Peter Boettke is a professor of economics and philosophy at George Mason University. He talks to us today about Don Lavoie, a late GMU economics professor, and his contributions. Lavoie’s work focused mainly on central planning and the answer to the socialist calculation problem, continuing the work of Mises and Hayek.
Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliet Sellgren, and this is my podcast, the great antidote name for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.adamsmithworks.org.
Welcome back Today on December 7th, 2022. It is my great pleasure to be talking to Professor Pete Boettke. He's currently a professor of economics and philosophy at George Mason University. And more importantly for us, he's the holder of all knowledge <laugh> when it comes to the history of economic thought, mainline economics and Austrian economics. In particular, when I was thinking about what to interview him on, because I knew I wanted to interview him, but there's so many topics that we could explore, right? I didn't know where to begin. Um, but then I came across this video between professor Boettke and Professor Chris Coyne. Go listen to that interview about the late economist Don Lavoie and his work relating to central planning. And I thought that that would make a perfect topic. Um, so we're gonna get into that, who he is, what he contributed, and all of that. But for now, welcome Professor Bucky.
I'm thrilled to be here with you. This is a great opportunity.
So, before we begin, what is the most important thing that people my age or my generation should know that we don't?
Pete Boettke (1.40)
Uh, that while curiosity might kill the cat, it fuels the scholar. So be curious and be compassionate. And that economics properly practiced is the most important tool for the curious and the compassionate. And, uh, so if I could communicate that to your generation, I'd be thrilled. Um, economics, uh, science enables ordinary individuals to rise to the height of observational genius, while a genius without the aid of economics is often, uh, reduced to, uh, speaking nonsense. And it's through economics that we can in fact become effective and, in our compassion rather than just simply, uh, foolish about our compassion. And so, uh, yeah, so if I could, if I commune that, communicate that to your generation, that economics is a tool for the curious and the compassionate, I'd be thrilled.
Juliette Sellgren (2.40)
I mean, I, I get that. I, I would like to think that. Um, but listeners, you heard it here and it's not just from me, <laugh>. Alright, so let's get into Don Lavoie. Um, obviously amazing economist, and we'll get into that. But can you tell us a little bit about who he was, what he was about, and why so few people know who he was, even though many of his students including you, are well known?
Pete Boettke (3.10)
Well, let me start with the last question, which is a very sad but very short answer, which is Don died when he was 50 years old, and he died over 20 years ago. And so, you know, um, you know, his, a lot of his work that would've been done never got to be finished. It became, in fact, the projects that many of us, his students did, and, you know, the next, you know, the next generation and, and whatnot don't hear about him as much except through the stories that his students tell about him. But they don't have direct access to his, his writings, which is one of the reasons why we, uh, brought out his two classic books, um, just a few years ago in paperback. And so you're re listeners can get them very cheap and, and, and, uh, in good, you know, condition.
But, um, Don had a bigger project, um, which he had in mind called Understanding Political Economy, and he never got to write that. And it's never been, you know, completed. And, and we're hoping someday to be able to fill in the gaps of that and, and bring that, and make that available to, uh, the next generation. But for right now, the chapter that students of that care about Liberty, uh, should read, is in his book National Economic Planning: What is Left, Chapter Seven, which is his, um, uh, a good summary of his broad social theory and the way he sees the implications of the lessons he learned from the Grand Socialist calculation debate for the way that we organize our society and whatnot. And I think his, his message there is as relevant today as it was in 1985, in a rather tragic way, uh, <laugh>, cuz we haven't learned, uh, enough of the lessons despite all the things that went on in between that.
So yeah, that's, that's why Don isn't known. He just, he's unfortunately passed away, um, at a young age. Um, who he was is a fascinating combination of people because, uh, Dom was trained as a computer scientist, uh, a very high, uh, level computer scientist. And so, in fact, people at Xerox Park, like Mark Miller and other people, you know, worked with Don even later on in his career. Uh, Dom was one of the first, uh, programmers to get a computer to be able to play music. And, and so he was an expert on artificial intelligence and other kind of things before he even went into studying economics. How he got interested in economics is a kind of a, another fascinating story, is that he had a job, he's from New Hampshire, and he had a job in a rural section of New Hampshire in which he had to man a railroad.
Um, I don't know what you exactly call it, but it's like, you know, like when, you know, like a, uh, the, a stopping gate, like a gate, you know, which you had to go up and down, whether or not, you know, so it would stop cars from going across the track if the railroad was coming. And then you have to, his had to be manually operated. So <laugh>, he, it was a railroad track, and he, and he had to control the, the, the gate to stop traffic going on. But the railroad never, it was a very sparsely traveled railroad. So he had hours and hours and hours in the summer, uh, where he had nothing to do except sit there. So he started reading and, uh, he came across an ad that told him to read Henry Haslett's Economics in one lesson. And so he read Henry Haslett's Economics in One Lesson, which is a rather thin book.
Uh, so he got through that pretty quickly. But at the back of the book is a recommended reading list of all the great, you know, books to read that helped Hazlett write the Economics in One Lesson. And so Lavoie ended up by reading Mises’ uh, Ludwig von Mises's Human Action, which is his grand treatise in economics. And he spent the summer reading that and he decided that rather than, you know, being only a computer scientist, he also now wanted to be an economist. And so while he was working, uh, he started to do his PhD in economics at, uh, NYU while he was working in computer science. And then eventually he got a fellowship, uh, at NYU when they became available. And he worked full-time now as an academic to become an academic. And then, you know, that's how he got his professorship at George Mason University after defending his dissertation at, at NYU. And, and, uh, the rest then was that early history of George Mason University in the 1980s.
Juliette Sellgren (8.08)
Huh. That is such an interesting course to take that you just happened to have been reading a book that just happens to have had another book reference that just Yeah, I mean, it all kind of makes sense. Yeah. Because of course, Henry Hazlett is referring to Mises. Yeah. Like that, that connection's obvious. So it's not just, it happens to be, but that's cool.
Pete Boettke (8.32)
People forget how powerful Henry Hazlett was, um, you know, cuz he lived very long. So, you know, they forget that Henry Hazlett was the economics editor of the New York Times. Right? So it's not like, so, you know, when he is 90, he's writing only for conservative magazines, but when he was, you know, 40, he was the economics editor of the New York Times. And so he was the one writing the editorials during the Great Depression in the New York Times in which The New York Times was actually, uh, very, you know, pro savings and not so much for government spending and all these things that was because of Hazlett. And so when Haslet left the New York Times in 1947 or 46 to, he was given a year to write his book, Economics in One Lesson. And when that book was published, it was a bestseller. So it was like, in this day and age, something like, you know, Freakonomics or some book like that, it was a phenom, you know, book. And we tend to forget that because, you know, there's so much distance between when it happened then versus when we think about it now. But yeah, I mean, Henry Haslett was, was, uh, uh, like a huge intellectual si uh, influence on a lot of people. And, and, uh, you know, and that needs to be remembered. I mean, the book sold 400,000 copies, I think, you know, in 1946 or 47, something like that. Just think about that. That's un unbelievable reach, you know, and, and, uh, and whatnot.
Juliette Sellgren (10.04)
Wow. So back to Lavoie. Yeah. <laugh>. Um, all right. So his two major economic works, they were published essentially back to back. Um, one of them was Rivalry and Central Planning, the socialist calculation debate Yeah. Reconsidered. And the other one was National Economic Planning. What is left? Hmm. Um, so before we get into what those works are and what they're about, can you briefly explain what central planning is, what the economic landscape of the moment was when he was writing this, and why he focused on this topic in both works?
Pete Boettke (10.38)
Right. So, um, okay, so central planning, uh, comes out of, uh, you know, the grand debate or the grand social experiment of the 20th century is the socialist economic system to replace the capitalist economic system. And so it's hard for me to answer your question without talking about the specifics of the book, but you can fill in, I guess, this's true. You can fill in, uh, you know, some more questions about the books, but mm-hmm. <affirmative>, uh, so Don essentially finished Rivalry and Central Planning in 1981. Um, but you know, it goes through various revisions and iterations through the referee process, you know, with Cambridge University Press. And so the book is, is accepted and then goes through iterations, and it comes out in 85. Um, but Don basically was done with the book by 83 or 80, early 84. The National Economic Planning book, um, is written, um, in conjunction with the Cato Institute, and it's more directed at current policy discussions of the day.
So this is, again, the late 1970s into the nine, early 1980s. The economic system was suffering from stagflation in the seventies, and a general sense of malaise. So to get a sense of this, you know, uh, if you watch the movie Miracle, uh, which is about the US hockey team beating the Russians in 1980, there's a lot of background in that movie about the long lines at the, you know, to get gas, the unemployment rate, you know, inflation, you know, basically all these things. And so there was a declining of the Rust Belt, what was called the Rust Belt in the United States, which is the industrial centers like Pittsburgh and Detroit, and, you know, sort of the whole Midwest sort of industrial belt was, uh, somehow being transformed and being out-competed supposedly by Japan and the East Asian Tigers. And so there was a call for a, uh, renewed, uh, effort at National Economic Planning in the United States to ensure our industrial base.
So they called for planning of the economy to make sure that we didn't lose our Indus industrial base. Okay? So that's, that's that. So you have the socialist experiment of the Russians and, and others, you know, which is based on their interpretation of Marx. Marx has very specific criticisms of capitalism. The opposite of those criticisms is gonna be what socialism can achieve. So if one of those things is that following Adam Smith, the market is based on the invisible hand, right? What we're gonna have is now the visible hand that's central planning, rather than the unc you know, uh, anarchy of production of the invisible hand, we're now gonna have rationalized production of the central planner. All right? And so that led to that experiment, but it was eerily relevant to the discussions that were being made in the 19, early 1980s about what we should do in the United States to save the industrial economy of the United States.
All right? And so what Lavoie does in the first book is he lays out the entire discussion from Marx and then into the various debates over central planning. So Mises’s challenge to the rationality of central planning, all right? And that Mises basically said that without private property in the means of production, you're not gonna have a market for the means of production. And without a market, you're not gonna have the relative prices. Without the relative prices, you're not gonna be able to calculate rationally how to allocate, you know, scarce resources among competing ends in the most efficient way possible. So you're not gonna be able to engage in that economic planning, right? Cuz you can't calculate, you can't rationalize production. And the whole goal of socialism was to rationalize production, right? And Mises shows that that's not gonna happen. And so then the debate continues with other people trying to answer Mises’s challenge.
And that led to market socialists like Oskar Lange, uh, and, and Abba Lerner. And they developed models of what they called market socialism. And MIses and Hayek, especially Hayek in this regard, respond to them and try to argue that they're still missing the point that Mises is making. And so, by the 1950s, this debate is kind of at a standstill where the market socialists are declaring one thing, and the Austrians or the market process people, or market theorists in general, Warren Nutter, who was a great University of Virginia professor, has a fantastic, has a fantastic, uh, essay in this debate called, uh, Prices Without Property as a Grand Illusion, alluding back to Mises's original point, uh, which is that without private property, you can't have those prices. So they were just using, you know, prices in a model sense, not prices that emerged out of exchange behavior.
Um, and so those don't really solve the problem, but the debate was kind of in the standstill. And then Lavoie’s, national Economic Planning book, what it does is it picks up and, and looks at the next generation of arguments that people made to try to answer the criticisms like input output tables and other kinds of, of methods of central planning, which all proof to be Lavoie demonstrates suffer from power problems and knowledge problems. And then that's gonna then also be the thing that's gonna undermine these calls for national economic planning, right? <laugh>. And so that's why these two books, they fit very nicely together because one is the theoretical debate, and then the other one is the more contemporary debate applied to America, um, in the 1970s and 1980s. And what's eerily relevant is that as, as your listeners may know, there's calls now for national conservatism and these of things which are making the same arguments about a national economic plan to save American jobs versus the international economy and globalization and things like that. And so Lavoie’ book is as relevant today as it was, you know, in 1985. Um, so anyway, I'm, I'm, that's a little long-winded, I apologize. Um, but all good, you know, maybe we can dig deeper into the content.
Juliette Sellgren (17.48)
Yeah. So a point of clarity on the history first. Um, so the Soviet Union, there's all this like socialism stuff going on, and us America, we were trying to do the same thing Yeah. Or a similar thing, but a different thing. But there's also the Cold War that's happening. How I, I don't know, like, did, did economists really think that that I, part of me is, I, maybe this is the good way to frame it. In my public choice class, we were looking at the preferences of economists as outliers compared to the preferences of the regular population Yeah. When you're, when it comes to like, policy. And so does that mean that at the time economists were less, less convinced of capitalism, I guess?
Pete Boettke (18.39)
Sure. I think this is a really great point, uh, that you're raising because part of those, uh, opinion surveys, that's like what Bryan Caplan uses a lot in his work. Um, they're based on surveys that were done after Reagan, so after the collapse of Communism <laugh>. And so, so of course, you know, it's a little different survey. Imagine if you did that same survey, um, in 19, uh, 37 in the midst of the Great Depression. And that's how you have to think about this stuff. So what happened was the Great Depression and the battle over what caused the Great Depression was it caused by, uh, you know, the, the, uh, sort of capitalist speculators, uh, you know, going, getting outta control and the inability of the market to be self-correcting. That's kind of the Keynesian interpretation. You know, the market's not self-correcting. That's why you have an unemployment equilibrium, you know, when you're in a standard Keynesian cross model.
And that the only way that it could be fixed is to have government from the outside fix it. There's no way that the actors in the model themselves could fix it. Um, so that's the Keynesian answer. And that became the dominant, you know, uh, uh, you know, answer to the Great Depression, uh, not the Austrian story of the business cycle or the Monetarist story. Um, neither one of those became the dominant, uh, view, though they always were in the air, but they weren't the dominant view, the dominant view defined by Paul Samuelson and others, uh, you know, uh, from his principles book, which first edition is I think 19, uh, 49. Um, and, and it becomes the dominant textbook from that period all the way for the next two generations of economists. And, uh, so, uh, there's a loss of faith in capitalism. Uh, there's a belief that, uh, government, uh, can, uh, you know, be, uh, serve only the good, uh, that you can assume a benevolent, uh, death spot that only wants to do the public interest.
This is why public choice becomes such an important counter, uh, counterpoint. And then period between 1950 and 1980 when it was developing, uh, because the dominant strand of economics was one in which assumed that there was market failure, um, and that government was the corrective. So yeah, market failures, government is the corrective and the main, uh, development of public choice was to examine, oh, when government acts as a corrective, perhaps government fails, right? And we examine that. So you have market failure and government failure. And, uh, part of the development of the entrepreneurial theory of the market process, which evolved out of the socialist calculation debate, was to say, markets fail, but use the market to fix the failure, uh, because the nimble and alert entrepreneurs, um, either the entrepreneur's gonna self-correct, or another entrepreneur's gonna step in to correct for the error and move prices in the right direction to allocate resources more effectively, um, as opposed to the government actor, um, who faces a different set of incentives rather than the profit motive.
And that's the development of public choice, um, that happens in that period after. But it's precisely because people have lost faith in the market and think that the government is the corrective that you have to address those issues. And just to, to put the, a fine point on this related to what you were talking about in the Cold War, is if you study the history of development economics and the history of development economics, that all takes place after World War II, right? In which now we have the post-colonial independence movement. So a lot of the, the, the colonial regimes are now moving to, uh, in being independent. Um, but they're relying on advice from either the Soviet Union or from the United States about how to do that. And what we did in the United States was we exported, uh, uh, a modified version of, of planning to development in the same way that the Soviets were doing development planning.
And so that's one of the other things that happens in the 1980s, is that this development planning model, because of the lack of convergence that we see, you know, in, in, in growth rates in the economy, right? So this is the, the hockey stick, but you also see that there's countries are getting more and more unequal. This is, you know, in 1980s, 1990s, the development planning model had failed. And so that's why you get books like Bill Easterly's book, The Elusive Quest for Growth, which, you know, just goes through every single step. And it's the same thing as a central planning debate. He's trying to examine development planning, and he goes through in every single step and says, look, incentives matter, you know, they, they face an incentive problem. They face a knowledge problem when they try to do that. And so the era of globalization was the recognition that the development planning model had fractured. And now we opened up to trade and innovation as the driver of growth and development, rather than the idea of government wisdom as the, the, the path for development. And that becomes very important story to tell. Um, so yeah, <laugh>,
Juliette Sellgren (24.18)
So Rivalry and Central Planning is often presented as a book that finishes Mises and Hayek's argument in the socialist calculation problem. What, what does Lavoie contribute to their argument?
Pete Boettke (24.38)
So that's a great question. So the first thing to get sorted out is what actually is the functional significance of economic calculation? So the functional significance of economic calculation is that it allows the economic system to sort from the array of technologically feasible projects, those projects which are economically viable. Okay? So there's many ways in which say, to build a railroad and just building the railroad on bases on technological knowledge, you might end up by trying to build your railroad tracks out of platinum, because platinum is a better metal for railroads to, to go on. They would be smoother, it lasts longer, all those things like that, right? But platinum has higher valued uses. How do you know that? Because of the market mechanism, all right? And in fact, the use of that platinum would be far more expensive than what the railroad could yield.
And so it wouldn't be a economically viable thing to use platinum to build the railroad. Now, just put a pause on that for a second. When the Soviet system collapsed Eastern Central Europe social system collapse, one of the things that was rampant in those countries was what was called negative value added firms, firms who their inputs cost more than the value of the output that they produced, right? Which is exactly Mises’ that's the point about calculation they couldn't calculate. So they were using resources that were higher valued uses to produce lower valued outputs, right? So that's that. You can't have an economic system operating that way. It leads to poverty and, and deprivation and collapse of your economic system. So the first thing is to recognize this sorting mechanism from the technologically feasible to the economically viable, right? That's what economic calculation allows us to do and, and, and, and whatnot.
So that's Mises’ main point, is that, hey, comrades, it's all fine and dandy that you want to have a better world with social harmony, classless, society, everything like that. I'm all on board. Let's sign up for that. That would be a wonderful thing to do it. What are your means to achieve those ends? Your means to achieve those ends are to collectivize the means of production. Well, collectivization of the means of production in order to produce a rationalization of production is an impossibility. And the reason is, is because you've eliminated the ability to do this sorting from the technologically feasible to the economically viable. And one of the things that Mises and Hayek do throughout is they constantly give the assumptions. They, they are steel manning an argument rather than strawmanning an argument. So they give their opponents the strongest set of arguments that they could give them.
So one of them is, let's assume that the central planner wants to only do, uh, you know, good for the society. They only wanna do the public interest. So the, the Austrians assume public interest, not because they thought that it was a reality of public interest, but because that was what the debate demanded them to give to steelman the argument. And so they granted that, but then showed that the, those agents in those positions, despite their aspiration to achieve these very laudable goals, had in fact did not have the ability to achieve those, cuz those means that they chose were ineffective with respect to the ends that they saw. And so that debate goes in various iterations. So when the market socialists come about, they no longer defend the same kind of position that the socialists defend it. The older Marxist socialists, they now are gonna use markets.
So they want to use market mechanism or simulation of a market mechanism in order to help plan. And so that's what Lange and Lerner are trying to do. They're trying to simulate the perfect competition model, rather than the auctioneer, the Walrasian auctioneer in that model, they're now gonna have, the central planning board is gonna be that, that individual in that, uh, position. And, and that's what leads the Austrians to really stress this idea of the competitive process is the reconciliation process of how it is that prices, property prices and profit and loss end up by coordinating our economic activity. So let me just say something about that very quickly, and then, and then, you know, I'll, I'll be quiet, which is that what's going on there is that the, um, in the central planning board, in the Walrasian model, the Walrasian does what's called pre reconciling of the plan.
So there's bids and asks in a market, right? And so what happens is the Walrasian auctioneer reconciles all the conflicts between the various bids and ask, and when they finally post the price and a Walrasian system, a perfect competition model, right? What you have is a unique price and quantity vector, which will clear the market. They don't, they pre reconciled that. So there's no trading going on. So I know that you've done some experiments, so, you know, in the, um, experiments, the market experiments, which Vernon Smith innovated, which people like Charlie Holt and others have replicated, you know, thousands of times there's no pre reconciliation, right? What happens is the prices emerge and the coordination emerges in the trading itself, right? And so it takes two or three rounds, and then all of a sudden you're at the equilibrium price, right? Well, that's the Austrian market process story.
That's why Vernon Smith calls it the Hayek story, right? Or the, the, the Hayek hypothesis, because, um, what's going on is the emergence of the equilibrium price and quantity emerges from the trading behavior, buy and low selling high, right? Getting penalized when you buy high and so low, you know, these kind of things. That's what generates the outcomes. And so the Austrians started to emphasize that aspect of the competitive behavior, the rivalry rather than the end state. So rather than the equilibrium state, think of all the things in a supply and demand curve to the left of where the price and quantity meet. And you see there's surplus in consumer surplus and producer surplus, and that gets bit away by exchange behavior. And so it was studying that exchange behavior. So the institutions exchange and the institutions within which exchange takes place that becomes the primary focus of an economist rather than the equilibrium condition or the end state.
And that is how the debate sort of emerged. And so they were talking past each other because the Ians are focused on the end state and the Austrians were saying, oh, but how does the end state ever come about in the real world? It comes about through trade and exchange. You're not studying what are the conditions of trade in exchange. So what's the first condition of trading and exchanging is what? Mine and thine property rights, <laugh>, right? You can't get exchange off the ground without property rights. So you can't treat property rights as fixed and given you have to actually do the economic analysis of property rights. And so that was, it's, that's the first condition. The second condition is, once I have property rights and I have trading, what are the terms of negotiating the trading? Those are prices. Then, you know, what is it that I learn whether or not what I'm doing in my trading behavior is a good thing or a bad thing?
Well, that's profit and losses. And so the role of property prices and profit losses is what the Austrians, Mises and Hayek, and then Israel Kirzner in the development of entrepreneurship. And then Don Lavoie, who's Israel Konner's student, is now emphasizing to contrast with a world of perfect competition and with a zero profit condition and all those other kind of things that you might, you know, remember from just the model, right? So the model gives you the end state, the Austrians give you how it is that the end state ever comes about. And so that's where Lavoie picks up the debate to stress again, Hey guys, you gotta remember that with all your, you know, pyrotechnics, <laugh>, right? That are giving me these equilibrium end states. We still have to explain how it is that human behavior results in that end state. And that's what, you know, that means that we have to focus on various things having to do with property prices and profit and lost.
Juliette Sellgren (33.42)
And in National Economic Planning, he talks about, uh, he talks about these things kind of through the lenses of the problems like the knowledge problem and the power problems. Yeah. So can you lay out what those are and how they relate to each other?
Pete Boettke (33.58)
So I've talked a little bit about the knowledge problem, which is just how is it that you come to know, uh, what to produce, how to produce it, and for whom are you going to produce it? Right? So any economic system has to answer, you know, those kind of questions to how, what and for whom, right? And the market system does that through, uh, the adjustment of, of prices, prices as guides, property as incentives, uh, prices as guides and profits as luring us, and losses as disciplining us. So do you see how all those systems work together to coordinate economic activity so that the most willing consumers and the most willing producers end up by aligning with each other? So, right. And so that's how the market system operates. And then the question is, is that let's get rid of the market system. Well, we still have to have some mechanism that answers that question for us, right?
And so does voting do that? Does planning do that? So they face the same knowledge problem of answering, you know, how what and for whom, how, right? And if I don't have a economic mechanism that tells me how, what and for whom, I might turn to some other mechanisms. And one of those mechanisms is politics. But how does politics operate? It operates basically on this power principle. So it's when I can't solve the knowledge problem that I turn to the power principle to solve the problem, which is ultimately reward my friends and punish my right. And so I end up by concentrating power in the hands of a few, right? In order to reward and penalize. And that's sort of the way that, that the system operates. That's the simplest way to think about it. It might be a little too simplistic, but that's the simplest way to communicate that.
Juliette Sellgren (35.56)
So then how has this contribution changed the conversation about central planning? How did it Influence?
Pete Boettke (36.06)
Yeah, it's okay. So again, that's part of the context that's been lost. So for, you know, you know, students like yourself, uh, talking about the collapse of communism is like talking about a Charlie Chaplin film in, in like say a film class or something. It's so long ago. You know, you see pictures of 1989 and people on the Berlin Wall, and you know, you might wonder like, oh, well they were just having a grand old time drinking champagne or something up there, rather than the context of it, right? Um, and so that context is all lost. So one of the things that's, that's very crucial about Lao's book, um, is it it plays several roles. So this is the rivalry and central planning book. So the first thing is, is that Larry White's Free Banking in Britain and Lavoies’ nationally, uh, uh, Rivalry and Central Planning, were both published by Cambridge University Press.
Cambridge University Press is one of the most prestigious places to publish in academic literature. And now a new generation of Austrian economists were publishing their works in the top academic publishers. That was a huge thing for people like me as a youngster. I was a first year graduate student in 1984. Don's book was published in 1985. Larry's book was published in 1984. Those books were tremendous demonstration effects to a young scholar like myself, that you could be a outlier, but contribute to the scientific literature, not just be pushed to the fringes. You could in fact, you know, engage the mainstream. The second thing is, is that Lavoie's book was in the context. It came out in the context where these issues were very live, because throughout eastern central Europe and the former Soviet Union, there was an internal recognition that the planning system was failing.
So in the early eighties, the solidarity movement in Poland, uh, got going. Hungary itself was going through a series of reforms where it was trying to fix its planning problem. Poland tried to fix its planning problem. Uh, the Soviet Union in 1985 starts to embark on a thing called Glas nos, which meant public frankness and perestroika, which meant economic restructuring to try to fix the failing system of the Soviet economy. And so Lavoie’s book had very good timing because it came out when everyone was saying, oh my God, look at this part of the world. Uh, they're all admitting that their system is collapsing in front of them, um, and we have, and we have to think about how we're gonna fix that. And Lavoie resurrected the debate. And so as a result, people like, uh, Cornay, um, who was a, uh, a very mainstream, uh, comparative economic system specialist.
He taught, he was from Hungary, but he taught at Harvard. He was now all of a sudden citing Lavoie's po book positively and saying, look, this is the work that does that. And then even like socialist, uh, you know, uh, intellectuals like Robert Hall Burner were admitting, oh, Mises was right. Lavoie explains why Misas is right, you know, kind of thing. And so at that sort of sweet spot of time, let's say between 1985 and 1995, there was a lot of confidence that, uh, the Austrians had got it right, that Lavoie had summarized why the Austrians got it right. Um, and that we had to now reform the systems by moving away from collective, uh, property to private property rights. So we had a privatization movement, um, throughout Eastern Central Europe as the system tried to transition from socialism and capitalism by 1995, that transition problems were very hard and difficult.
And then the debate became whether or not it should have been gradualism versus shock therapy. And the kind of discussion that Lavoie was engaged in sort of faded into the background. See what I'm saying? Like, it's no longer the front part of someone's discussion. Now, it's more the practical political economy of transition. So, you know, and what got lost in the transition, because the former Soviet Union, for example, had a triple transition. It was facing, it was the transition of the economy, the transition of its polity, its political system, moving from a one-party dictatorship to a democracy. And also it's basically sort of cultural social psychology, a superpower that is now no longer a superpower. You know, the Soviet Union, which was a large, you know, land mass, now it's just Russia, Russia, all the other countries are, are going their own way. And so there was massive, you know, disruption by 1995, and you could say that the transitions were mismanaged because of politics and other things.
And so, you know, in 1992, the Ruble exchange for a dollar 180 rubles to a dollar, by 1995, it was over 5,000 rubles to a dollar. And that's during a time when supposedly they were following Monetarism, which of course they weren't. Garris Shanko, who was the central banker, was just printing money like crazy during that time, which is why you had the hyperinflation that you had. But nevertheless, it got blamed on market reforms. And so then the debate becomes shock therapy failed and all these things. And so the kind of debate that Lavoie was discussing is no longer at the forefront. And so that, that sort of, but between 1985 and 1995, you know, the kind of discussion that Lavoie, uh, initiated was the, uh, it's, so here's the way to think about it. It switched the terms of the debate. So who is the person that has to bear the brunt of the, of the, of the, you know, uh, uh, of the debate that, you know?
Um, so let's go back in history. In 19 48, 18 48, when John Stuart Mill published his Principles of Political Economy, he says that Laissez-Faire is the position that, you know, is the status quo. And any criticism of laissez-faire has to bear the burden of proof, right? So Laissez-Faire is the default position. Government intervention is the one that requires you to provide proof of why it is that you should intervene. Fast forward to Paul Samuelson in 1948-49, the presumption is flipped. The presumption is government is the corrective to all of our social ills. Anyone who doubts that has to bear the burden of proof to see. So it, by 1985, Lavoie had shift the terms of the debate back. So the market is the presumption. The market is gonna allocate resources more effectively. Anyone who wants to plan the economy, they bear the burden of proof.
But by 1995, when the transitions to the market had stalled and, you know, stuttered and all of that stuff, the debate sort of shifted again, back to the idea that maybe we needed to manage the transition better, you know, and things like that. I, I, I wrote a paper in the, uh, in the nineties trying to respond to this, called, is the transition to the market too important to be left to the market? And my answer, of course, was no <laugh>, right? It's precisely because it's the transition to the market is so important, we have to rely on the market to pull off the transition to the market. But what happened during the 19, uh, nineties and, and, and in all these various places is that, you know, they said they were transitioning to the market, but really what they were doing was creating a whole new set of special privileges for the next oligarchs to emerge. And that's got blamed on markets, but it really wasn't the market's fault. But that's a whole other debate
Juliette Sellgren (44.36)
I've heard you say in the context of Don Lavoi’s important work in the eighties, that Libertarians failed to capitalize on the fall of communism. Can you explain what you meant by that?
Pete Boettke (44.48)
Yeah. So I think that what happened was is that libertarianism, uh, is in my view a political theory, all right? Uh, and a social theory. Um, it's not a personal lifestyle <laugh>, and it's also not a, um, uh, you know, a guide to Congress on what, you know, laws to pass or whatever. And so what happened was libertarianism is best, um, examined, recognizing that it's about culture, because politics is downstream from culture. So what you wanna do is, you know, be creative and clever in all of that in the cultural zeitgeist so that individuals can have a, a change in, you know, you were talking about preferences, a sort of shift in preferences about what it is that government should and ought to do, right? Um, and so what we did in 1989 is we said, oh, look, we won our biggest battle that we've ever, you know, fought because communism has now admitted that, you know, it, it failed in 1989 and 1992.
And so we went into politics to try to do, and by politics, I mean policy to try to change, you know, or implement libertarian type policy. And all of the efforts were put into that. And as a result, very few efforts were put into the culture. And so what's happened is, is that by the time we get to your generation, the default position is that, uh, you know, um, markets are, are these terrible things. In fact, I just read a review this morning. I'm not gonna be able to find it fast enough, but it's of Glory Liu's new book on Adam Smith. And, uh, the reviewer starts out by talking about the invisible hand. And this is in a review, you know, uh, uh, in a magazine, you know, like a, like a legitimate source. And it says the following, it says something like, you know, we're taught in economic principles that the invisible hand will guide resources, you know, in the most efficient way, or blah, blah, blah.
And then it stops and says, yuck. Like, actually puts that in there, yuck, you know, with a explanation mark. And then rather than seeing the beauty in the invisible hand, they see the invisible hand as yuck. So the default position is flipped again. And that's because we abandoned, you know, as economics teachers and everything, we abandoned the cultural zeitgeist, and we allowed that to controlled by other people that tell those stories about how society operates. And you know what, you know, that they think that it's a zero sum or a negative sum game rather than a positive sum game. And so we, as, as scholars and as intellectuals, we failed in our most important task, which is to communicate to the general populace how the invisible hand operates, right? That's <laugh>, you know, and the, and the, and the power and the beauty of that system so that we can understand that we can engage in self-governance.
And so, you know, that's, that's what I mean by that, is that we stop being creative in the way that an earlier generation, let's say Robert Nozick or someone else was who tried to change the intellectual zeitgeist, we became more focused on day-to-day politics. And politics is very transitory. It's driven by, uh, a various motives other than necessarily ideas. It's driven by the vote motive and, and mini, you know, minimum winning coalitions. So you end up with strange bedfellows, uh, right? Because you need to have a minimum winning coalition. So you try to work with people to be part of your mini minimum winning coalition, but those are people that you might not want to be standing next to. And so I think that a lot of the issues that happened with libertarianism and conservatism that have been indicted over the last, since, let's say, since you were in high school till today, um, it's, it's, a lot of it was just because we were involved in politics rather than sticking to our principles and our, and our hope to construct an, uh, like a, a a, a workable utopia, which is, I think, a, a more creative task.
Juliette Sellgren (49.20)
Yeah. I mean, to me, and correct me if I'm wrong, but that kind of reminds me, or at least makes me think that it's almost an acknowledgement of the power problem. If you're focusing on the politics and all of that, you're almost acknowledging that the political markets are the right way to do things.
Pete Boettke (49.38)
Sure. I think the other problem is, is that it also means that you become a technocrat. So part of the point about the calculation argument and the knowledge argument is to actually challenge the idea that you could have a technocracy, you know, this, this trained elite mm-hmm. <affirmative>. So I think one of the things to think about public choice, um, and the Austrians, is that they are critical of the utilitarians, they're critical of the engineering, and they're critical of elitist. Now, what do I mean by that? What I mean is the utilitarian Benthamite argument that somehow you could aggregate up from individual preferences to a social welfare function, right? Um, and that you could have some kind of aggregate society's, you know, social welfare function. And then the second thing is, is that economists then are trained as engineers of that welfare function. And those economists that are trained to do that welfare function, the, they're gonna be trained at elite institutions, right?
So the Harvards and the MITs, and whenever there's a conflict between the social welfare function and the preferences of other people, we are going to allow the elite preferences to trump the, uh, no pun intended, there, uh, uh, you know, to, to over, to overtake the, uh, populous preferences. So this is where you're gonna have the elite progressive preferences are the correct preferences. And so the way economists were trained from, you know, the early part of the 20th century with the progressive movement, uh, was, is that we are trained to be elite engineers over society's social welfare function. And what public choice does is it punctures a hole in that by challenging what are the incentives that the social planner faces. And what the Austrians do is they pun punch a hole in it by asking what are the epistemic, you know, uh, assumptions that you're making about the elite, right?
Um, and whether or not they're, they have all-knowing omni missions. And so part of the Austrian and public choice, you know, analysis when you combine them together, is they challenge the assumption of omissions and benevolence in our talking about social policy. So let's do social policy without the assumption of benevolence and without the assumption of admissions. Once you do that, then, you know, that makes us start thinking, okay, so what do we need to do? Not benevolent? We need to have then what? Checks and balances. So that means in that realm, we have to have lots of different hands working to checkmate one another so that they don't get, so competition is then unleashed to help us to make sure that we're trying to serve the public interest rather than to cater to the monopoly power of the elite. And then knowledge, same thing. We're gonna have all these nimble entrepreneurs out there trying out their various different ways to do things, and that's how we're gonna discover how it is that we can best serve the needs of the individuals in the society.
And so I think that's, you know, the, the, the, the, the critique of the utilitarian and the critique of the engineer and the critique of the elitist presumptions in political economy are all part of what's going on in that period between 1950 and 1980, in which you have the challenge to the hegemonic view of the Keynesian system. And so Milton Friedman's contributing to that arm and Alchians contributing to that. And of course, Jim Buchanan and Gordon Tullock are contributing to that. And Israel Kirzner, you know, Hayek and Mises and Hayek and Israel Kirzner are contributing to that. And so by the time you get to the 1980s, the new people developing that are, you know, the students of these people. So, you know, now you're talking about, you know, Don Lavoie, uh, you know, uh, you know, in the, in the Austrian camp doing that.
And so that's how you know that you see this interaction between the power problem and the knowledge problem is all part of that critique of that idea that you could have these monopoly experts telling all the rest of us what to do. And so, one way to sum up the argument is that the argument from Lavoie and others is that ordinary people can do extraordinary things if given freedom, whereas the alternative side is extraordinary. People can do extraordinary things if you just give him the power to do it. And so it's that contrast between ordinary people being able to achieve extraordinary things if given the freedom and scope to discover versus the idea that you have to have, you know, the best and the brightest, uh, you know, uh, brain trust to be able to do it.
Juliette Sellgren (54.45)
And what about, so earlier you mentioned that, um, now like I, we still have conversations about industrial policy from the left and the right. Oh, we need tariffs, we need this, we need that. What about the Rust Belt? Um, do you think that that has anything to do with the fact that the libertarians focused on policy and kind of turned to technocracy a bit instead of focusing on maintaining these ideas and continuing along the other vein?
Pete Boettke (55.20)
Um, so I don't think the libertarians are responsible for those arguments. I think various interest groups are responsible, and they would've come about anyway. I just think if the libertarians would've focused on their principles rather than trying to offer an alternative, uh, version of a, of a technocracy, but for limited government, right? So what they want it to be is they want it to be efficiency experts for the state, how, right? And you, and you go back and you again, think about things like reimagining government when these were all movements that took place in the 1980s and whatnot. We're gonna, you know, this is neoliberalism if it means anything, is really this effort to try to use market language to make government policy more efficient, right? That that's what that, that's what the neoliberal sort of revolution was about. But you'll see then, if you think about it that way, then the leading neoliberals were Bill Clinton, you know, Al Gore, right?
These kind of people who were all trying to use that logic to, uh, Obama even, you know, to use logic of the market to make government work better. And that's what happened with libertarianism in the zeitgeist. That's how it got co-opted or whatever. And I'm sort of against that. And I think instead what the libertarian argument should have been is trying to change people's preferences for self-government rather than, uh, uh, you know, governmental solutions. So governments, right, local, decentralized, overlapping, competing various different forms of governance, um, which include also purely private sector governance, um, would be solutions. And, and, and we have a great test case of this, which is that in 2008 and 2000 and to 2010, we had the global financial crisis. How do we respond to that? And then in 2020 to today, even we have the covid crisis, and how do you respond to that?
And I think that, you know, both of those things raised very serious challenges to a self-governing perspective like I hold. And I think that we needed more creative voices and more conversations about how it is that a truly decentralized self-governing mechanism can address really serious problems, not to push the problems away, right? Not to wave a hand like a Jedi mind trick and say, there is no global financial crisis. There is no, you know, covid crisis. But instead say, yes, there's this crisis of the manipulation of money and, and credit, and look at how it is that we have to engage in recalculation and how we have to, you know, change the rules such that we end up by having more effective self-governance in that sector. The greatest discipline of manipulation of money and credit is in fact the market itself. And similarly, how can we have various different entrepreneurial efforts to come up with protection mechanisms for, to protect the most vulnerable, to allow others individuals to find new therapeutics, to find various different mitigation strategies in the way that they deliver goods and services to people.
If you shut everything down, you don't allow people to discover, right? Instead, the central metaphor of Covid is that we're kind of like on a military base, and the general told us, all right, there's an outbreak of a disease, everyone stays sheltered in their home, and then the government, the, the general is in charge of making sure that they get us delivery of, you know, our food and things like that. And so the government has to spend money to do that. That's not a very entrepreneurial solution. But imagine if we would've, uh, you know, think about various pockets if we've, we've seen in which people were very innovative in the way that they approached trying to mitigate the, the, uh, the, the problems with the disease to live with, you know, the issue to have other kinds of things like that. And so I wanna see more of that conversation and less of the general has to shut everything down and control the barracks rather than seeing the ordinary people do extraordinary things if just given the scope and freedom to do so.
Juliette Sellgren (59.39)
Thank you for sharing so much of your wisdom with us. I wish I had more time to ask you even more questions, but I have one more. Yep. <laugh>, what is one thing that you believed at one time in your life that you later changed your position on and why?
Pete Boettke (59.53)
So, that's a hard question because I've changed my mind on many things. Uh, especially, you know, the idea of having a, um, you know, a, a a, a limited government that you could have, uh, checks and balances effective enough to overcome the power problem, um, that could be sustainable. Um, so, you know, uh, basically the power, whether or not constitutions are contracts that can discipline opportunistic behavior or whether or not they have to be coordination mechanisms which allow us to coordinate rather than, uh, you know, basically public beliefs. So I have much more power in what I was just talking about in, in now I believe that much more turns on public ideology, so that you have to have a greater sense of understanding of how it is that a self-governing democratic society operates in order to achieve it. And much more citizen engagement than I used to believe.
So I used to believe you could have a free society even though you didn't know how a free society operates, right? That's one of the beauties of spontaneous order we have it, even though we don't even understand it, right? And I, and I used to think that could be writ large, but now I'm not so sure. I know there's some tipping point, but I think that we need to have more, otherwise it's not self-sustaining. It's constantly under assault, um, and, and, and, and, and torn away. And so we need to have a better understanding of how it is that a self-governing democrat society operates. And we as teachers in the social sciences have to communicate that better. And, and, and that goes back again now to my very, you know, first point to you about teaching of economics. So I think the vast majority of teaching of economics is done poorly, and we need to improve on that.
And the way we improve on that is that we have to bring the shock and awe of the world that we live in a world of scarcity and trade-offs, but we also have to explain to people the beauty of spontaneous order. And we have to explain the hope that entrepreneurial innovation brings, and we have to explain the compassion to the least advantage in society that economic growth and development brings. And when we do that, I think we demonstrate to our students, especially our young people, that curiosity is such a driver that this is a great tool for the curious and a great tool for the compassionate. And so that's what I really hope that we as economic instructors can do a lot more of, so that we can communicate with people what are the general principles of a self-governing society.
Juliette Sellgren (1.02.47)
Once again, I'd like to thank my guest for their time and insight, and I'd like to thank you for listening to the Great Antidote podcast. The Great Antidote is sound engineered by Rich Goyette. If You have any questions, any guests or topic recommendations, please feel free to reach out to me at the great antidote gmail.com. Thank you.