On fallibility and perfection: Boettke’s Hayek vs. mainline economics

The Review of Austrian Economics - Peter Boettke’s F.A. Hayek Economics, Political Economy, and Social Philosophy (Palgrave 2019) is a nuanced treatment that examines the historical context...     

James M. Buchanan’s contractarianism and modern liberalism

This paper contrasts Buchanan’s contractarian–constitutional liberalism with Hayek’s evolutionary liberalism and Rothbards free-market liberalism as representative branches of the classical liberal tradition. While Hayek and Rothbard focus on individual liberty as private autonomy, Buchanan posits that individual sovereignty should be recognized as the fundamental normative premise of liberalism. He insists that a consistent application of this premise requires liberals to respect individuals as sovereigns not only in their capacity as private law subjects but also at the constitutional level of choice where, as sovereign citizens, they choose, jointly with their fellow citizens, the rules under which they wish to live. It is argued that by supplementing the notion of individual liberty as private autonomy with the concept of individual sovereignty in constitutional matters Buchanan lays the theoretical foundation for complementing the well-developed liberal theory of the market with a consistent liberal theory of democracy.     

30 years after the nobel: James Buchanan’s political philosophy

There are three main foundations of Public Choice theory: methodological individualism, behavioral symmetry, and “politics as exchange.” The first two are represented in nearly all work that identifies as “Public Choice,” but politics as exchange is often forgotten or de-emphasized. This paper—adapted from a lecture given on the occasion of the 30th year after Buchanan’s Nobel Prize—fleshes out Buchanan’s theory of politics as exchange, using four notions that are uniquely central to his thought: philosophical anarchism, ethical neutrality, subjectivism, and the “relatively absolute absolutes.” A central tension in Buchanan’s work is identified, in which he seems simultaneously to argue both that nearly anything agreed to by a group could be enforced within the group as a contract, and that there are certain types of rules and arrangements, generated by decentralized processes, that serve human needs better than state action. It is argued that it is a mistake to try to reconcile this tension, and that both parts of the argument are important.     

‘Medical altruism in mainstream health economics: theoretical and political paradoxes’ comments

In this article, which was published in the September 2014 issue of the Review, Batifoulier and Da Silva examine the role of medical altruism in health economics. They argue that abandoning homo economicus and the mainstream practice of incorporating patient well-being in the doctor’s utility function in order to explain the clinical behavior of doctors and switching from profit maximization to medical altruism both lead to a dead end. We agree but the authors leave us with no way out. We argue instead that the doctor’s clinical behavior whether expressed in terms of utility or altruism is not a fit subject for economics. The way out is to restrict economics to health care issues with financial dimensions. In their article, Batifoulier and Da Silva bring their French experience to the table. We bring to the table our American experience with more than 40 years of hands-on care for patients along with the experiences of four other physicians in our extended family. The specialties include intensive care pediatrics, emergency medicine, intensive-care pulmonary medicine, dermatology, and otolaryngology. Our premise in responding to Batifoulier and Da Silva is that apart from payment for services rendered, there probably are no serious differences in the actual practice of medicine in France compared to the United States. And even if there are such differences, they are matters to be taken up by medicine not economics.     

‘Adaptive accumulation’ and US political economy

According to popular and academic understandings of political economy, the United States is characterised by the most open forms of free market production. From Marxist to institutionalist to liberal analyses, the US is said to exhibits a governance model in which state structures are minimally intrusive to capitalist civil society. There is a need for political economy that re-positions the US state as more than just a willing facilitator, lender-of-last-resort or minimal regulator of capitalist dynamics. This paper argues that ‘adaptive accumulation’ has normalised in the US context, wherein capital actively allies itself with public state objectives (and mechanisms) to seek new or enhanced profit streams, by transforming or rerouting public revenues, such that they afford private accumulation. The robust entry of capital in areas such as health, education and incarceration are highly notable, inasmuch as they harness public objectives for private but not-so-competitive ends. By shedding light on such domains, the paper contributes to our understanding of capital and its ongoing efforts to stay ahead of investment crises by actively shaping its operative environment – in this case, maintaining both the credibility and regularity of publicly inspired (and often financed) revenue streams while, ultimately, transforming their utilisation and purpose.     

The political economy of Ecuador’s external debt default

The default of the 2012 and 2030 Global Bonds during the early stages of the Alianza PAIS government in Ecuador is best understood in the context of the social conflicts that characterized the exhaustion of neoliberalism in the country and the struggle between different fractions of capital for the direction of the process of accumulation. The restructuring of external debt and the new wave of public borrowing facilitated a boost in public spending that spurred economic growth and provided a ‘fiscal pacification’ of social unrest and political instability. The movements in public debt have also been a lever for State and geopolitical repositioning that reflects a new moment in the correlation of social forces and hegemony in the world economy. In this new scenario, however, Ecuador has not overcome the structural imbalances and contradictions that underpin its external debt problematic.     

Finance commission of India’s assessments: a political economy contention between expectations and outcomes

We explore the normative fiscal assessments of the Finance Commission (FC) of India, and realisation of fiscal policy with regard to Central Finances over the period 1990–2012. We employ the Theil’s inequality coefficient to investigate the magnitude of assessment errors and its partitioning in to bias, slope and random components. Furthermore, this article also evaluates the efficiency, biasedness and persistence of forecast errors. The robustness of the efficiency results are confirmed with the application of maximum entropy bootstrap. The objective of this study is to examine the structural basis on which FCs make their awards rather than examining the predictability of the forecasts. The story of FC’s assessments reflects an interesting political economy theatre of contention between aspirations and outcomes. Our key findings are as follows: First, source of errors for assessments of tax revenue, nontax revenue, interest payments, defence revenue expenditure, plan revenue expenditure and fiscal deficit is principally due to random component. However, the errors in the remaining economic parameters originate due to systematic components i.e. mean and slope errors. Second, the expenditure side predictability is lower than the revenue side predictability.     

Time for behavioral political economy? An analysis of articles in behavioral economics

This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program. Such an extension could be related to the concept of robust political economy, according to which the case for paternalism should be subjected to ??worst-case?? assumptions, such as policymakers being less than fully rational.     

Advance disposal fee vs. disposal fee: A monopolistic producer’s durability choice model

This study examines how the timing of waste disposal fee collection affects the producer’s choice of built-in product durability and social welfare in a durable-goods monopoly model. We categorize the waste disposal fee policies into two: advance disposal fee (ADF) policy and disposal fee (DF) policy. We show that a DF policy has two opposing effects on durability. Firstly, a DF policy gives the producer an incentive to increase durability in order to delay the households’ waste disposal and to discount future payments of the disposal fee (the payment-discounting effect). Secondly, a DF policy creates an incentive for consumers to dump waste illegally in order to mitigate the payment of the disposal fee, and gives the producer an incentive to reduce durability in order to avoid market saturation and the associated future price cuts (the illegal-dumping effect). When the disposal fee is low, the payment-discounting effect dominates the illegal-dumping effect under a DF policy, leading to the enhancement of durability. In this case, from a social welfare viewpoint, a DF policy may be more desirable than an ADF policy if the environmental damage associated with illegal dumping is not serious. However, when the disposal fee is high, a DF policy induces more illegal dumping, reduces durability, and inflicts more environmental damage. Therefore, an ADF policy is more socially desirable than a DF policy when the disposal fee is high. Moreover, we consider an oligopoly case and find that an ADF policy is more socially desirable in an industry with smaller market power.     

James Buchanan’s theory of federalism: from fiscal equity to the ideal political order

The distinct characteristic in James Buchanan’s thinking about federalism in contrast to the traditional theory of fiscal federalism is his view about fiscal competition. In this paper, it is demonstrated that this thinking went through three stages. From the 1950s to the beginning of the 1970s, his analyses were well embedded in the traditional fiscal federalism literature and concerned with equity and efficiency issues. In the Leviathan approach starting from the mid-seventies, he considered competition between jurisdictions as a means to restrict Leviathan governments. In his interpretation of federalism as an ideal political order, Buchanan binds these perspectives together and adds a procedural view: Federalism enables citizens to exert political control, it raises their interest in politics because one vote has more influence, and it facilitates to act morally within their moral capacity.     

Back to Buchanan? Explorations of welfare and subjectivism in behavioral economics

In light of behavioral findings regarding inconsistent individual decision-making, economists have begun to re-conceptualize the notion of welfare. One prominent account is the preference purification approach (PP), which attempts to reconstruct preferences from choice data based on a normative understanding of neoclassical rationality. Using Buchanan’s notion of creative choice, this paper criticizes PP’s epistemic, ontological, and psychological assumptions. It identifies PP as a static position that assumes the satisfaction of given ‘true preferences’ as the normative standard for welfare. However, following Buchanan, choice should be understood dynamically as a process whereby preferences constantly regenerate. Accordingly, the meaning of welfare emerges from an ongoing quest for individual self-constitution. If this holds true, then rationality axioms cannot serve as a priori normative standards. Instead, creative imagination and learning processes must remain central to any understanding of welfare in economics.     

Old (Chicago) school,new century: the link between Knight and Simons’ Chicago plan to Buchanan’s constitutional money

James Buchanan had long been a champion of the early Chicago school’s emphasis on the essential role that institutions play in framing the market process. In his post-2009 analysis of the financial crisis, Buchanan echoed his old Chicago mentors like Frank Knight and Henry Simons in arguing that the Great Recession, like all previous financial crises, was primarily a failure of the rules governing our monetary-financial system. This “old Chicago” emphasis on the institutional “rules of the game” formed the basis of his essential post-2009 argument that the financial crisis fundamentally represented not a market failure, per say, but a constitutional failure. In this paper, I connect the dots in Buchanan’s post-2009 analysis of the Great Recession and his reaffirmation of the need for “constitutional money” to his old Chicago mentor’s strikingly similar calls for a radical restructuring of the monetary-financial system in the Chicago Plan of the 1930s. Though Buchanan’s twenty-first century resurrection of these ideas has yet to conjure up the academic support of his predecessors, certain elements of his “old school” monetary-financial reforms have experienced a strong revival since the financial crisis, as has Buchanan’s more general call to “constitutionalize money.”     

The problem of order in Austrian economics: Kirzner vs. Lachmann ∗

The current controversy among Austrian economists concerns the precise way in which time and ignorance is to be incorporated into market analysis. While both sides think the market process is fundamentally orderly and coherent, they disagree about how to conceptualize that order. One side, associated mostly with Israel Kirzner, conceives of economic order in the conventional sense of a system converging towards a neoclassical notion of equilibrium. The Austrian contribution to this analysis is to emphasize the important role of entrepreneurial alertness in bringing about convergence towards equilibrium. Kirzner's theory of alertness is able to incorporate partial ignorance into economic analysis, but it does not give a satisfactory account of the consequences of real time.

The other side, following Ludwig Lachmann, argues that a full appreciation of the implications of time and ignorance in economics forces us to abandon conventional notions of equilibrium and instead formulate a theory of the ‘kaleidic society’. Lachmann makes a convincing case for the inappropriateness of conventional notions of equilibrium, but fails to weave his critiques into a theory of social order.     

An anarchist’s reflection on the political economy of everyday life

James Scott has written a detailed ethnography on the lives of the peoples of upland Southeast Asia who choose to escape oppressive government by living at the edge of their civilization. To the political economist the fascinating story told by Scott provides useful narratives in need of analytical exposition. There remains in this work a “plea for mechanism”; the mechanisms that enable social cooperation to emerge among individuals living outside the realm of state control. Social cooperation outside the formal rules of governance nevertheless require “rules” of social intercourse and techniques of “enforcement” to ensure the disciplining of opportunistic behavior.     

Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics

The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.

Bulgaria’s hyperinflation in 1997: transition,banking fragility and foreign exchange

This article has two objectives: to study the 1997 episode of hyperinflation in Bulgaria, and to compare and contrast this analysis with the post-Keynesian theoretical approach. This approach highlights the role of three components observed simultaneously in order to understand the emergence of hyperinflation: a virulent distributive conflict; the presence of indexing mechanisms; and finally, flight from domestic currency into one or more foreign currencies. The article reveals that a transitional economy like that of Bulgaria in the 1990s may generate hyperinflation in the absence of any violent distribution conflict: the transition and the banking crisis engender inflation. The foreign exchange rate is decisive in the emergence of hyperinflationary dynamics (and therefore mistrust of domestic currency). This interpretation of hyperinflation is confirmed by an econometric analysis.