Living Economics

Article excerpt

My love affair with economics began in the fall of 1979. The summer prior to that I had experienced the long lines for gasoline, and I was confused and frustrated by the experience for a variety of reasons. Economics erased my confusion and targeted my frustration on the cause of the shortages. I was hooked.

In many ways, the logic of economic reasoning came naturally to me once I started studying. My first readings in the field were Henry Hazlitt's Economics in One Lesson and Free Market Economics: A Basic Reader, edited by Bettina Bien Greaves (which included Leonard Read's "I, Pencil"). These were followed by various essays and excerpts from books by Ludwig von Mises related to the problems of socialism and interventionism and the benefits of the free-market economy, and then Milton and Rose Friedman's Free to Choose. By the time I finished Free to Choose, I would never think about the world around me the same way. I saw everything through the economic lens - from the most mundane human activities to the most profound. To me, economics is simultaneously the most entertaining discipline in the human sciences and the most important discipline in the policy sciences, as it ultimately answers fundamental questions about human life and death.

Getting Back on Track

I believe that much of modern economics has lost its way, and I am actively engaged in trying to get the teaching and doing of economics back on track. Following one of my teachers - Kenneth Boulding - I use the term "mainline economics" to describe a set of propositions that were first significantly advanced in economics by Thomas Aquinas in the thirteenth century and then the Late Scholastics of the fifteenth and sixteenth centuries at the University of Salamanca in Spain ----- These insights were further developed in economics from the Classical School of Economics (both in its Scottish Enlightenment version of Adam Smith and the French Liberal tradition of Jean-Baptiste Say and Frédéric Bastiat), to the early Neoclassical School (especially the Austrian version of Carl Menger, Ludwig von Mises, and F. A. Hayek), and finally with the contemporary development of New Institutional Economics (as reflected in the property rights economics of Armen Alchian and Harold Demsetz; the new economic history of Douglass North; the law and economics of Ronald Coase; the Public Choice economics of James Buchanan and Gordon Tullo ck; the economics of governance associated with Oliver Williamson and Elinor Ostrom; and the market process economics of Israel Kirzner).The core idea in this approach to economics is that there are two fundamental observations of commercial society: (1) individual pursuit of self-interest, and (2) complex social order that aligns individual interests with the general interest.

In the mainline of economics, the "invisible hand postulate" reconciles self-interest with the general interest not by collapsing one into the other or by assuming super-human cognitive capabilities among the actors, but through the reconciliation process of exchange within specific institutional environments. It is the "higgling and bargaining" within the market economy, as Adam Smith argued, that produces social order. The "invisible hand" solution does not emerge because the mainline economist postulates a perfectly rational individual interacting with other perfectly rational individuals within a perfectly structured market, as many critics suppose. Such idealizations would be as alien to Adam Smith as they would be to F. A. Hayek. Instead, for those who "sit in the seat of Adam Smith," man is a very imperfect being operating within a very imperfect world. Sound economic reasoning, by focusing on exchange, and the institutions within which exchange takes place, how complex social order emerges through the aid of prices and the entrepreneurial market process.

The mainline of economics, in my narrative, is to be contrasted with the "mainstream" of economic thought. …