Quote of the day: economics as a flight from reality

One of my favourite methodology/history of thought papers is Pete Boettke's "Where did economics go wrong? Modern economics as a flight from reality"(.pdf), published in Critical Review, 1997. Here's the summary:

The twentieth century's oscillation between perfect market theory and market failure theory, both of which take as the terms of debate the formal model of general competitive equilibrium, will inevitably be won by theorists of market failure. It is obvious that the economic world is not perfectly competitive (or even near that state of affairs). Hence the triumph of the interventionism Hayek, forecast—not because economic theory has been rejected, but because it has been misconceived.

While Stiglitz and other contemporary market-failure theorists intend to rebut Hayek's analysis of the benefits of the private-property, competitive-price system, in reality their response to Hayek constitutes a non sequitur. Since Hayek's argument did not depend on the achievement of static equilibrium, the deviations of real markets from the model do not constitute rebuttals to him: Indeed, deviations from the model were Hayek's starting point.

This is the one paper I'd like to ram down the throats of those who lump "free-marketeers" into one category, failing to appreciate the difference between the perfectly competitive models of textbook economics and the disequilbrium/market-process view set out by Mises and Hayek. It is the one paper that demands a place for Austrian economics at the top table. Read it!

Comments

[wgrass]

Corrected link:
http://econfaculty.gmu.edu/pboettke/pubs/03%20Journal%20Articles/1997/1997%20where%20did%20economics%20go%20wrong,%20critical%20review.pdf

[Jim]

" those who lump "free-marketeers" into one category"

Speaking as someone who does use that term, if only as an occasionally derisory catch-all for my delicious tags, I should say that I'm not actually labouring under the misapprehension that all 'free-marketeers' subscribe to exactly the same economic theories. But I also don't think that difference is as important as you think it is, compared to what appear to me to be similarities in mindset and in overall policy preferences.

[aje]

I don't have a problem with people who use that term, and if you're talking about policy preferences it's understandable to lump Chicago-school economists in with Austrians.

*However*, as Pete's article demonstrates, there are significant methodological differences and it's a pity that so many people believe merely pointing out that we don't live in a world of perfect competition undermines the case for free markets.

[Jordan 3 fire red]

Good job.No matter where we are, we must study all the way. As the proverb says that: A person is never too old to learn. Thank you for your blog.