Essays on Economics, the Economics Profession, and Applied Political Economy
Kyle W. O'Donnell
Major Professor: Peter J Boettke, PhD, Department of Economics
Committee Members: Christopher J. Coyne, Peter T. Leeson
Buchanan Hall (formerly Mason Hall), #D135
September 09, 2015, 10:00 AM to 06:30 AM
This dissertation explores critical issues in the history and evolution of economic thought, the economics profession and practice, and applied political economy from a subjectivist economic perspective.
The first essay examines the influence of Friedrich Hayek’s thought regarding economics and knowledge on mainstream economics. We focus on several areas of technical economic theory, in which Hayek’s work is widely cited as a fundamental influence—notably, mechanism design theory and information economics—that purport to have captured Hayek’s major insights in a rigorous, formalized manner. Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors’ subjective data are coordinated in a way that enables them to successfully dovetail their plans and activities? With this problem in mind, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge and emphasizes the role of institutions in shaping the interactions and results of human action. Despite purporting to have appropriated Hayek’s thought by acknowledging the information-transmitting role of prices, mainstream economists have failed to fully grasp and appropriate Hayek’s economic thought. Contrary to the notion that Hayek’s informal theorizing is too “fuzzy” to be formalized, the mainstream’s failure stems from the inherent limitations of formalism itself, which Hayek presciently described. The predominant tool of formal economics—equilibrium analysis—begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate).
The second essay looks at the economics profession itself—especially how the institutions of scientific communities structure incentives and shape scientific practices and research—and recent debate surrounding ethical issues. Following the global financial crisis of 2008, the economics profession has been criticized for its apparent complicity in promoting corporate and financial industry interests at the expense of the public interest, resulting in increased scrutiny of its ethics. We argue that the only social responsibility of economists is to maximize their career advancement within their scientific community, and the appropriate target for criticism and reform is the institutional framework of that community. We do not need “good” scientists to produce good science; rather, what is required are good rules of scientific engagement that foster a contestable market for ideas. The true source of corruption is not corporate and special interests but the state’s capture and politicization of the discipline. Proposals for professional ethics reform that focus on the conduct of individuals, such as a strict code of professional ethics and conduct, would be ineffective solutions and largely irrelevant to the economics profession. We further argue for a radical humility in economics that would reduce opportunities for corruption and limit potential harm from the economist qua social engineer.
The third essay brings the theoretical tools and insights of subjectivist economics to bear upon empirical analysis and applied political economy the economics of drug prohibition. I outline a subjectivist theoretical framework for applied political economy and institutional analysis that enables me to shed light on some of the sociocultural effects of drug prohibition. Notably, government intervention seems related to significant changes in the demographics, norms, and culture of illicit drug use, as well as their ongoing evolution. Prohibition distorts the incentive structure that guides the decisions of individuals, which creates a new optimal pattern of behavior and exchange, and therefore distorts the spontaneous-ordering logic by which the system, through the actions of purposive individuals, organizes itself. These tendencies are especially important due to their effects on the transmission and use of knowledge within the social networks of illicit drug users. As a result, prohibition tends to create systematic distortions in the social learning processes and evolution of the illicit drug culture, ultimately transforming the nature of the “drug problem” itself.