Why have economists had so little meaningful to say about the 2008 crises? Where and when did the 'science' get off the track? Can anything be done to restore respectability to Economics as a useful area of inquiry? This short essay examines these questions.methodology of economics, financial crisis, economics as science

James M. Buchanan

English

Research Papers in Economics

RMM Vol. 0, Perspectives in Moral Science,
ed. by M. Baurmann & B. Lahno, 2009, 151–156
http://www.rmm-journal.de/
James M. Buchanan
Economists Have No Clothes
Abstract:
Why have economists had so little meaningful to say about the 2008 crises? Where and
when did the ‘science’ get off the track? Can anything be done to restore respectability to
Economics as a useful area of inquiry? This short essay examines these questions.
1. Introduction
David Hume is Hartmut Kliemt’s intellectual hero. And in the whole history
of philosophy, no one has been Hume’s equal in an ability and willingness to
remain as the small boy who calls attention to the king’s nakedness.
Economists have rarely claimed the role of kings, and, in many respects,
they recognize their own limitations. Nonetheless, economists must appreciate
the waste of massive intellectual energy as their best and brightest have chased
intellectual puzzles that emerge from a ﬂawed abstract understanding. It is little
wonder that so much of what economists have said, and say now, is exposed as
irrelevant and essentially useless.
Economists are embarrassed by their inability to offer ‘scientiﬁc’ explanati-
ons for the 2008–9 crises or to advance suggestions for reform. And for the few
who have dared enter the political dialogue, the arguments seem to differ little, if
at all, from the nostrums offered three-quarters of a century past by Keynes and
his converted disciples. It seems as if, for economists, the whole post-Keynesian
epoch must be judged to be a sequence of lost generations from whom no value
product emerged at all.
2. Measure without Control
The Keynesian-inspired separation of macroeconomics from microeconomics
that took place in midcentury seemed to embody genuine scientiﬁc advance. The
attention of many economists was shifted to measure the aggregate variables
that seemed adequate to describe the macroecomy. The size of the gross product,
the number of unemployed, the price level—these variables, and others, seemed
intrinsically worth measuring, and especially rates of change over time. The
whole corpus of macroeconomic modeling that came to be dominant in the years152 James M. Buchanan
immediately following World War II seemed to offer new vistas for economists’
productive value to the general welfare.
Unfortunately, economists, generally, failed to understand that aggregate va-
riables that may be measured with tolerable accuracy ex post may not be va-
riables subject to control, directly or even indirectly. The fundamental miscon-
ception here lies in the understanding of what ‘the economy’ is. The ‘economic
problem’ is not (despite Lionel Robbins) an engineering problem that may be
deﬁned simply as the allocation of scarce resources among alternative uses. The
economy, in some inclusive deﬁnitional sense, is perhaps best described as an
order that consists of an interlinked set of exchanges, simple and complex, from
which outcomes emerge that may in some respects be meaningfully measured
but that cannot be chosen, and thereby controlled, by concentrated decision ta-
kers.
The false conceptualization here is, of course, exempliﬁed in the failure, both
in theory and in practice, of the grand socialist experiments of the twentieth
century. What remains missing, however, is a general recognition by economists
themselves that their mind-set, when confronted with challenge, has not esca-
ped from the engineering mentality. There has been little or no spillover from
observation of events to the analysis by the putative scientists in the academies.
It is not, therefore, surprising that the policy objectives and implementation are
basically the same as those advanced by the Keynesians of midcentury.
Economists do not really understand what they are doing as they seem for-
ced to make efforts to control aggregate variables that are not controllable in
any direct sense. For example, the rate of employment (or unemployment) can-
not readily be shifted by governmental mandate. At best, small and peripheral
changes may be made while the emergent aggregate generated by the working of
the large and complex economy remains stubbornly immune, or worse, to wron-
gly conceived reform efforts.
3. The Missing Avenue of Inquiry
If the economy is properly conceptualized as an emerging and complex dyna-
mic order, what is the role for the economist who claims scientiﬁc status? An
elementary step is the recognition of the existence of constraints, sets of rules ,
or, broadly considered, the constitution. Gross misperception, especially in the
minds of noneconomists, often prompts the claim that ‘the market’ (or ‘capita-
lism’) either works or does not work without constraints, a claim that is demons-
trably unsupportable, either in analytical logic or in empirical reality.
Adam Smith’s whole effort can be interpreted as an argument for getting
the ‘laws and institutions’ reformed so as to allow individualized self-interest
to generate emergent outcomes that would prove beneﬁcial to all participants,
especially to the members of the working classes.
My own position has long been clear. I entitled my 1986 Nobel lecture, The
Constitution of Economic Policy. Economists should have paid, and should nowEconomists Have No Clothes 153
pay, attention to the constitutional structure within which actors play out the
multitude of transactions that describe the market order, whether these actions
be taken in roles as consumers–buyers, sellers–investors, employers–employees,
individuals–ﬁrms.
How do markets work? Standing alone, this is an inappropriate and unans-
werable question. It must be replaced by the question: How do markets work
under this or that set of constitutional and institutional constraints? Economists’
scientiﬁc expertise can be brought to bear on the predicted effects of alternative
sets of constraints. The relevant question is not that of asking how this or that
end-state or outcome may be put in place through possible collective or political
action. The question becomes, instead, how can this or that set of constraints be
predicted to operate so as to allow the generation of an order that meets certain
criteria of desirability? The difference between the two methodological stances
may appear minor, but much ill-advised effort might be avoided if economists
would recognize the limits of their own discipline.
4. Ideal Worlds
In a recent lecture, I labeled myself as a ‘natural pragmatist’ based on my con-
tinued emphasis on the recognition that any change must commence from the
here and now—from the status quo that describes current reality. But there is
a feedback relationship of a sort between this position and the one encountered
in the statement ‘but you can’t get there from here’. Realization of the dilemma
here has made me change my stance to a degree. It now seems more evident
that any change from the here and now, to be at all meaningful and potentially
productive, must be informed by some ultimate vision of how things might be,
no matter how vague and cloudy such vision must be. We must engage our thin-
king and analyses of worlds that might be, ideal worlds if you will, while keeping
within the boundaries of the possible.
The procedure is, then, one of moving beyond the obvious limits of what
might be by the construction of idealizations that remain possibly attainable,
but which have not been fully examined and analyzed. Why have political eco-
nomists, in particular, been apparently so willing to accept as sacrosanct the
monetary framework in being? Why has not more attention been paid to alter-
native structures, to differing rules and institutions?
The constitutional economics of money have been almost wholly neglected
for more than a half century, while professional attention shifted to idealized
constructions of models remote from reality, on the one hand, to pragmatically
deﬁned within-rules alternatives, on the other. The constitutional economics of
money must, in some ultimate sense, have teleological purpose. The aim is to
evaluate differing sets of rules and to place these in some order of preferability.
But, as noted, the end-states that may emerge under any set of rules are drawn,
as it were, from a distribution as determined by the whole complex of interlin-
ked exchanges generated by the choices made by separate choosers. It is folly154 James M. Buchanan
to interpret the whole exercise as the search for unique or even narrowly deﬁ-
ned results. Such conceptualization would be analogous to choosing the rules for
an ordinary game with, once chosen, the rules themselves predicted to guaran-
tee speciﬁc outcomes, while the choices of the players in the game itself being
without effect.
5. Constitutional Revolution?
As noted, the strictly pragmatic route that involves efforts to shift policy para-
meters so as to generate outcomes that differ from those currently observed, as
produced by the existing (or nonexisting) set of rules, may not accomplish what
seems to be required here. A more dramatic constitutional revolution may be
necessary.
But how might a genuinely alternative set of rules be, ﬁrst, articulated and,
ﬁnally, emplaced? As noted above, something beyond pragmatic adjustment
among institutions (e.g., new and differing politicized regulations) may be ne-
cessary. The introduction of previously imagined idealization into reality may
prove minimally critical.
What function must the whole ﬁnancial-monetary structure perform in an
ideally working market economy? This question is relatively easy to answer. The
ﬁnancialmonetary structure must be neutral in its allocative effects. It must be
limited to the facilitation of exchanges (to the reduction of transactions costs).
As recent events demonstrate, however, the structure has been far from neu-
tral, even in some remotely deﬁned sense. It seems that real value has been de-
stroyed, as if genuinely new goods previously added to the economic nexus were
withdrawn thus generating a reduction in the effective extent of the market.
The results of the ﬁnancial collapse that occurred in 2008 were not basically
distributional in effect. Real value was apparently destroyed but should not be
understood as the achievement of differential gains to some groups at the expen-
se of others. It is not at all as if only one of two traders ﬁnds, after trade, that
the good received is worthless. In the 2008 setting, everyone feels to have been
somehow defrauded by the deﬂation of what had seemed to be real values.
In the parlance of theoretical welfare economics, there occurred a Pareto-
inferior shift in which all persons in the nexus were made worse off by their own
utility calculus. The utility functions seemed to have all shifted inward. What
happened? It is as if all participants in the inclusive economic nexus were riding
along on a donkey seated quite comfortably on a saddle of inﬂated air, until an
unanticipated rupture collapsed the cushion.
What seems noteworthy here is that the deﬂation of the ‘hot air’ in the
banking-ﬁnancial sector did not beneﬁt any deﬁned subset. The loss in utility
seemed to be general over the whole and inclusive market economy. The events
were such that they could have scarcely been generated by any identiﬁable group
whose aim was to exploit others.Economists Have No Clothes 155
Critical evaluation and assessment suggests that the structure of the whole
monetary economy is ﬂawed, which points toward genuine constitutional revo-
lution rather than either a change in participants or piecemeal adjustments in
the regulatory apparatus.
6. Toward Monetary Neutrality
Care must be taken to avoid premature efforts to locate the origins of the crises
in particular markets or particular monetary-ﬁnancial instruments. In the Uni-
tes States, a trigger was perhaps the market in subprime mortgages that had
evolved into the complex package that described the world of ﬁnance in the ear-
ly years of the century. It is necessary to understand and appreciate, however,
that, even if this market had never existed, some other elements would have
proved to be vulnerable to unanticipated collapse. The familiar ‘house of cards’
metaphor surely is applicable.
Radical rethinking is required here—a rethinking that has not occurred since
the Great Depression.
Individual choices to shift nominally valued assets among differentially le-
veraged accounts cannot be allowed to generate multiplier effects over the whole
system. Some modern equivalent of one hundred percent, or full, reserve ban-
king must ﬁnally be installed and enforced. The Glass-Stegall efforts to separate
deposit and investment banking should presumably be updated and put in play.
Some extension-application of the antitrust laws to the banking conglomerati-
ons seems to be in order here. And, economists, in particular, must break free
from institutionally imposed biases and, instead, imagine settings in which the
liberties of traders to choose among alternatives are utilized in tandem with the
tools available through the wonders of modern electronic technology, while, at
the same time, still achieving some close approximation of ideal money neutra-
lity.
7. The Constitutionalization of Money
In a separate paper, I have called for the ‘constitutionalization’ of money. The
events of 2008 demonstrated that markets will not work with money anarchy.
Further, history tells us that politicization is not an effective alternative. We are
left with the in-between prospect of establishing and enforcing a set of constitu-
tional rules that will, on the one hand, limit the range and scope of disorderly
anarchy, while, on the other, isolate the monetary sector from political efforts at
manipulation.
Perhaps the most hopeful perspective involves an initial recognition that the
objective is within the possible. There is no physical or psychological barrier
that necessarily prevents the achievement of that which is commonly desired.
The value of the monetary unit, the United States dollar in the setting of early156 James M. Buchanan
twenty-ﬁrst century, can, and must, be treated as a ‘relatively absolute absolute’.
Along with the other required institutional changes, some of which are noted
above, this value can be operative as an anchor for exchange transactions at all
levels.
8. The Challenge for Economists
Economists, and perhaps those are most closely associated in their inquiries
with the monetary institutions in being, have almost totally failed in their basic
understanding of the constitutional elements that must be present in any viable
regime. In particular, these economists are unlikely sources of inspiration for
the quantum leaps in attitudes that are needed here. There is no need for some
‘beyond science’ competence. As in other aspects of modernity, return to classical
understandings and their implications could be transformative. It is time that
nonmonetary economists return to their elementary textbooks.
It is also praiseworthy that both nonprofessionals and professionals from
other disciplines join economists in the unique opportunities now presented.
Hartmut Kliemt, a philosopher, is associated with the Frankfurt School of Fi-
nance and Management. Such an afﬁliation can only yield productive results as
all of us, both inside and outside the academies, confront the critical challenge
of the century.

Economists Have No Clothes

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