The Economic Emperors Have No Clothes: The Brilliance of James Buchanan

|Peter Boettke|

In Thomas Kuhn's essay "The Essential Tension" he argues that original contributions in science result from a delicate balancing act between irreverence and obedience to tradition.  Only someone deeply embedded in the existing scientific mainstream can gain the scientific credibility to shift scientific opinion.

Many readers of The Structure of Scientific Revolutions often misinterpreted the notion of paradigm shift, and believed that paradigmatic shifts in science could come from anywhere.  But Kuhn's history is different.  Lone wolfs barking in the back woods don't pull off scientific revolutions.  Instead, it is from within the group of outsiders, those who have the greatest claim to insider status that pull off the revolution in thought.  Irreverence from those of accomplishment within the recognized scientific community works, irreverence from outsiders who are outside the recognized scientific community doesn't.

Gordon Tullock is among the most irreverent leading scholar I've ever met. Kenneth Boulding was jokingly irreverent.  Israel Kirzner, on the other hand, is decidedly not irreverent -- in fact, that is probably the last word anyone would choose to associate with him. But Jim Buchanan, while never as outlandish as Tullock, and impish as Boulding, does possess a strong irreverent streak with respect to mid-20th century mainstream economics.  "What more," Buchanan often asked us, "do we know about market processes today than what Adam Smith knew in 1776?" And, he added, "if we cannot answer that question easily, then perhaps the 'emperor has no clothes'." Consider the following example of Buchanan's irreverence from What Should Economists Do?:

If not an economist, what am I? An outdated freak whose functional role in the general scheme of things has passed into history? Perhaps I should accept such an assessment, retire gracefully, and, with alcoholic breath, hoe my cabbages. Perhaps I could do so if the modern technicians had indeed produced "better" economic mousetraps. Instead of evidence of progress, however, I see a continuing erosion of the intellectual (and social) capital that was accumulated by "political economy" in its finest hours.

In my essay "James M. Buchanan and the Rebirth of Political Economy" I explain how Buchanan's paradigmatic revolution of public choice fit the Kuhnian story of the "essential tension".  As his student, this tension between a deep commitment to the teachings of the discipline of economics and political economy tracing back to Adam Smith and as developed by classical and neoclassical economics, and a harsh criticism of the currently fashionable Neo-Keynesian synthesis and the hyper-formalism of equilibrium always economics was evident in every lecture.  Would-be social engineers and modern technicians did not advance the teachings of political economy that was developed by scholars from Adam Smith to Frank Knight.

The Emperor (in this case the eastern establishment economists) had no clothes.  In the wake of the financial crisis of 2008 and 2009, James Buchanan has reiterated this theme against modern versions of Keynesianism and the hyper-formalized models of economic behavior which cannot explain current affairs.  Buchanan's essay "Economists Have No Clothes" challenges scientific and policy legitimacy of the current orthodoxy, and argues instead for a "constitutional perspective" on the crisis and post-crisis political economy.

Hat-tip: Tyler Cowen

Comments

[Greg Ransom]

Some caveats on Kuhn:

1. Kuhn wasn't really providing a psychological account, he was providing a formal account about the structure of communities and the role of model problem solutions in those communities. The formal stuff interrelated with empirical understandings is at the center of all this.

2. Kuhn is explicit in saying his model applies only to a limited domain within the hardest of the hard sciences.

3. Leading students of such key sciences as biology say that Kuhn's model doesn't well fit the work in that domain.

4. The scientific credibility of, say, Einstein came essentially from from the ability of one editor to recognize the significance of his arguments, expressed via the professional language of the time. It didn't come from Einstein's professional credibility as a failed would-be physics professor with a position as a clerk in the Swiss Patent Office.

4. History, personality, the guild structure of the academy, changing fashion, the historical change unfolding of evidence, etc. play as big a role as anything, as shown by the example of Wegener and global geology-- the biological evidence supported global drift, among all sorts of other evidence. Geologists didn't care for such evidence at the time for reasons of fashion and guild structure, etc. Wegener was much more of an "insider" than Einstein, with much more "scientific credibility". Kuhn's account doesn't work so well in such cases, among others. But then Kuhn never claimed his work applied to essentially complex phenomena such as geological history.

Pete writes:

"In Thomas Kuhn's essay "The Essential Tension" he argues that original contributions in science result from a delicate balancing act between irreverence and obedience to tradition. Only someone deeply embedded in the existing scientific mainstream can gain the scientific credibility to shift scientific opinion.

Many readers of The Structure of Scientific Revolutions often misinterpreted the notion of paradigm shift, and believed that paradigmatic shifts in science could come from anywhere. But Kuhn's history is different. Lone wolfs barking in the back woods don't pull off scientific revolutions."

[Mario Rizzo]

Please stop with the EASTERN establishment business. If the rest of the country weren't so dumb the "easterners" would not have been able to convince most of them to go along with the Keynesian synthesis.

[Barkley Rosser]

Yeah, "eastern establishment," such as Mario at NYU, not to mention people at George Mason, Auburn, and so on, in contrast with all those hardworking Austrian/pub choice radicals at Stanford and Berkeley!!!

[bbb]

This is off topic, but I would be interested in a discussion on Buchanans contractarian approach from your perspective. Especially, how it stands in relation to the concept of the minimal state ("taxation as theft") that is sometimes advocated on this blog.

[CrisisMaven]

No clothes? Would "no brains" not better fit the facts?

[Hume]

Brad Delong has comments about this piece (I am NOT endorsing Delong, only pointing you all to his critique).

[Roger Koppl]

This is what Hume refers to:
http://delong.typepad.com/sdj/2010/02/five-pieces-worth-reading-february-10-2010.html#comment-6a00e551f0800388340128778a0e44970c

DeLong seems to think that anyone who disagrees with him is an idiot or a knave, which is itself incredibly stupid. I just posted the following on his blog. Let's see how long it lasts!

On Buchanan:

In the quoted passage the context was "an ideally working market economy." Um, Brad, that context implies that, er, all goods are, you know, perfectly liquid.

Yes, you might indeed argue that in the rest of his short note Buchanan inappropriately neglected the liquidity considerations you raise, but that hardly makes the quoted statement stupid. Now forgive me for saying something really obvious, Brad, but his neglect of your issue simply reflects his rather different diagnosis of the problem. That hardly makes him a dolt!

[Greg Ransom]

One more Kuhn caveat:

4. Kuhn explicitly says that he inspired to develop his picture of how hard science works by the stark contrast between how he saw the hard science working and how he perceived the social science to work. The inspiration can while hanging out with economists and behavioral scientists ...

[Russnelson]

Yeah, let's name names and take prisoners. It's not the "Eastern" establishment. It's MIT's econ department.
Between Krugman and Stiglitz, Bernanke, and Thurow, they're all on the dark side. Mankiew is the only ray of hope, and frankly I'd give him up if I could get rid of Krugman and Stiglitz. Retrench the whole department and all of its graduates. Renounce their degrees and pull their PhDs.

[Pietro M.]

I don't know if it has something to do with the Eastern establishment, which looks too much like a conspiracy theory to me, but I think that the case for free markets has been laid on shaky foundations.

Let's assume that all Economics has to offer is New Keynesian models and Real Business Cycle models. Maybe Garrison's judgement of the latter as "sterility matched by no other" is too harsh, but nonetheless not far away from the truth.

If I were a graduate student and were offered the choice between:

(1) saying that economic policies are irrelevant, the financial structure is inconsequential, money is neutral, public debt is automatically matched by higher saving, markets always clear, markets are complete, transaction costs do not exist and everything can be explained by calibrating a warlasian general equilibrium,

(2) analyzing the effects of nominal and real rigidities, market incompleteness and asymmetric information on markets' dynamics.

I would probably choose (2). These "Perfectist" (there is an Italian economist, Ricossa, who wrote a brilliant essay on this "ideology") defenses of free markets are devoid of realism, intellectually and practically unlikely, poor in common sense, highly abstract.

Without an intellectually defensible defense of free markets (I'm probably taking New Keynesian models to seriously: there are many things in them that strike me as nonsense), the choice of "good" economic theory is an intellectual slippery slope.

Fortunately enough, there are traditions of thought which are ideologically market-oriented but do not share these intellectual errors: Austrian economics, public choice, maybe new institutionalism... focusing on macroeconomics, the alternative paradigm boils down to Austrian economics.

The problem with AE is that almost all that we know now about business cycles was already known to Mises and Hayek in the '30s. Although there are exceptions, of course, the problem is that as an intellectual alternative AE is perceived as weak and stagnant, and as an "amateur insider" I cannot say that this charge appears to be wholly unfounded.

If for instance tomorrow I wanted to understand international capital flows, I'd read Tirole, and I'd have almost no AE literature to count on.

[Peter Boettke]

Pietro M.,

Why Triole? That work is almost a decade old. Fine economist no doubt, but if you want work from yesterday or today, why rely on work in the 1990s. Why not look to Shleifer, or better yet for current work Simon Johnson?

And I bet that Selgin would have something of value to say on the topic, or White, or Lewin, or Horwitz or for that matter O'Driscoll.

You misunderstand the use of the term "Eastern Establishment" in Buchanan because it was used decades ago, when the differences between Harvard and Chicago were real and deep. But it was basically the neo-Keynesian synthesis and the Musgrave style public finance, which Buchanan was in opposition to.

Now, on to the choice you put to the hypothetical graduate student. Ironically, while I share Garrison's judgement, I think you are unfair in your interpretation of Real Business Cycle theory. New Keynesianism has _some_ important insight, but so does New Classical Economics. And in fact, New Classical Economics as practiced by Lucas et al (not the cartoon version portrayed by its critics) is actually a thing of amazing intellectual beauty. Just as Romer's New Growth theory is as well. There is much to learn from eliminating ad hocery from economic explanations.

And one final point, once we scratch the surface of the current debates, how much more do we know today about market instability than what Keynes taught in 1936 as preached by the modern theorists. Doesn't it strike you as amazing that the old Hayek v Keynes debate is almost being played out verbatim in the modern context.

Roger presents ABCT rather traditionally, but I think if you look at different discussions from Horwitz or Selgin or Lewin, you will see interesting wrinkles to the story.

Pete

[Pietro M.]

Thanks for the answer.

I'm sorry to have been probably too sketchy, but my comment was too long even without qualifications. Among the "exceptions" I was talking about I would of course add Garrison, White... and there is surely something I don't even know it exists.

The problem I was describing, and I think that many people share the same (true or false) impression, is that if I'd like to point out to academic works (I mean, theoretical foundations) regarding the present crisis from the point of view of international capital flows, the role of financial derivatives, etc. I'd have problems.

Maybe it's just a difference in interests, as there is much more work on alternative institutional settings (e.g., free banking, 100% reserves) than on current policy changes. I'm not a moderate and I like radical thinking in both theory and practice: but maybe the world sees it as out-of-sync.

Besides, I'd have problems in citing Austrian ideas that have been discussed at a high level, except some discussions of the credit boom, like William White's at BIS, the Mitchener/Eichengreen's paper on the '20s, or some recent columns at VoxEU (which, however, often are unaware of the existence of AE), and the recent rediscovery of Hoover's New Deal on JET by Ohanian, which cites Rothbard's AGD.

So, there is a problem of underappreciation of AE in business cycle analyses, which I assumed is due to AE being considered a stagnant paradigm. If it is not (and I can point out a good number of interesting exceptions, but maybe not enough to dispell this impression), it is at least still considered out-of-sync with the world. And I consider it a pity.

I totally endorse your strategy of entering the academia, but in the macro field AE is still very far away from significant results. The opposed "markets are perfect" and "governments are perfect" views of the world still make the day.

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