Liberty vs. Power in Economic Policy in the 20th and 21st Centuries

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Every semester students from throughout the world are introduced to the teachings of economics and political economy. What are the first things students learn as they enter the world of the economic way of thinking? Obviously the answer to that question varies from instructor to instructor (Heyne, Boettke, and Prychitko). Some will emphasize behavioral assumptions and the logic of choice, others will emphasize institutional structure and economic performance as captured in notions of efficiency; some will emphasize the harmony of interests that are reconciled through the market system, while others will highlight the conflict of interests that result from market imperfections. The intellectual battle lines in public policy between liberty and power are often drawn based on these points of emphasis in economic teaching.

I believe that in studying the development of the history of ideas in political economy it is useful to distinguish between the mainline of argument, and the mainstream in the currently fashionable practice of the science. The mainline of argument emphasizes the core propositions that have been argued throughout the history of the discipline. Mainstream, on the other hand, defines whatever is currently fashionable within the discipline. Economics is whatever current economists do. To be a mainstream economist does not necessarily mean that one is comfortable with the mainline of argument from Adam Smith onward. The mainline of argument stresses the harmony of interests that emerges through the competitive market process. David Hume and Adam Smith emphasized this reconciliation power of the market economy in the 18th century, J. B. Say and Frederic Bastiat did so in the 19th century, and F. A. Hayek and James Buchanan represent perhaps the most articulate defenders of spontaneous order in the 20th century. But throughout the history of political economy there were always individuals who sought to juxtapose their own position with this harmony of interest doctrine: from those who argued against free trade such as Friedrich List to those who emphasized the possibility of a general glut in economic activities such as Thomas Malthus; from those who emphasized class conflict such as Karl Marx to those who emphasized the instability of financial markets such as John Maynard Keynes. Modern mainstream economists such as Joseph Stiglitz, who emphasize the imperfections in market structure and imperfect information, are more in line with List, Malthus, Marx and Keynes than they are with Hume, Smith, Say, Bastiat, Hayek and Buchanan.

The contemporary discipline of economics has often lost sight of the core propositions that emerge in the mainline of political economy. My contention is that economics as a discipline should be defined by the propositions it advances about the real world, and not the form in which economic statements are presented. Mathematical models and techniques of statistical significance are useful tools in examining certain economic propositions, but we must never forget that it is the propositions that must be assessed rather than the formal tools utilized in examining them. The crisis in modern economics is that theorists as divergent on substance as Stiglitz and Robert Lucas are accounted as mainstream, while figures such as Hayek and Buchanan are often described as non-mainstream. But one would be hard pressed to deny mainline status to Hayek and Buchanan, and would be hard pressed to force fit Stiglitz or Jeffrey Sachs or Paul Krugman into the mainline of argument in political economy from Hume and Smith to Hayek and Buchanan. Lord Acton perhaps stated the position best when he wrote: "But it is not the popular movement, but the traveling of the minds of men who sit in the seat of Adam Smith that is really serious and worthy of all attention."

So let's go back to our erstwhile principles of economics students being exposed to the economic way of thinking for the first time. …