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… is from page 292 of Vol. 19 (Ideas, Persons, and Events [2] [2001]) of The Collected Works of James M. Buchanan; specifically, it’s from Jim’s 1996 essay “Adam Smith as Inspiration”:
To suggest, with welfare economists, that market failure supports politicization, there must be not only departures from the necessary conditions for efficiency, but also some presumption that political action is informed by a knowledge of what the allocatively efficient solution is, quite apart from the operation of politics itself. By contrast, to suggest, with Adam Smith, that regulatory failure supports market liberalization does not require any presumptive knowledge about what particular outcome is likely to produce maximal value. There is a categorical epistemological difference between the two comparative exercises, a difference that many modern economists still do not understand.
Jim relates here an insight understood by all great economists, from at least the time of Adam Smith [3]. This insight refers to the open-endedness and creativity of market competition – of what Schumpeter [4] famously called “creative destruction.” It is a market process governed by intricate feedback loops that ceaselessly convey more or less ‘proper’ – and, hence, often changing – doses of information and incentives to market participants. (“Proper” doesn’t mean “always correct” or “perfect.” It does mean that this feedback-looped competitive market process works remarkably well, especially compared to any feasible alternatives. If you want evidence for the claim that markets work remarkably well, stroll into any supermarket in Boise or Boston or Baton Rouge and observe what you can buy for only a few minutes of your work time. If, upon doing so, you retort that “government built the roads that lead to the supermarkets” or that “government supplied the schooling for food-industry workers,” then you are not following the conversation and are missing the essential point.)
Somewhere (I’m too hurried now to find it) Arnold Kling complains that too many economists sacrifice philosophical depth for analytical brilliance. (These are my words, not Arnold’s; I’m going here on memory.) (UPDATE: I thank Georg Thomas for finding the link to the Arnold Kling post [5] that I had in mind.) Arnold is right to complain.
Until his death three weeks ago, Jim Buchanan [6] was, without doubt, one of the two or three most philosophically deep and wise economists alive – indeed, maybe the most philosophically deep and wise economist alive. An economist with nothing but analytical brilliance will not necessarily see the point that Jim relates above. Indeed, because open-endedness and creativity and process (in contrast to static equilibria) are far more difficult to reduce to models, the Analytically Brilliant Economist will look away from the reality pointed out above by Jim. Thus missing that point, the Analytically Brilliant Economist will construct impressive models that ‘prove’ the existence of market failures that, at least in principle, can be corrected by wise and apolitical government action. That Analytically Brilliant Economist will then be tempted – and often succumb to the temptation – to accuse those who disagree with his or her analyses and policy prescriptions of either being ideologically benighted or being an opponent of Science (or both). The Analytically Brilliant Economist thus reveals himself or herself to be philosophically shallow.
So here’s a bonus quotation of the day. It’s from page 65 of the 3rd (1978) edition of the late Mark Blaug’s Economic Theory in Retrospect [7]:
In appraising Adam Smith, or any other economist, we ought always to remember that brilliance in handling purely analytical concepts is a very different thing from a firm grasp of the essential logic of economic relationships. Superior technique does not necessarily imply superior economic insight, and vice versa. Judged by standards of analytical competence, Smith is not the greatest of 18th-century economists. But for acute insight into the nature of the economic process, for economic wisdom rather than technical elegance, Smith had no equal in the 18th or even in the 19th century.