consensus among free market people on banking. Many actually continue to support the current system.

Any 12-step program begins with acknowledging one has a problem. We have a banking and monetary problem.