Real Economics

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0:00:07.8 Trevor Burrus: Welcome to Free Thoughts, I’m Trevor Burrus. Joining me today is Peter J. Boettke, University Professor of Economics and Philosophy at George Mason University, the BB&T Professor for the Study of Capitalism, and the Director of the FA Hayek Program for the Advanced Study in Philosophy, Politics and Economics at the Mercatus Center at George Mason University. He’s also a former President of the Mont Pelerin Society. He is the author of many books, the most recent is ‘The Struggle For A Better World’. Welcome to Free Thoughts, Pete.

0:00:35.0 Peter Boettke: Thanks, it’s great to be here with you.

0:00:38.5 Trevor Burrus: So I’d like to start with something more autobiographical that you mentioned in a later essay in the book, ‘Remarks to the Mont Pelerin Society,’ about your teacher at Grove City College, Han Senholtz. So what did Dr. Hanson Holts teach you that you still carry with you to this day?

0:00:55.8 Peter Boettke: That’s a great question. In many ways, almost everything. He totally changed my life. I was not at all interested in becoming an economist or a scholar, my goal was to become a high school basketball coach, and he totally transformed me by introducing me to the world of Economics. Now, I was prepared to learn because the summer before I went to Grove City College, I worked digging pools, and that… There’s two things about that job which stick out, one of which is that it was in the middle of the gas shortages, in the late 1970s, and I was the youngest person on the crew, I in fact got the job because there were older guys at the playground that had told me about this job that they worked at. And so, that’s why I ended up working there, and they made a lot of fun of me, “College boy. Blah, blah, blah” all these things like that. And so I had to siphon the gasoline from one… And that’s a terrible job, if anyone ever gets given that, and you could imagine a 17-​year-​old sucking on a tube to get gasoline from one to another with a bunch of high testosterone males enjoying the hilarity of the situation. And so it was just…

0:02:30.2 Peter Boettke: I hated the gas lines because I didn’t wanna be doing that, so that’s one. Second is that at the end of the summer when I went to quit my job to get ready to go to school, I had told the guy there that I was gonna leave to go get ready, and I went to get my paycheck the last time, so there’s always a delay, right? And you get paid on a two-​week thing like that. And so I went to see him and I won’t go into the gruesome details here, but he paid me in cash. And then he grabbed my hand, then he said, “Oh, I gotta take withholding out.” Now again, remember, I was just a kid, so all summer long, I’ve been getting a cheque that had already taken withholding out, but I didn’t even really know that it was withholding, it just is what I got paid. But now he paid me all the cash out, and then he grabbed my hand and then took it. And I’ll never forget, he didn’t take it and put it back where he got the cash from, he put it right into his pocket.

[laughter]

0:03:30.0 Trevor Burrus: He put it into his pocket, yeah, yeah. I was predicting that. [chuckle]

0:03:33.5 Peter Boettke: And so, to me, I was like, “Oh my God, this is like thievery.” But I got out a dodge there because it was a sketchy kind of place to begin with in New Jersey, and I didn’t wanna be involved with it, but I had in the back of my head, this idea that the gas lines were terrible and that somehow this withholding taxes were really thieving from my money that I had. And so here I am in the back of an Economics classroom, and in the first week, Senholtz is explaining why it is there’s gas shortages in America, and it’s because of the government and setting the prices the way they did, and everything like that. And I was like, “Oh!” So I had now an object of my anger that I could focus on. And then a few weeks later, he was talking about basically the welfare state and taxation, he described it as a giant circle in which we all had our hands in the pockets of our neighbors, and we were taking and taking and taking. So now, all of a sudden, the withholding and the taking, and I’m like, “Ah! And that’s the same culprit that cost me.” And so, that changed my whole world view, and it coincided with Milton Friedman’s Free To Choose, coming out.

0:04:44.8 Peter Boettke: And so I went from reading Henry Hazlitt and Senholtz’ lectures to then reading Milton Friedman, and that book is so punchy and condensed with so much great information, and the PBS series is involved and so that my whole world changes. And just a few years ago, my aunt, my brother’s sister passed away, and when she passed away, various different materials from her stock of materials got sent to my brother and then my brother gave them to me, and one of them was a letter that I had written “My father” when I was off at college at Grove City. And you gotta remember, again, like I had never shown any inclination to be academic or anything like that, all I cared about was sports. And my letter to my father is all about economics, [chuckle] it’s all about what I’m learning in economics, and then there’s like a paragraph about how sports are going. And I remember thinking at the time, my father must have thought like, “What the hell happened to my son?” [chuckle] Like, “He went away to college and disappeared,” but he shared it with my aunt, I guess, to show my maturation, so… Yeah, that’s Senholtz.

0:06:00.8 Peter Boettke: Senholtz then introduced me to these set of ideas, but then he also more importantly got me involved in reading, and the way Senholtz taught economics was through his lectures, which were more like public lectures, ’cause he traveled all over the country giving public lectures. So his classes weren’t like course lectures, they were more like the way you would get a chicken dinner talk at, say, a banquet for… Today, we would call it the Bastiat Society or something like that. And so they were more engaging than that, and I just completely was enamored by it. But then he also pointed us to read. So as I already mentioned, Henry Hazlitt and Friedman, but early on I had read Mises’ socialism, ’cause Liberty Fund had published the book and so we read that, and he taught his economics or the history of economic ideas, so reading that, and then the original text. So we had to read Adam Smith in the “Wealth of Nations,” we had to read Karl Marx’s “Capital,” We had to read John Maynard Keynes’s “General theory.” And that’s the way he taught Economics, he taught Economics… It wasn’t like I was… I thought I was learning history of economic thought, I thought I was learning economics.

0:07:17.8 Peter Boettke: And this is just the way he did it. And he focused his criticisms, the critical dialogue was between the free market guys from Adam Smith to Hayek, against the Marx, Veblen, Keynes and Galbraith. So by the time I was a senior, I had read basically almost every book Galbraith had published, and Keynes to General theory, Marx. And then on the other side, we would read… It was mainly Adam Smith, Jean-​Baptiste Say, and then Bambavrik. So, he was a translator of Bambavrik, so that was a big thing for him. So we worked our way through capital and interest in Bambavrik, and then Mises. And then he would always hold a special disdain for Mill and for Hayek, who he considered leakers, the great leakers of the classical liberal tradition, and that they gave too much space for the Marx, the Keynes… Or no, Marx, the Veblen, the Keynes and the Galbraiths. And so that’s…

0:08:32.1 Trevor Burrus: Yeah, this idea that Hayek was too nice. Yeah, you get that from…

0:08:33.8 Peter Boettke: Yeah, Hayek was too nice.

0:08:35.8 Trevor Burrus: Yeah.

0:08:37.0 Peter Boettke: And so then… And in the mean time, while that was the education he was giving me, since I was reading all these people, I got really excited about reading basically Austrian economics in more depth, so Manger’s principal’s book was made available through NYU press. While I was a graduate student, one of the older students was in New York, brought me back a copy, I can remember reading it like, it was the greatest thing in the world, and Rothbard, so… And then, reading Murray Rothbard. Now it’s the Murray Rothbard that your readers and listeners wouldn’t know, it’s the Murray Rothbard from the 1950s to 1970. And so to me, the pinnacle of Rothbard besides “Man, Economy and State,” in which basically I learned a ton of my economics from that, because at that time reading Mises and dissecting Mises’ Human Action was probably a little bit beyond where I was at in the world, but Rothbard made it very…

0:09:36.9 Peter Boettke: So Rothbard became the main text, but his book “For a New Liberty” is really what kind of framed… So think about going from free to choose and then thinking, that’s not radical enough. And so then I… And Rothbard’s “For a New Liberty” really captured the period of time in which I was learning these ideas, which is in the late ’70s, early ’80s. Because Rothbard’s book originally came out in the early ’70s, but it resonated with my whole growing up, of the Vietnam War and the failure of that and the corruption of government, let’s say, and not only Nixon, but Agnew and these kind of issues at the time, then the stagflation of the ’70s and then the also social issues. So Rothbard really hammered home the idea that there was a sphere of activity that is the right of the individual, that the state has no play in, of who we love and how we love and what we inject or ingest into our bodies and the choices over our own self-​ownership, and I just completely… I’ll shut up after this, but let me tell you one another story. I didn’t know how to read. Again, I was a kid, so now I’m in college and I’m finally now caring about whether my grades are okay or not. And so I figure, “Okay, I gotta start learning how to highlight,” but I didn’t really know how to highlight. It’s gonna sound stupid to your readers, ’cause I had never done it before when I was in high school, or anything like that. So when I first was highlighting, I didn’t know what to highlight.

0:11:14.4 Peter Boettke: I just didn’t know. So then what I did was I decided… I ended up by highlighting everything. And then I was like, “Well, that doesn’t help,” whole paragraphs and everything like that, that doesn’t help. So then I tried all kinds of different hacks, learning hacks, and so then I came up with the idea, “You know what I’m gonna do? I’m gonna only underline in red, in squiggly letters, those… Like a line like this. Only those things that I disagree with.” And it’s right at that time that I read for the first time, “For a New Liberty.” So I start picking up the book, and I start reading it, and I must have been waiting for me to draw a little squiggly line. I got all the way to the end, I made no highlights, no squiggly lines, ’cause I completely was… And so, at that point in my life, say 20 years old or whatever, I was a complete 100% like, “I’m Rothbard… ” Mises set the stage, Rothbard finished the stage. And this is the Rothbard. And so, by the time I got to be a senior in college and was considering graduate school, I was interested in these ideas, and it’s important to keep in mind that I had read Marx, Veblen, Keynes and Galbraith.

0:12:26.5 Peter Boettke: And so, one of the very first papers I ever read and wrote and published, academic papers was this paper that was motivated by Rothbard’s ’70s appeal to the new left, and now I was trying to address this issue about why is economics not an evolutionary science, and is the Austrians like a way that they can actually be the fulfillment of this evolutionary science? The person I sent that paper to was Murray Rothbard. I sent it to him and I said… ’cause when I decided to go to graduate school at George Mason University, my alternative… NYU was on the table, Auburn was on the table, all those were there. But my alternative, really, in my head at the time was going to the Center for Libertarian Studies in New York City because Rothbard was giving a series of lectures, which later became his history of thought book. And it was like, I actually didn’t understand academics so I was like, “Maybe I should study with Rothbard as an independent scholar kinda thing. And so, I wrote to him, and nothing, I didn’t get anything back. And then eventually, about six months later, I’m in graduate school and he’s giving a series of lectures in DC at the Mises Institute, which used to have a headquarters in DC, they just opened it up.

0:13:42.8 Peter Boettke: And I went out to see him give the lectures and I went out to dinner with him. Amazingly charming man. Again, it’s hard to capture to younger people, because of all the stuff that’s gone in between. But within five minutes of meeting him, you’re calling him Murray, you’re plotting for the world revolution with him. It’s a totally different kind of thing. He’s a different person. He says to me… Now, again, the fact that he then sat with me and talked for hours afterwards, but his first words to me was, “I have a scathing review of that article of yours.” And I said, “Why?” I said, “It’s motivated by you and your attempt to reach out to the new left.” And his argument is just, “Yeah, that didn’t work.”

[laughter]

0:14:29.5 Peter Boettke: So he’s trying to tell me not to focus on that, but that’s the Rothbard that I was influenced by, the kind of very radical libertarian, kind of social… Not socially conservative, but instead, socially welcoming, free immigration, open borders, drug legalization, sexual freedom, pro-​choice. All of these positions which are extremely relevant even for today. And to me, I think this is the key aspects of what a radical libertarian position is. And I came to that position as a kid, and I think of myself more as a social scientist than a libertarian activist, but clearly, all my priors are still grounded in those same positions. And I think a lot of critics of libertarianism today would be shocked by those positions, because… But to me, that’s the true position that libertarianism is an emancipatory doctrine. It’s a doctrine about overcoming all forms of power and privilege, including the business elite who are wedded to the state, and everything like that. Adam Smith’s Wealth of Nations is a criticism mercantilism, which is this. And so, it’s all about eradicating these barriers to the ability of ordinary individuals to live free lives. And that’s the key thing, and that’s always been what’s promising to me.

0:16:04.6 Trevor Burrus: The interesting thing too, is that Senholtz’s PhD advisor, I believe, was Mises, correct?

0:16:11.0 Peter Boettke: Yep. Yeah, yeah. Yep, yep.

0:16:11.1 Trevor Burrus: Which brings in this kind of lineage which I find interesting, because many of your PhD students are friends of mine. And it’s sort of like a generational thing where it goes from Mises to Senholtz to you, to people like Dan Tomiko, Liya Palagashvili, people like that.

0:16:29.1 Peter Boettke: Yeah, yeah.

0:16:30.9 Trevor Burrus: Now, that fits in the Misesian tradition where you were educated.

0:16:33.7 Peter Boettke: Yeah. So I think that this has been always a kind of an unusual aspect of the sociology of modern Austrian economics is that my education is through… My core education is through Don Lavoy, whose lineage is through Israel Kirzner, and Israel Kirzner traces back to Mises. And my actual direct teacher was Han Senholtz, who was also a student directly to Mises. And so I grew up in the Misesian tradition and understanding that it’s… That tradition, I see that Hayek is in that same tradition, just like Maklov and others that trace back to his Viennese days. And so I don’t see it as these sort of dividing lines the way that the internet has taken it or the way the story has evolved. And so, in general, I don’t really… In general, I don’t really think that that conversation is that productive. That’s why I haven’t really spent a lot of time, except in internet scribbles which used to flare up here and there or whatever. But I do think there’s a Rothbardian tradition, and that there are Rothbardians, but Rothbardians are not necessarily Misesians and they’re certainly not necessarily seen…

0:17:53.6 Peter Boettke: For sure, Austrian economics is a progressive research program in which you don’t really label it after any one individual, but it’s like a conglomeration of a series of ideas, which we’re all trying to work with and develop in our own way in going forward. And so, it’s a set of methodological and analytical propositions about the way that an economist engages in their craft. And to me, that’s what… I’m a professional economist, I try to do good economics. To me, to do good economics means that you have to actually follow certain methodological and analytical approaches, to answer the questions that I care about, that I think are essential for us to be able to understand the world. And to me, the Austrian tradition, not exclusively, but in a major way, made major advances and methodological arguments and analytical arguments about how we should study the world. That’s what I wanna do. Yeah.

0:18:51.4 Trevor Burrus: Well, in that… We have that kind of actual human lineage. But it’s also connected to one of the ideas that you’ve discussed a lot and you discuss in the book, which is mainstream versus mainline economics. What is that distinction that you make? And then the second is, is it Austrians who picked up the mainline almost exclusively…

0:19:16.0 Peter Boettke: I don’t think so. But I’ll explain in a minute. First of all, I get this distinction and the notion of mainline economics from one of my other teachers, a man named Kenneth Boulding, who in a wonderful essay called After Samuelson, Who Needs Smith? And his argument is that we all do because Samuelson didn’t exhaust what Smith has to offer us. And so the question is this, “Can I draw a line from Adam Smith to the kind of questions today and that would be the mainline of economics?” Developing that idea in my own unique way, I started thinking about, what is it that… Here’s how my mind works. This is kind of a funny thing. Is that I imagine a Martian coming to earth, and the Martian comes to Earth in the year 1780 and meets someone and says, “I’m an economist.” Well, what would they think that person believed? And then if they came in 1820, “Oh, I’m an economist.” What would they think that that person believed? And then they came in 1890, and they said, “Oh, I’m an economist.” What would that person believe? But then what happens when they come in like 1940, and someone says, “I’m an economist,” and then they’re like, “Huh, that doesn’t seem like the other people that were there before.” Right?

0:20:32.8 Peter Boettke: So that’s the kind of idea, is that that somehow… And so what I wanted to explain was, that there’s a mainline of economics which is derived from the idea that we live in a world of scarcity, that individuals make choices against constraints, and ultimately what we have is we have two fundamental propositions. The invisible hand proposition, about the self-​regulating powers of the market, and we have the rational choice postulate. And so, what we’re gonna do is we’re gonna try to square the rational choice postulate with the invisible hand, but the way the mainline people did was always they did it via institutions. Which is they relied on the institutions of property, contract, and, consent to be able to funnel the ordinary motives of individuals to be able to realize social cooperation among each other, right? Now, other people did this by collapsing one to the other, by making very strong cognitive assumptions for mathematical tractability. Well, that’s not what Adam Smith was doing. But that is what like Walras was doing. And so that’s different.

0:21:34.0 Peter Boettke: On the other hand, there’s other people who simply denied it, like Keynes. In The End of Laissez-​Faire, he says there is no invisible hand, there is no rationality of the individuals. And so, he cut the legs out from underneath the two propositions. Alright? And so, but that’s not what Adam Smith was arguing either. So what is it that Adam Smith argued? Adam Smith didn’t argue that individuals pursuing their self-​interest under any conceivable set of circumstances will generate a publicly desirable outcome. It was always within specific institutional context, having to do with the rules of property, contract, and consent. And so, it’s that focus on the institutional framework within which economic activity takes place, that is what is the connection between the political economy thinkers, from Adam Smith all the way up to Vernon Smith. And so I try to draw that line. My argument is, is that, that’s the mainline of economics, and then what happens is mainstream is whatever is currently fashionable. And so, when the mainstream deviates from the mainline, various aspects of the mainline rise up as schools of thought to try to pull the mainstream back to the mainline.

0:22:48.7 Peter Boettke: So, the Austrians are at the core of this, because they were recognizing the idea that economics is about exchange and the institutions within which exchange takes place. And they were fighting that battle right as people were trying to treat economics as formal properties of equilibrium. Okay? But they weren’t the only ones. So, earlier, non-​Ricardian British economists, such as Philip Wicksteed, was trying to put forth an exchange paradigm kind of approach. And of course, Bishop Whately argued for the catallactic view, and these things like that. And then, after the Austrians, in some sense, Armen Alchian, bringing back property rights economics, or Jim Buchanan bringing back the fact that economic life exists inside of politics, and we have to study politics. And Ronald Coast, emphasizing that we have to think about the legal environment in which these things are organized. And so law, economics, political, public choice, and property rights economics go side and side with market process economics to be part of the mainline tradition in economics.

0:24:00.4 Peter Boettke: And there’s roots that are connected that have been forgotten by a lot of people in those schools of thought, which I’ve spent a lot of time trying to unearth archivally and demonstrate, or whatever. But the reality is, is that like for an economist today, that might not care about the history of economic ideas, what I’m trying to ask them to think about is the consilience between law and economics, property rights economics, public choice economics, new institutional economics in general, and Austrian economics, and to see those as part of a broad research program which is challenging the hegemonic view of economics as a version of mathematical economics, let’s say, or a version of that economics and statistics. And so it’s basically fighting a variety of intellectual battles in the science of economics about how to do economics. And it’s all because I wanna try to understand social cooperation and division of labor, and how economic life exists within political, legal, and cultural context, and that it’s these political, legal, and cultural contexts that either hinder or help in the achievement of social cooperation and division of labor.

0:25:23.0 Trevor Burrus: Does that mean there’s something wrong with Math Econ kind of inherently? The equilibrium theory, the kind of equations that you would learn in your standard Econ class, if we’re not using your textbook, for example; is there a tendency, does it inevitably pull to quantification and statistics and econometrics, and all these kind of big number theories, as opposed to focusing on human action, to coin a phrase?

0:25:50.9 Peter Boettke: Yeah, so I wouldn’t necessarily go that far, because I think mathematical reasoning can be very valuable on various margins. The way that Marshall used to talk about this was that mathematics is a very good servant, it’s a very bad master. The problem is is that for a variety of sociological reasons, and I would argue deep philosophical reasons, which maybe we don’t wanna go into here, but we ended up by making a kind of Faustian bargain where we cared more about tractability than we did about intelligibility. And once when we made that move, we were prone to excessive formalism and excessive empiricism. So the note of the term there is excessive, because we all want rigorous arguments. Economics is grounded in logic and logical reasoning. The difference is, I am gonna go into the philosophical issues, the classical economists…

0:26:51.0 Trevor Burrus: Please do.

0:26:52.8 Peter Boettke: To the contemporary Austrians wanted to derive logically sound theories. Okay? Now, the problem with logical soundness, alright, that is if the premise is true, and the logical analogical deductions are in fact correct, then the conclusions are in fact true. It didn’t have an easy sorting mechanism between competing claims about logically sound theories. So people were constantly debating issues throughout the years. Economics is a series of debates, and then the technical debates. And so, we thought that, “Oh, those debates are unresolvable because we’re using natural language,” right? And the problem is with the ambiguity of natural language. So what we need to do is, is… The greatest confusion is when we use the same words to mean different things, or different words to mean the same thing. So mathematics gets rid of that, but once we got mathematics into the picture, what we had to recognize is that we were giving up on logical soundness, and instead we were deriving logically valid models. Now, we had an over-​confidence because we thought as the evolution of statistical techniques rose up, our testing procedures would be unambiguous, and then we could sort from the array of logically valid models, those that are empirically relevant. But the problem was, is that even in physics, there’s a thing called The Duhem Quine thesis, which is that even in physics, the testing is ambiguous at best, it’s not unambiguous.

0:28:28.6 Peter Boettke: Well, so what that means is that you lose the sorting mechanism, and when you lose the sorting mechanism, you get stuck with these toy economies and no way to sort between them. And so, we gave this Faustian bargain to somehow give us precision, and we got a certain flawless precision, but that also meant that we became less and less relevant to solving the world out the window. And so, think about things like entrepreneurship, right, just simple kind of discoveries of various things. You can’t explain in the formal model the creativity and cleverness of someone like a Malcolm McLean, who recognized that the longshoremen were taking as long to unload and load as the boats were or the trucks were to deliver the goods to the ports or to the market. And so then he thought of containerization and the idea that you could have flat-​bed trucks, and you could have the boats repurposed in that way, and you just have the full containers. And that way you don’t have to have the longshoremen spending three days to unload and three days to load, so you have a the six days and you cut the cost down. All of a sudden, that opens up world trade, right? And so where is that coming from? That’s coming from this recognition or all the kind of ideas that Julian Simon had about that the ultimate resource is the human imagination.

0:29:49.2 Peter Boettke: And so, what we wanna study, and again, this relates to our broader notion of what economics is about, is that Adam Smith did not invent the butcher, the baker, or the brewer. He didn’t have to invent the common woollen coat that ended up on the back of the day labor. He’s trying to philosophically understand an already existing phenomena. That view of economics is from the inside out, not the economist standing from the outside looking down and fixing a machine that’s perhaps broken or whatever. And so, the era error of economics as is being viewed from the outside in, makes perfect sense to focus on these tools of control, right? Which is mathematics and statistical measurements and things like that. Whereas if you think about economics as putting an emphasis on the clever and creative actors that populate the economies that we study, alright, how ordinary people can do extraordinary things if just given the freedom, rather than thinking about how extraordinary people can do extraordinary things if just given the power to control you, right? That kind of approach to economics leads in one direction, which I argue is the mainline direction. And the other one, the mainstream, is what’s ever currently fashionable and at sometimes the mainstream aligns with the mainline. Adam Smith to John Stuart Mill basically, or the rise of, say, the counter-​revolution to Keynesianism in the 1960s, and ’70s and ’80s, where a lot of these ideas came back into the forefront.

0:31:27.8 Peter Boettke: But a lot of other times it deviates and it relates a lot to this idea of do I see economics from the inside out, or do I see economics from the outside in?

0:31:36.6 Trevor Burrus: Sometimes when I look at things like equilibrium theory, which even when I first learned that in my Econ class, it struck me as kind of odd because it seemed to be very much in a test tube.

0:31:48.4 Peter Boettke: Yeah.

0:31:49.3 Trevor Burrus: Like that you would have to have… A perfect competition, there are no profits, there’s a market that is completely cleared, and you wonder where that actually happens. But then it occurred to me that maybe the value of something like equilibrium theory is similar to the value of studying physics in a frictionless universe. When we… We can analyze the path of a ball thrown by Tom Brady, and we can use all the physics things to say, “Okay, here’s where the ball’s gonna land,” but in the real world, the ball will never land there unless we can take every single thing into account. So I mean, does Austrian Econ and kind of stepping back outside of the system, just add noise into the equilibrium and trying… The standard equilibrium model and trying to understand the model with noise there?

0:32:27.6 Peter Boettke: So I think it’s a little different than that, but that’s one way in which people could talk about it. But I think the first thing is as you think about it, what’s in the background and what’s in the foreground of your explanation to the world? So I’m gonna use a weird example to start, but I think it relates. You’ll see in a second. So in the movie, Harry Potter, when Harry is learning how to play Quidditch, if you remember that, what happens, he falls once and breaks his arm, and there’s this kind of weird wizard that is goofy and always sort of everyone’s worried about the spells that he does, but he comes over and says, “I’ll fix your arm, Harry,” and he goes…

[vocalization]

0:33:04.7 Peter Boettke: And then what he does, he eliminates all the bones from Harry’s arm. So now, Harry’s arm doesn’t have a broken bone but has no bones. So what does it do? It just hangs there like this. That’s economic theory without equilibrium, as a background. [chuckle] Okay? It’s just like an amorphous mess. It has nothing there. The way to think about it is that the equilibrium optimality conditions are like the skeleton, and then what you need to do is put on top of the skeleton, the ligaments and the muscles and everything like that to be able to make the theory work, and it’s those ligaments and muscles and everything like that, that the Austrians are talking about. So the skeleton has to be there, always in the background. The problem with a lot of standard economics is that they flipped it, and so in the background is the story they might tell a student about market clearing in a principle’s class, but when they write down the system of equation, there is no process of market clearing, it’s simultaneous equations, which is the way… So all it is is a dot, boom, there it is. There’s a P&Q space that clears the market, and so… Or how is it that information is acquired? Well, who cares? What matters is that there’s an informational threshold, there’s an information space that they have to have to be able to have the pre-​condition of the optimality conditions.

0:34:19.3 Peter Boettke: So a lot of this is… This gets confused in a certain way, ’cause Austrian economics is not non-​mainstream economics, it is not not neoclassical economics, it’s a branch of neoclassical economics, and it’s not heterodox economics in the same way that Marxism is, or old institutionalism or Post-​Keynesianism is, because it believes in methodological individualism, choice against constraints, it’s just that the emphasis… And it believes in the systematic interconnectedness of the equilibrium propositions. It’s just that the way they explain how you go from one to the other is filled with this idea of the very thing. So let me give you an example that’s from Daniel Houseman, the Philosopher of Economics at University of Wisconsin, Madison. So he, building on Mill’s idea, describes economics as the inexact science. And let me just back up for a second. It’s important to remember that Manger distinguished in economics, between, exact theory, empirical realistic theory, and economic history. That is the Austrian methodology. There’s exact theory, which is the pure ratiocination of the logic of choice, and then there’s empirical re…

0:35:44.3 Trevor Burrus: Do you mean like the price goes up and consumption goes down?

0:35:47.1 Peter Boettke: Yeah, your individual decision, yeah.

0:35:49.3 Trevor Burrus: Would that be… Yeah.

0:35:49.4 Peter Boettke: Yeah, and so your marginal benefit, marginal cost calculus. And then you have the empirical realistic theory, which is that logic of choice played out in world with other logical choosers and rules that govern your interaction between you and them and nature, and that determines what’s rational in certain environments. And the combination of the pure… So that’s the pure logic of choice translates into situational logic, when we throw them into this institutional filter. The combination of those two things, is what provides the intellectual eye glasses for reading history now. So that institutional, empirical, realistic part, that’s where you bring in politics, law and social and cultural morays, because they shape. And even think about someone like Bambavric explaining the horse market, the way in which the horse market, the equilibrium that emerges in the horse market is gonna depend on the rules that govern the auction over the delivery of the horses.

0:36:57.6 Peter Boettke: So Mill explained this in reference to a harbor, so we would say is that there’s universal laws, your physics, in the laws of gravity and the gravitational pull, that’s gonna dictate the law of the tides. Alright? So as we rotate through the month, the gravitational pull is gonna change the way the tides are, and that’s independent, that’s just… That’s the pure logic of that situation. But the behavior of any particular harbor with respect to the laws of gravity and tides is gonna be a function of the way in which we’ve drawn the harbor, and the way we’ve… If we build it up too much on one side or the other side, or whatever, we’re gonna shape it. And so, economics is this play between the laws that are exact and the laws that are conditioned by these various different environmental factors, so the logic of choice must be met with the situational logic of this context, and that that forge is what we mean by economics. So when we think about the market economy, we’re thinking about a world in which we have enforced an exchangeable property rights, in which we honor the rule of law and whatnot. So just to give a very broad context of this, Milton Friedman in 1979 goes to China and he’s asked by everyone in China, “Professor Friedman, what should we do?” And he says, “Privatize, privatize, privatize.”

0:38:29.0 Peter Boettke: In 2006, he’s asked, “Professor Friedman, have you ever re-​thought what you said in China, ‘Privatize, privatize, privatize,’ given the troubles that we’ve seen in transition and things like that?” He goes, “Oh yeah, yeah, yeah. Privatize, privatize, privatize provided there’s a rule of law.” Right? [chuckle] That’s a huge difference. Now, the other question for people like me who go back to that earlier rock parting idea, who wanna study the endogenous evolution of the rules which govern the market, so I wanna see this co-​evolution outside the States. So I’m not waiting for a Deus Machina to tell me how the harbor… I’m actually seeing how the harbor is constructed and its interaction effect with the logic of choice, that’s why I call it analytical anarchism, is a study of endogenous rule formation. When I’m looking at that, I’m not relying on the state to be the enforcer, and developer, and evolution of those property rights because market participants in fact can do those, so that’s where I embrace the things like for example, Benson’s work on the Law Merchant, or Leeson’s work on Anarchy Unbound, or any of that kind of stuff like that.

0:39:36.7 Trevor Burrus: Or the Ostrom’s?

0:39:37.6 Peter Boettke: Yeah, and that makes sense. Why is it that we would turn to the Ostrom’s? Again, they were part of the public choice tradition, they’re very grounded in a recognition of Meesus’s calculation argument, that’s a key aspect of understanding of Vincent’s work, but it wasn’t like any other Austrians were tapping into those, but we did, in our research group because we wanted to study endogenous rule formation, we look out in the world of scholarship. Besides Benson working on the Law Merchant, who else is working on those things? Well, Eleanor and Vincent Ostrom, were working on those things. And the whole notion of Poly-​centric governance. And so that made sense, especially given that we were studying transition economies, which in fact, by definition meant that the rules were all torn asunder, or there or failed and weak states, like after military conflict or whatever, or pre-​development economies.

0:40:31.9 Trevor Burrus: Or post-​Katrina?

0:40:32.5 Peter Boettke: Yes. That was the way we were able to fund that.

0:40:34.3 Trevor Burrus: That is some of my favorite work from Japan. Yeah. We assume, it is kinda crazy to me when I was first starting economics that it took so long or to get to someone like Jim Buchanan and Gordon Tullock to say, “Let’s assume behavior, and see what happens, let’s see what happens when the rules change.” So the rules of politics versus rules of the market, and so it’s not… So the rules change, sort of like the harbor changes and everything changes, but people are still behaving in the same general rational choice actor way. And that kinda gets to this way in the final essay of the book where because you accept these things as facts of the world, it makes you, in your term, pessimistically, optimistic about the future, and what’s gonna bring. Because you’re not expecting humans to get significantly better, I guess, in some sense, that they will still continue to make choices, so then we have to really focus on the rules. Correct?

0:41:37.7 Peter Boettke: Yeah, so the general mantra is same players, different rules produce different outcomes, and so you’re trying to explain the variation of the outcomes, not by variation of people. Right, so it’s not because some people are dumb or others are smart, or because some people have more skills and whatever. Obviously, in many things of the world, different people, same rules produce different outcomes, so LeBron James simply can play basketball better than me. Alright, but… Or if I said to you, we’re talking about the allocation of entrepreneurial talent, so we’re talking about someone being in the NBA, or someone being in the Kentucky Derby. Right, and so then you say “Shaquille O’Neal won the Kentucky Derby.” That would seem really weird to you, right? Seven foot four riding on the back of a horse.

0:42:29.4 Trevor Burrus: Not a typical jockey.

0:42:31.8 Peter Boettke: Right. Or if you said Willie Shoemaker was jumping center in the NBA, whatever, five foot one or whatever he was, and 100 pounds. Right, so in that sense, the characteristic of the person does all the work for you, and to me that is not requiring a theory, because what you’re doing is it’s just a description, Right? You’re just saying, “Good people do good things, bad people do bad things”. Where theory comes in, is when good people trying to do the best they can, lead a path to hell. Or greedy people or whatever, trying to do the best that they can end up by producing the invisible hand, and then those two things mean that we have to have a theory to explain it, and so that’s what we’re trying to do. So we’re gonna do the following, we’re gonna have same players and basically just freeze their preferences is what you’re doing, treating preferences is given, and then you’re gonna try to explain the variation and outcome by the variation in the institutions within which these people go.

0:43:32.7 Trevor Burrus: So again, to your listeners that are more philosophical, this argument is really laid out in Nozick’s first part of Anarchy, State, and Utopia, brilliantly actually. And I think actually reading Nozick as an invisible hand theorist is a very important exercise, because the beginning of the book is that way, the middle of the book, half of it is that way, process versus end states, the last of the book is all that way. So the only time in which Nozick is rights as trumps, is one half of the argument against Rawl’s, it’s not even the vast majority of the argument, so people have misun…

0:44:10.2 Trevor Burrus: And he got that from Rothbard…

0:44:11.2 Peter Boettke: Yes.

0:44:12.1 Trevor Burrus: And his own information too. Yeah.

0:44:12.2 Peter Boettke: I think he’s misinterpreted a lot of times by friend and foe, but that’s a whole other story for a different time. But I think this idea of having an animating agent, a institutional filter, and then an equilibrating tendencies, that’s our core theory, that’s what I meant before by the logic of choice meets up with situational logic, and then gives us these pattern that we then use as our theory, to then understand the world around us.

0:44:44.2 Trevor Burrus: So how do things get better? How do things get better if we…

0:44:46.3 Peter Boettke: This is the key issue, which is, you’re now not trying to change people, people are who they are, what you’re trying to do is see about changing the ideas now. This is where McCloskey comes in, right? Institutions are ultimately, they turn and succeed or fail depending on their underlying legitimacy in the social and cultural zeitgeist of an age. Why? Because to put it in Econospeak, which maybe is advantaged or not, but what it does is it raises or lowers the cost of enforcing of those institutions. So if my informal norms tell me that I should respect private property, I don’t need to have a cop on every corner, protecting private property. And so, that’s gonna be the issue. It lowers that cost of having that, therefore we have more widespread suggestion of that. And so it’s not the form of the institution in particular, it’s the practice of the institution that is necessary, and so McCloskey is right to try to put a strong emphasis on ideas, it is ultimately all about ideas, but those ideas, in my opinion, she disagrees with this, those ideas have to be instantiated in concrete institutions.

0:46:10.0 Peter Boettke: And then, those concrete institutions have their impact by structuring the incentives and generating the informational feedback loops that are necessary for the actors to learn how to adjust their behavior to one another to realize their goals, and those institutions are either gonna hinder, or hurt, or help us realize that we do better by living together rather than we would apart. And that’s a big part of my book, is to try to say about the liberal project that we can’t expect it to be where sharp objects in our social interactions disappear. We’re always gonna have cleavages, and social differences, and disagreements or whatever. What we’re gonna try to do is push those down to the most local level. When the disagreements and stuff are at the highest levels of government, it’s very difficult to get responsible governance, but we push it down to more local levels, and then we dull the edges. So that what happens is through our interactions, our decisions to exit, all those kind of things like that, to say, no, but also to say, yes. All of those interactions that we interact with, that we engage in, they end up by giving us cuts and bruises, but not deeply mortal wounds.

0:47:33.8 Peter Boettke: What our problem, I would say today, is that a lot of our discourse has sharpened the sharp edges rather than dull them. And so this has led to the situation now where a lot of our social engagements are at the edge of providing mortal wounds and that’s gonna raise the cost of us realizing social gains from cooperation and living better together than we would apart. And so, that’s what leads to this issue. When I chose the title of the book, I was thinking of it in terms of two types of struggles, my struggle as a scholar to try to understand what’s going on, but then also the struggle of the ongoing emancipatory project of liberalism, that liberalism is a revolution that’s unfinished rather than something. So we’re not trying to go backwards. You’re never going backwards. What the hell was it like to be a gay man in 1950. My uncle was gay and unfortunately passed away in the first rounds of the AIDS crisis, and so he passed away before AZT and all that other stuff was around.

0:48:53.8 Peter Boettke: What was life like for him coming out of World War II and the 1950s and ’60s or whatever. When I was a little kid growing up in the 1960s and getting close to the ’70s, my uncle became more and more flamboyant. [chuckle] You’d see him in always more and more flamboyant dress, and everything like that, he spend all the holidays with us, lived in New York City and came over and did all of that. And now in retrospect, I can understand why, because he was feeling now he could be kind of pockets of freedom in his life. He could be free. He could be who he was as opposed to who he had to put a public face on because he was discriminated against at an earlier time. And so, there’s no back to go to. There’s only a future of greater and greater opportunities for the spread of liberal ideas, and I think that’s the way that we should be presenting it. It’s not that liberalism is hollow. That’s one way to think about the project. But when I read say, Frederick Douglas’s, What is the Fourth of July to the Slave? He’s influence in that by Lysander Spooner, people forget that, that’s like a major influence of him, and he’s not saying that the American Revolution is a sham, he’s saying that the American Revolution is a hypocrisy because it’s not fulfilled as it should be.

0:50:18.5 Peter Boettke: And that’s a different project. Saying that it’s a sham is one thing, saying that it’s hypocritical and not consistent, and if you think about the abolitionist movement, that’s what they wanted to put in your face, that’s when they’re saying, “Am I not a man? Am I not your sister? Right. Am I not your brother?” They’re making you… They’re staring it in your face that you’re just a hypocritical pain in the ass. And so this is the same thing when we think about today with regard to immigration and open borders, when we think about trans and other sexual identities that people wanna have, and all these things like that. Liberalism should be a project that all of these groups understand as emancipatory, not as the potential blockers to their progress, but the vehicle by which they have the opportunity to have a free and flourishing life. And it’s a tragedy to me that liberalism has been communicated in a way that doesn’t attract the young and the dispossessed. And somehow it seems like we’ve pushed them to the side when actually it’s all about lifting up the opportunities.

0:51:31.1 Peter Boettke: I use a metaphor in the book, and I don’t really… I’m not sure that it’s the right metaphor, which is that the liberal introduction of markets is a hand reaching across to a stranger and welcoming them into friendship, okay. But it’s also in the process of doing that, it’s in a certain way, taking its hand and lifting up, right, but it’s not lifting up under any kind of, “I’m the White man’s burden lifting you up” kind of idea, ’cause I’m the… And so I don’t know how the… I think the metaphor, the anal and you might break down, because I’m not trying to say that, that it’s only because of our hand that we can lift you up, because the lifting up is done by you. Right. It’s you being an entrepreneur.

0:52:27.3 Trevor Burrus: Well, it’s mutual too. It’s mutual.

0:52:30.1 Peter Boettke: But it’s this notion of Cadillac, of turning a stranger into a friend, that’s a critical aspect about realizing the social cooperation and division of labor, and it just amazes me that we don’t live by the values of the openness to an opportunity economy, inviting people in and saying, Come here and flourish. ’cause when we look around us, all we see is people who came from all over parts of the world that have made our lives better off because they’ve come here and been able to have the freedom to be able to come up with better goods and services or better ways to deliver the goods and services to us, and so again, our tremendous material well-​being is a function of this ultimate resource, the human imagination and the freedom of individuals to be able to pursue productive specialization and realize peaceful social cooperation through Exchange.

0:53:40.0 Peter Boettke: And so, the book is a series of lectures that I was given the opportunity to give over a period of the 2000s, and this is the theme that I wanted to keep coming back and communicating to people. When I became President of MPS, I did this deep dive. I’m an academic, so I’m a nerdy type. So I did this whole history of MPS and all these different things like that, and I went back to the original documents and the original purpose, and I’m trying to capture those things and say like, “This is what we’re all about, you people that think it’s about somehow a neo-​liberal cabal or whatever, you’ve missed the whole picture about what it is that we’re trying to engage in,” and so that’s the history that I tell.

[pause]

0:54:43.3 Speaker 3: Thanks for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favorite podcast app. Free Thoughts is produced by Landry Airs. If you’d like to learn more about Libertarianism, visit us on the web at lib​er​tar​i​an​ism​.org.