Smith vs Keynes

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S M ITH V ERS U S K EY N ES : ECO N O M ICS AND

POLITICAL ECONOMY IN TH E P O S T-CR IS IS ERA

SAMUEL GREGG*

INTRODUCTION

Alongside politicians, bankers, and CEOs, few groups havereceived as much opprobrium for the 2008 financial crisis aseconomists. Economists are the forgotten guilty men was thephrase employed in February 2009 by Anatole Kaletsky, editor-at-large for the London Times when explaining why a bankwith just 1 billion of capital [would] borro w an extra $99 billionand then buy $100 billion of speculative investments. ^ Self-indulgence and imprudence had a part, but so too, Kaletsky as-serted, did those economists who insisted that their models prov ed that occurrences such as Long Term Capital Manage-ment's demise in 1998 or Lehman Brothers's collapse almost ex-actly ten years later were mathematically likely to happen onlyonce every billion years.^ Kaletsky's wider claim was that m ain-stream economics had been so discredited by the financial cri-

sis that economics itself required an intellectual revolu tion orrisked being reduced to a somewhat suspect sub-branch ofmathematical modeling and statistical analysis.

Kaletsky has not been alone in making such argum ents. Eco-

nomic historian Harold James made a similar point, albeit moretemperately:

[A]n overwhelming majority of modem economists were

misled by treating short-term trends as if they were perma-nent phenomena that could be used to derive reliable behav-



444 H arvard Journal of Law Pub lic Policy [Vol. 33

eccentric, not only by the commercially driven economists

who worked for financial institutions as de facto salesmen,but also by the overwhelming majority of academic econo-mists, who were also subject to commercial pressures in theforms of peer evaluation and patterns of career develop-ment. These economists instilled a false complacency in poli-ticians and other policymakers.^

In March 2009, Willem Butler, a former external member of

the Bank of England's Monetary Policy Committee, likewise

referred to [t]he un fortunate uselessness of most 'state of theart' academic monetary economics. ^ Though unwilling to de-

mand either a complete parad igm change or a defenestration ofthe economics profession, the Economist suggested that the fl-

nancial meltdown raised profound questions of coherenceabout two specific fields of econom ics: financial econom ics and

macroeconomics. Few financial economists, it suggested, thought much about illiquidity or counterparty risk, for in-

stance, because their standard models ignore it. Likewise, [mjacroeconomists also had a blind spot: their standard mod-

els assumed that capital markets work perfectly. ^

These claims evoked a strong riposte from the Nobel Prizeeconomist Robert Lucas in defense of the Efficient Market Fly-

pothesis (EMH), the claim that the price of a financial asset re-

flects all relevant, generally available inform ation. One thing ,Lucas w rote, we are not going to have, now or ever, is a set of

models that forecasts sudden falls in the value of financial as-sets, like the declines that followed the failure of LehmanBrothers in September [2008]. * Since the late Paul Samuelsonpublished his proof for one version of the EMH in 1965 and

Eugene Fama detailed the theory and evidence for three formsof the EMH in 1970, ̂the EMH had been subject to consistentcriticism. But none of these critiques, Lucas maintained, had

proved its falsity. Other economists, however, argued that the



N o. 2] Smith Versus Keynes 445

stock market meltdown demonstrated the EMH's inahility to

account for the market overpricing assets such as mortgages. Onthis basis, they conjectured, the EMH, as applied to the stockmarket in aggregate, m ust be discarded or modified. *

While these discussions are important, much of the debateabout economic theory following the 2008 crisis has focusedupon the place of models in economics. Some contemporaryeconomists seem hesitant to question the appropriateness oftheir heavy dependence on models and mathematical logic.

This hesitance may arise because they want to avoid raisingdifficult questions about the very nature of postwar main-stream economic science.

Since John Maynard Keynes's time, mainstream economicshas undergone a steady process of mathematization and im-mersion in abstraction. One need only glance through theirnearest copy of the merican Economic Review and observe theplethora of algebra that is now central to most mainstream

economists ' argumentation. Outside the Austrian school ofeconomics, few economists have publicly questioned this de-pendence. One economist willing to do so, however, wasWilhelm Röpke (1899-1966). Röpke is well known as one of theintellectual architects of postwar West Germany's path fromNational Socialist economic collectivism to a market-driveneconomic miracle in the decade following West Germany'seconomic liberalization in 1948. Less attention, however, has

been given to Röpke's passionate critiques of postwar devel-opments in economics as a social science. On one level, theseden unc iations w ere driven by Röpke's belief tha t policies basedup on K eynesian-influenced economics w ould gradually d imin-ish economic and political liberty. But another source ofRöpke's angst was his conviction that Keynes and, more par-

8. Posting of A nd rew Sm ithers to Free Exchange, h ttp://ww w.ec ono mist.co m/

blogs/freeexchange/2009/08/lucas_roundtable_the_emh_must.cfm (Aug. 11, 2009,20:42 GMT). Certainly there is, as Nobel Prize-winning economist Myron Scholes




ticularly, his many disciples were slowly undermining the in-

tegrity of economics as a social science. Though Röpke diedover forty years ago, his analysis of trends in economic sciencefollowing Key nes's eneral Theory ̂ provides useful insights intosome of the challenges confronting contem porary econom ics. Italso contains some intimation of a possible direction for post-crisis economics, one closer to the vision of Adam Smith thanthe legacy im parte d by Keynes and his successors.

I. ECONOMICS POSITIVISM A N D SCIENTISM

Reflecting on the fortunes of economics in the 1950s, Röpkemarveled at the enormously augmented scope for economicresearch.^ He contrasted it w ith the econom ics p rofession'ssituation in prewar Germany as a lowly handmaiden to facul-ties of law . Postwa r econom ic science enjoyed a statu re thathad previously eluded the discipline, partly, Röpke thought,

because a range of difficulties had emerged since the 1930s thatcaused many to turn to economics for responses.^^ But, Röpkeheld, these new realities were actually grounds for considerableconcern abou t po stwar changes in economics as a social science.

The economist, too, Röpke once w rote, has his occupa-tional disease: restricted vis ion . Em phasizing that he spokefrom personal experience, Röpke suggested that some econo-m ists found it ha rd to look bey ond their ow n discipline or con-

cede that the economy was part of a larger order about whichother sciences ha d things to say.'* This provincialism w as m ag-nified by the error of economism, the habit of viewing eve-rything in relation to the econom y and in term s of m aterial pro-ductivity, making material and economic interests the center ofthings by deducing everything from them and subordinating eve-

9 . JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST,A N D M O N E Y ( 1 9 3 6 ) .



N o . 2] Smith Versus Keynes 447

ry th ing to them as mere m eans to an end. ^^ Eco no mic research,

Röpke ins is ted , would not be pro duc t ive if economis ts la rgelyignored the complexi ty of the wo r ld in which eco no mic cho icesand policies operate .^^ Economism invariably led economists intothe trap of w ha t Röpk e called so cial rat io nalism, the tenden cyto regard market mechanisms as va lue-neutra l methods appl ica-b le to any eco no mic o r soc ial o rder . O ne example was the a t tem ptof social is t economists such as Oskar Lange to reconcile the pricem echanism w ith co l lect iv is t eco no mies . H o w , Röpke asked, cou ld

a mechan ism tha t a ssumes human f reedom opera te in so cietiesprem ised o n the radical subo rdinatio n o f liberty?^''I t f o l lowed, accord ing to Röpke , tha t eco no mis t s sho u ld seek

to avo id segment ing eco no mic inqu i ry fro m the co mplex charac-ter of hu m an natu re . Th o ug h a t ten t ive to u t i li ty , Rö pke rejec tedthe neoclassical premise of h u m a n s as ra t io nal u t i li ty m aximiz-ers: Th e o rd in a ry m a n is no t such a homo œconomicus . . . . T hemo t ives which d r ive peo p le to wa rd eco no mic success a re a s va r-

ied as th e h u m a n s o u l itself. ^ ̂ N o r d id Rö p k e c o n s id e r it rea-s o n a b le to p re mise e c o n o mic th e o ry on an u n d e r s t a n d in g of

h u m a n s as selfless creatures . '^ Instead, R öpke invo ked a ra therSmi th ian unders tand ing of h u m a n b e in g s to expla in h is fo nd-ness fo r market economies over the a l te rnat ives :

There is a deep moral reason for the fact that an economy offree enterprise brings about sodal health and a plenitude ofgoods, wiiile a socialist economy ends in social disorder and

po verty. The liberal econo mic system delivers to useful endsthe extraordinary force inherent in individual self-assertio n,whereas the socialist economy suppresses this force and wearsitself out in the struggle against it. Is the system unethical thatpermits the individual to strive to advance himself and hisneighbor through his own productive achievement? Is the ethi-cal system the one that is organized to suppress this striv-ing? . . . It makes virtue appear irratio nal and places an ex-travagant demand upon human nature when men in serving

virtue in a collectivist economy must act against their o wn




proper interests in ways that, as even the simplest of them can

see, do nothing to increase the total wealth.^"Röpke was also impatient with economic theories that dimin-

ished the study of individual human choice and action to rela-tive insignificance.^ This d iminishm ent, Röpke maintained , w asthe product of scientism's effect upon economics. He defined"scientism" as the tendency to "understand by science [what] ismerely fundamentally the narrow territory of the 'positivist' and'exact' natural sciences and their technical application."^^ Scien-tism em bod ied the notion that there were no limits to the cogni-tive capacities of positivist methodology and technical analysis.It was usually associated with "an optimistic belief in progressby means of a mechanical leadership of society."^^ J\^Q resultwas "the scientific elimination of the H um an elemen t in politicaland economic practice."^*

Röpke also treated scientism as destructive of humanity's

centuries-old striving towards a unity of knowledge, epito-mized by the medieval and early-modern scholastic tradition.Tho ugh he agreed tha t "the end less m ultitud e of possible prob-lems"^^ necessitated specialized intellectual inquiry in both thehum anities and sciences, both social and natural, Röpke un d er-lined "the utter futility of a science which progressively heapsup matter, which is always measuring, analyzing, and docu-menting but which continually gets further and further awayfrom a synthesis."^^ It created peop le

whose head [s] . . . [are] filled exclusively with "useful"knowledge and who cannot grasp that abstract natural sci-ence and physics possess quite a different educational valuefrom the moral sciences ... that the science of mathematicsis an admirable, nay an indispensible training for the intel-lect but that when it has done its work it can be pu t aside.^''

20. Id . at 233.



N o. 2] Smith Versus eynes 449

Scientism implies simultaneously disdain for synthesis. It means

ever more specialization, the breed ing of a learned type. ^Âm ong economists, scientism had he lped to facilitate the disin-clination of so many economists to make contact with sociology,ethics or politics. ^' This isolation of economists from the rest ofthe academy added u p to a cult of endless docum entation, ofEmpiricism and Historicism, of the quantitatively measurab le, ofresearch more geométrico to the detriment of the humane sciences(the moral sciences), and their orientation towards the natural

sciences as the one idea l to be pursued in everything. 3oMuch of Röpke's appraisal of scientism's impact upon eco-nomics parallels and draws upon another twêntieth-centuryadvocate of free markets, Friedrich von Hayek.^^ In Hayek'sview, scientism undermined economics insofar as it encour-aged the illegitimate importation of the techniques of the natu-ral sciences into a social science.^^ Röpke also shared Hayek'sconcern that scientism in economics encouraged collectivist

economic thinking. The post-En lightenm ent faith in the mis-sion of rationalism for the reconstruction of society, faith in thetask of 'organiser scientifiquement l'humanité, '^^ had simplymisled some to believe economic life could simply be reorgan-ized along m ore rationa l lines than m arket economies.

II. ECONOM ISTE-PHILOSOPHES OR ECONOM ETRICIANS?

The influence of positivism and scientism on economicsmarked, according to Röpke, a departure from the understand-ing of economics Adam Smith articulated. In Röpke's view.Smith w as a represen tative of the hu m an ist spirit of the eight-eenth century, wh ose Wealth of Nations^ formed part of a lar-ger intended work on the cultural history of m ank ind inw hich econom ics w as viewed as an organic par t of the larger

28 . Id. at 68.



450 Ha rvard Journal of Law & Public Policy [Vol. 33

whole of the intellectual, moral, and historical life of society. ^^

As the author of The Theory of Mor al Sentiments, '^ ̂ Smith under-stood that his Wealth of Nat ions did no t and could no t en capsu-late human life in its entirety.^'' Röpke asserted tha t Sm ithviewed social and economic life as the product of an invisiblehand and a living order with an imm anen t logic of its ownwhich the human mind could comprehend and even destroybut cou ld not duplicate. ^*

By w ay of contrast, Röpke viewed John M ayn ard Keynes as

Sm ith's an tithesis. Keynes wa s a represen tative of the geom et-ric spirit of the 20th century and an exponent of positivisticscientism, for w ho m economics w as par t of a mathem atical-mechanical universe. ^' When combined with the modern pro-clivity for statistics, this outlook actually lim ited eco nom ists'ability to com prehend economic phenomena. * Thus, altho ug hRöpke treated Smith as a promising start, he consideredKeynes to embody a rationalistic deterioration in modern eco-

nomics' explanatory power. *' Although Röpke did not regardall Keynesian concepts as mistaken, he did view Keyn esian-ism as a defective w ay of economic thinking . Röpke consignedmore blame to Keynes's followers,'*^ but he m aintained thatKey nes's app roach to economics had created an old econom -ics and a new econom ics in wh ich the reason of one w as thenonsense of the other.*^

35 . WILHELM RÖPKE, ECONOMICS OF THE FREE SOCIETY 224 (Patrick M. Boarman

trans., Henry Regnery 1963) (1937).36. AD AM SM ITH, TH E THEORY OF M OR AL SENTIMENTS (1759).

37. See RÖPKE, supra no te 17, at 92.38 . RÖPKE, supra note 35 , a t 224.39. Id .

40. Wilhelm Röpke, Die entscheidenden Probleme d es w eltw irtschaftl ichen Verfalls74 ZEITSCHRIFT FÜR SCHWEIZERISCHE STATISTIK UND VOLKSWIRTSCHAFT 493, 493-

506 (1938).

41. RÖPKE, supra note 35 , at 224.42. Id . at 225. In his analysis of Key nes's tho ught, Gilles Dostaler prese nts a




H ere Röpke w as not referring to the difference betw een rela-

tively free market and relatively interventionist economic poli-cies. His concern was with what people thought constituted theessence of economics as a social science and the methods it em-ployed. According to Röpke, most economists working in thepost-Keynes era were inclined to reduce economics to mathe-matical and statistical analysis or macroeconomics. Economicsconsequently became a quantitative enterprise that teems withequations in ever-increasing profusion and that focused on the

development of patterns of aggregate behavior by entire socie-ties that bore little resemblance to reality.^ Opening a post-Keynes economîcs textbook, Röpke claimed, made readers won-der wh ether they had purchased a chemistry curriculum.''^

Röpke's concerns about the post-Keynes macroeconomic fo-cus of economics did not m ean that he som ehow op po sedmacroeconomics. Even non-Keynesians employed terms like acoun try is living bey on d its m ean s as a w ay of describing ho w

the aggregate expenditure for investment and consumption ina given area created more purchasing power than could beprovided at present prices for the economy's output in thatarea. *^ Röpke's complaint w as tha t Keynes ha d essen tially de -clared the m ethod of thinking in aggregates to be the only validone, now and in the long run. *^ This development was un-dermining the doctrine of the movement of individual prices,the great achievement of 150 years of economics,' '^ and, thus,

the real content of econom ics. W ith the appearance of a genera-tion of economists exclusively trained to work with economicaggregates, Röpke maintained that the economist's skills wereincreasingly dim inished to the capacity to articulate hy po -thetical statements about functional relationships in mathe-matical formulas or curves. '*^

Here Röpke may have been thinking of Paul Samuelson's at-tem pt to rearticulate econom ics in mathem atical terms.^ For

Röpke, such endea vo rs confused the object of economics with a



452 Harvard Journal of Law & Pub lic Policy [Vol. 33

medium of economic analysis. As Jesús Huerta de Soto noted,

mathematics is a form of language based upon symbols thatpartly emerged as a way of facilitating the study of the natural

sciences. But the functional relationships that mathematics at-

tempts to capture in the economic world are constantly un-

dermined by factors such as entrepreneurship, which distorts

the constancy of information that mathematics demands.̂ ^ In

Röpke's view, mathematics and empirical methods were also

less adequate when it came to studying the economic effects

and implications of things such as traditions, institutions, andvalues. Mathematical formalism, Röpke argued, chose to ad-

dress these realities by generally ignoring them. It thus lost

sight of economics' essence, which is not macro-aggregates but

the choices of individuals and institutions. On this basis, Röpke

suggested that the new economics was destroying economics

as a 'moral science' in the sense that it deals with man as an

intellectual and moral being. ^^ Instead, in the new economics,

the economist became a type of bureaucratic technocratcharged with preempting economic problems through the use

of sophisticated mathematical quantitative methods. Conse-

quently, the post-Keynes economist was invariably

obsessed by one thing, i.e., effective demand, which hethinks must be kept up at whatever cost, while he forgets theworking of the mechanism of prices, wages, interest and ex-change rates. Whereas formerly a good economist was a man

who knew how to assess the relation of the actual economicforces and whereas formerly judgment, experience, and asense of proportion were rated higher than the formal skill inhandling certain research techniques introduced illegitimatelyfrom the natura l sciences into economics— today glory goes tohim who knows how to express more or less hypotheticalstatements in mathematical symbols and curves.^^

Concerns about these changes, Röpke noted, were not limited

to non-Keynesians. He cited one of Keynes's disciples (and firstbiographer), Roy Harrod, saying that substituting a fascination




with mathematical aggregates for attention to basic economic

principles had led him to conclude that w e shou ld be betteroff with the old Political Economy. ^Drawing upon the Austrian economist Ludwig von Mises,

Röpke maintained that sound economics allows mathematics toexplicate certain relationsh ips tha t have quantitative characteris-tics. But the more economics drifted in a mathematical-statisticaldirection, the more it ignored that which is un-m athem atical anddoes not always behave predictably: human beings.^^ Röpke

was not persuaded that mathematics could encompass the in-stability and complexity of economic life. Despite the apparentinformation such methods could obtain, economic trends rarelyseemed to conform to the new economics' forecasts. The resultwâs no t only that with all ou r cleverness, we have become de-cidedly less wise, while knowing more and more about lessand less, ^^ but also that economic science was dehumanized.^^ Keeping economics hu m an , Röpke held, did no t necessitate

completely rejecting m athem atics or agg regate co ncepts. But hedid ask economists to consider that behind factors such as sup-ply and demand, amounts of savings, volumes of investment,rates of inflation, and levels of w ages w ere indiv idua l hum anbeings with their feelings, their deliberations, their appraisalsof value, their collective suggestions and decisions. ^*

Röpke's warnings against the dominance of the language ofaggregates and mathematics also reflected his worry that eco-

nomics would gradually become unintelligible to non-economists and of decreased usefulness to policymakers.^^Moreover, Röpke argued that the new economics' marginaliza-tion of individual human beings reflected general social trends toward impersonalization, tow ard collectivization, towârdmechanization, toward dehumanization. ^° Just as modem eco-nomic science received tremendous impetus in the late-eighteenth, nineteenth, and early-twentieth centuries from the

desire to understand market economies, Röpke maintained that



454 Harvard Journal of Law Public Policy [Vol. 33

mid-twentieth century economics was being influenced by the

context of political and economic collectiviz tion in which it waspracticed.î The postw ar new econom ics help ed to supp ortthe belief that the state could m an age the econom y andtherefore facilitated expectations that governments should at-tempt to do so. Governmental institutions committed to inter-ventionist policies wanted macroeconomic research that addedempirical credibility to such proposals. As Keynes's most im-portant biographer, Robert Skidelsky, noted:

The needs of Keynesian macroeconomic policy spawnedvast quantities of national-income statistics which were fedinto hu ge com puter-forecasting models set u p to capture thesignificant short-term trends of the macroeconomy. TheKeynesian age was the golden age of macroeconomics: thefamous economists of the time were all macroeconomists;most of them worked for or advised government at leastsome of the time. The study of markets and how they

worked, or even failed to, was distinctly unfashionable.^Â form of collusion consequently developed between the postwareconomic profession and states pursuing interventionist strate-gies. It meant, Röpke thought, that many economists had essen-tially compromised their integrity as scholars committed to thepursuit of truth above the temptations of expediency.

III. RELATIVIZING— NOT ABA NDO NING— MO DELS

Röpke's diagnosis of some of the problems characterizingmainstream postwar economics is several decades old. Hence, itdoes not address the emergence of New Classical economics inthe late 1960s, monetarism in the 1970s, the N ew Keynesianism ofthe early 1980s, or wha t some call the New Neoclassical Synthe-sis of New^ Keynesian and New Classical economics of the late1990s. Nevertheless, Röpke's analysis plays directly into many

contemporary debates about the failures, imagined or otherwise,of economics in the context of the 2 8 financial crisis.




ables and processes that are not amenable to m easurement or

to modelling but that have important information content. ^^The presence of these variables has im m ediate implications for

understanding complex phenomena like the role of money increating inflation.

It may be difficult for central banks (or financial market fore-casters) to precisely model the impact of money supply on in-fia tion as relationships have become less predictable over time.This does not mean, however, that monetary aggregates re not

a very important (indeed, possibly the most important) vari-able in determining inflation. It simply means that to under-stand the processes we have to interpret the data and we mayhave to accept that any predictions we make are simply predic-tions of tendencies rather than of precise magnitudes.^

Consequently, not only central banks but also politicians and

governments in the post-crisis era ought to tone down theirrhetoric abou t m anag ing an economy, because economic sci-

ence simply does not possess the pred ictive abilities to validateclaims to control such a complex system .The question, ho wever, is where do we go from here? Does a

post-crisis economics involve dispensing with most of the

mathematical tools and modeling Üiat assumed such a promi-nent place in economic science in the wake of K eynes's GeneralTheory Are we to conclude along with Paul Krug m an and oth-

ers that much of the econom ic research of the past thirty years

has been a spectacular w aste of time and energy?*În his famous review of Milton Friedman and AnnaSchwartz's A Monetary History of the United States ^^ RobertClower stated that [i]f successful prediction were the sole cri-

terion of the m erit of a science, economics should long since

63. Philip Booth, Learning from the Crash and Teaching after it in PROFIT, PRU-

DENCE AND VIRTUE: ESSAYS IN ETHICS, BUSINESS ANDM A N A G E M E N T 225, 234




have ceased to exist as a serious intellectual pursuit. ^'' In other

words, economic science is not just concerned with m akingeconomic predictions or shaping economic policy. It is aboutunderstanding the truth about the economic dimension of hu-

man life. To this end, econom ists have a range of tools at theirdisposal, including logic, inference, historical analysis, statis-tics, a n d mathematics. Doubts about the predictive powers of

economics should not mean that we engage in blanket dispar-agements of econom ists ' use of mathematical tools. As Booth

com m ents, [n]eo-classical econom ics can be helpful for un-derstanding particular problems. The closed form solutions tom any m odern finance problem s, such as the pricing of deriva-tives, derive their method from the neo-classical way of think-ing. * ^ As long as there is a quantitative dimension to econom-ics, we will need tools that allow us to com pare theories abou thow the economy works to quantifiable data. They provide us

with useful—though not all-encompassing— information about

factors that economists and those they advise should be con-sidering, ranging from matters such as the effects of interestrate increases to the growth of wêalth in given societies.Though predictability in the social sciences is only imperfectlypossible, the philoso phe r A lasdair Maclntyre correctly statedthat it is often achievable thanks to our knowledge of statisticalregularities, the common realization that people need to coor-dinate their actions, and our aw areness of the causal regulari-

ties of social life and nature.^'Â similar point applies to abstract models. Economic models

are like map s. Although m aps do not in them selves capture the

wh ole truth, they do provide us with some insight into aspectsof the truth. A map of London can tell us how to get fromHeathrow to Westminster. It cannot, however, encapsulate Lon-do n's entire reality. Similarly, economic m ode ls cannot encapsu-late a holistic vision of the economy. But, depending upo n the

subject matter and the m odel's capacity to approximate aspectsof reality, they can provide us wîth some information about what




objectives.'' Some abstractness is often necessary in m any social

and natural sciences if we are to reach conclusions about anynumber of questions. As James Buchanan and Geoffrey Brennannoted, abstraction in economic science is a way of allowingeconomists to impose intellectual orde r o n the o bserved chaos ofhuman interaction, without excessive distracting detail in di-mensio ns of the analysis that are no t centrally relevant. ^^

By the same token, econo mists shou ld ackn ow ledge that neo-classical econom ic mo dels are only useful for certain purp o ses.

A radically empirical, positive approach to economics is inade-quate because it simply leaves out too much. A London streetdirectory will not show us the distance between Buenos Airesand London. Nor does it tell us that we should travel from Lon-don to Paris. Likewise, economic models are not designed toprovide us with all the information we need to resolve eco-nom ic and po litical dilemm as. It follows that, as Buchanan andBrennan noted, even those economists who believe that apply-

ing the presumption of homo economicus to many problems isuseful should

recognize that homo economicus has its own limits as a usefulabstraction. We can only load the construction with somuch, and we stand in danger of having our whole sci-ence collapse in an absurd heap if we push beyond the use-ful limits. The fact that the whole set of noneconomic mo-tivations are more difficult to model than the economicshould not lead us to deny their existence.''^

On these grounds, we m ay state that one useful po st-crisis les-son for many econo mists is the need to be mo re cognizant of thelimits of abstract modeling and wary of attempts to reduce eco-nomic concepts to mathem atical formulae. Econom ists need tobe willing, as Booth co mm ented, to focus on variables that areimportant rather than just on variables that are precisely m eas-

''̂ For the same reason, economists should also be willing



4 58 H arvard Journal of Law Pub lic Policy [Vol. 33

to discourage those—including government officials, central

bankers, and politicians— tempted to base entire schema rangingfrom particular investment strategies to government monetarypolicy u po n one or more models, econometric or otherwise.

IV. ECON OM ICS AN D POLITICAL ECONO MY

If Röpke was correct in his claim that many economists'reputations in the post-Keynes era have been primarily built

upon their skills as econometricians and macroeconomists, andif—as Röpke also insisted—much postwar economic sciencefell into the traps of positivism and scientism, then there will beconsiderable resistance to the suggestions above. One explana-tion for such resistance might be simply career preservation.An other is that a comm itment (conscious or otherwise) to posi-tivism and scientism involves an assent (again, conscious orotherwise) to a range of intellectual positions that are not so

easy to discard if they have long been central to a pe rso n's hab-its of thinking. But if economists believe that economics is, likeany other moral, social, or natural science, about the search fortruth, then they have no reason to adhere to assumptions andmethodologies that have, in many respects, actually limitedeconomics' ability to wrestle wîth its subject m atte r.

One way forward m ight be attemp ting to widen the horizonsof economics by seeking to engage it—especially its technical-

positive dimension—in truly synthetic l analysis. Synthesis heredoes not mean a version of Hegelian dialectics or the applica-tion of the homo economicus model to a range of problems thatwere traditionally outside the realm of economics. As the Aus-trian-school econom ist M urray Ro thbard wrote in 1989:

In recent years, economists have invaded other intellectualdisciplines and, in the dub ious nam e of science, have em-ployed staggeringly oversimplified assumptions in order to

make sweeping and provocative conclusions about fieldsthey know little about. This is a m od em form of economic




this economic imperialism have been particularly ludicrousin the fields of sex, the family, and education.^*

Doubtless many economists would claim that Rothbardoversimplified the character of their endeavor insofar as theirapplication of eco nom ic research m etho ds to such questio ns isnot concerned with reducing everything to an econo mic ex pla-nation, but rather with pro viding n ew insights that m ight oth-erwise remain dormant. The bro ader po int, ho wever, is thatsuch endeavors are not in themselves synthetic. A mo re prom -

ising path for synthesis may lie in re-grounding economics 'positive-technical dimension upon a renewed Smithian under-standing of po litical eco no my.

Since Antoyne de Montchrétien first coined the term in 1615to describe how m o narchs could m anage their kingdoms,^^œconomie politique has been defined in many ways . It was AdamSmith, however, who gave political economy its comm only ac-

cepted positive meaning by defining wha t is properly called

Political Oeconomy as the scientific study of the nature andcauses of the w ealth of nations. ^* As A.M.C. Waterm an no ted.Sm ith's political econo my partly co ncerns the po siting of scien-tific (in the positivist sense of the word) theories to understandeconomic phenomena. This scientific positing constitutes mostof what is com mo nly understo o d to be economics today. In an-

other sense, however. Waterman claimed that Smith's politicalecono my also involves the study of the interrelationship between

econo mic theo ry and the po litical ideas and mo vem ents of a giventime.'''' Lastly, there is the sense in which Smith und ersto o d po liti-cal economy in terms of what we wo uld call econo mic policy, in-

sofar as Smith treated po litical econo my as a branch of the sci-

ence of a statesman or legislator who se go als were first to

provide a plentiful revenue or subsistence for the people, o r m o reproperly to enable them to pro vide such a revenue or subsistence

74. Murray N. Rothbard, The Hermeneutical Invasion o Philosophy and Economics,



460 arvard Journal of Law Public Po licy [Vol. 33'

for themselves; and second, to supply the state or commonwealth

with a revenue sufficient for the publick services. ^*On one level. Smith's Wealth of Nations was a work of abstract

economic analysis and prescription. Smith scrutinized the pre-

vailing mercantilist economic theories and those of the French

physiocrats, presented a fresh argument about how wealth crea-

tion occurs, and then explained what might be done if society's

overall material enrichment was considered desirable. But we

should not forget that, as E.G. West stated. Wealth of Nations be-

gan not as a book on economics but as an essay in conjecturalhistory, the systematic study of the effects of legal, institutional

and general environmental conditions upon human progress. '''

In doing so. Smith also attempted to articulate normative reasons

for an economy based on private property, free competition, free

trade, rule of law, and limited government. For Smith, the shift

from mercantilist to market economies was not just a question of

implementing insights from scientific economic reasoning fo-

cused on wealth creation. It was also a matter of civilizationalgrowth. Although certain elements of commercial order dis-

turbed Smith,̂ ° he also preferred market-oriented economies to

previous economic arrangements on the basis not only of their

greater efficiency, but also of the greater liberty provided by

market economies to ever-widening numbers of people. Emma

Rothschild reminded us that Smith saw^ economic liberty as

something to be supported partly because of its ability to free

people from many forms of subjugation. '̂With a few exceptions, this Smithian conception of econom-

ics and political economy faded after Smith's death in 1790. In-

stead, economics in the Anglo-Saxon world increasingly fo-

cused upon studying the choices and actions of homo

economicus, a being whose nature is rather different than the

more sophisticated, sometimes irrational creatures in Smith's

writings. By 1844, John Stuart Mill was stating:

What is now commonly understood by the term Political




man passion or motive; except those which may be regarded

as perpetually antagonizing principles to the desire ofwealth, namely, aversion to labour, and desire of the presentenjoyment of costly indulgences Political Economy con-siders mankind as occupied solely in acquiring and consum-ing wealth; and aims at show ing w hat is the course of actioninto which mankind, living in a state of society, would beimpelled, if that motive, except in the degree in which it ischecked by the two perp etual counter-mo tives aboveaverted to, were absolute ruler of all

Mill did qualify these remarks. No economist, he claimed, trulybelieved that this description captured humanity's essence.*^Nevertheless, Mill did reflect a narrowing of the parameters ofm od ern economics established by Adam Smith.

Since Mill's forays into economics, there have been manysuccessful efforts to widen the scope of econom ic science, som eof which have impacted mainstream economic research as wellas economic policy. Examples of this impact include theFreiburg ordo -liberal school associated w ith the Germaneconomists Walter Eucken and Franz Böhm, the new institu-tional economics of Ronald Coase, Harold Demsetz, andDo uglass N orth, as well as the law and econom ics m ovem entpromoted by figures such as Richard Posner. W hat distin-guishes ordo-liberalism from the other schools is that the ordo-liberals w ere com mitted to integrating the liberal concern forliberty with the conservative belief in order into their eco-nomic research program and policy recommendations. Inshort, they treated a concern for the promotion of certain val-ues as integral to economic inquiry and recommendations.Eucken and Böhm were especially concerned with the issue ofhow to preserve freedom in complex social orders based pri-marily upon voluntary cooperation. Like many other Germans,Eucken was worried about the accumulation of pow er a nd lessconvinced that the spon taneous interaction of people usually

sufficed to produce a stable and flourishing social order.^ Writ-ing in 1933, Böhm noted that: The experience of the last dec-



462 Harvard Journal of Law Public Policy [Vol. 33

ades has shown that business associations and interest groups

have mastered the art of turning every politically influentialideology to their own purpose in a most effective manner. ^^

Cartels, to Böhm's mind, exemplified how private contracts,

often with the support of the legal system and government,

were used to shelter sections of the economy from competition.

This collusion of private and public power undermined essen-

tial market mechanisms such as free prices and paved the way

for extensive economic intervention and, eventually, centrally

planned economies. Seeking to find ways to limit the ability ofinterest groups to capture state power in order to diminish free

competition, Eucken and Böhm drew upon Scottish Enlight-

enment insights but also what might be regarded as natural

law reasoning to try to establish precise parameters that recog-

nized positive law's legitimate authority on questions of eco-

nomic regulation while simultaneously limiting (often via con-

stitutional law) that authority to very specific tasks.

This attention to values brings us face-to-face with the chal-

lenge presented by Smith's political economy to mainstream

economics. It reflects the Scottish Enlightenment approach to

intellectual inquiry in which there was no rigid separation of

social science and moral normativity.̂ ̂For Scottish Enlighten-

ment figures such as Adam Ferguson, it was not simply that

identifying certain normative concerns was considered central

to explaining social phenomena; rather, Scottish social science

sought to comprehend and evaluate man so that we endeav-

our to understand what he ought to be. ^^

Smith's understanding of political economy certainly con-

tained a strong positive dimension insofar as Smith wanted to

outline theories that explain economic phenomena. His Wealth of

Nations however, is full of historical commentary and reflected a

strongly normative-sociological purpose: the identification of

the social, historical, and ethical conditions that permitted the

establishment and maintenance of the civilization of natural




tions and habits had developed to protect and support these

liberties. The descriptive and normative dimensions of Smith'spolitical economy are consequently deeply intertwined. Thereis no doubt that Smith considered utility to be something thatintellectual inquiry could not ignore. But liberty and virtue weresimilarly indispensable if people were to engage in human flour-ishing.88 As Ryan Patrick Han ley observed, it is largely recog-nized today that the model citizen of Smith's commercial soci-ety resembles less an interest-maximizing caricature of homo

economicus . . . than the more moderate, sober prudent man de-scribed in [The Theory of Moral Sentiments]. ^ ̂ In short . Smith and

other Scots sought a judicious integration of positive analysisw ith the prom otion of particular norm ative goals.

Economists wishing to re-engage economics in a wider dis-cussion about the truth of human reality could thus do worsethan return to the writings of Adam Smith. Here one finds atruly synthetic approach to comprehending not just the eco-

nomic dimension of human reality, but also how that eco-nomic component fits into a fuller picture of human reality—one that is committed to treating moral virtues as real to thesame extent as the forces of entrepreneurship and peacefulfree exchange, not to mention institutions such as the rule oflaw that are the very stuff of modern flourishing economies.Returning to Smith does not imply who lesale aban do nm ent ofall the tools and methods developed in a range of different

schools of economic thought since 1776. It does, however,suggest that efforts to quarantine economic science from nor-mative considerations or even knowledge of the basic moralgoods knowable by human reason ought to be themselvesviewed as unreasonable and unscientific.

ON LUS ON

Obviously, rethinking the scope and emphasis of economicsalong the lines suggested here would involve rather significant



464 Ha rvard Journal o f Law Public Policy [Vol. 33

economists have proved immune to the effects of the hyper-

specialization that characterizes so much of contemporary uni-versity education. The ability to engage in this type of eco-nomic research—to integrate positive technical analysis withknowledge acquired from other disciplines—requires a sophis-ticated knowledge of fields outside positive technical econom-ics. Yet integration may be only half the challenge for contem-porary economics. If the 2008 financial crisis has taught usanything, it is that economists, business executives, politicians,

and bankers—indeed, all of us—need to cultivate a range ofmoral and intellectual habits (especially humility) that informthe use of technical skills. Although Keynes was much criti-cized by Röpke for his impact on the character of postwar eco-nomics, one suspects Röpke wou ld h ave agreed with K eynes sfamous description of the talents required to be a good econo-mist—one tha t is just as relevant today in a post-crisis world :

[T]he master-economist must possess a rare combination ofgifts. He must reach a high standard in several different di-rections and must combine talents not often found together.He must be mathematician, historian, statesman, philoso-pher—in some degree. He must understand symbols andspeak in words. He must contemplate the particular in termsof the general, and touch abstract and concrete in the sameflight of thought. He must study the present in light of thepast for the purp oses of the future. N o part of m an s n atu re

or his institutions must lie entirely outside his regard. Hemust be purposeful and disinterested in a simultaneousmood; as aloof and incorruptible as an artist, yet sometimesas near the earth as a politician.*



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