The Age of Constructivism

20 December 2009 at 10:25 pm cpirrong 5 comments

| Craig Pirrong |

I am reading Vernon Smith’s Rationality in Economics. I highly, highly recommend it. Largely a homage to Hayek, it explores the implications of Hayek’s distinction between constructivist rationality and what Smith relabels ecological rationality. It contains a wealth of methodological and substantive insights. Smith is knowledgeable and thoughtful. He is almost John Stuart Mill-like in his even handed and fair characterizations of competing views, even those he disagrees with. He integrates experimental economics, game theory, institutional economics, neoclassical economics, neurology, and much, much more.

What fascinates Smith is the ineffable process by which an ecologically rational order emerges from the actions of myriad imperfectly informed and incompletely rational (in the constructivist sense) individuals. This process — a sort of economic transubstantiation — is the most fascinating economic mystery. It is also, alas, one that has received far too little attention from economists whose formal tools permit them to analyze (constructively) equilibrium, but which are virtually powerless to analyze the process of getting there; the proverbial drunks looking for their keys under the lamppost.

We live in an era of constructivism regnant. In health care and finance, especially, constructivist schemes will reshape for better or worse — and almost certainly worse — vast swathes of the American economy. What’s more troubling still, this is constructivism refracted through the flawed lens of politics and public choice. Appreciation of the emergent order, the ecologically rational, is sadly rare. Vernon Smith appreciates it, deeply, with an almost religious sense of awe. Read his book and you will appreciate it too.

Entry filed under: Austrian Economics, Classical Liberalism, Evolutionary Economics, Former Guest Bloggers, Institutions, Methods/Methodology/Theory of Science, New Institutional Economics.

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5 Comments Add your own

1. Peter Klein | 21 December 2009 at 2:26 pm

Craig, I was just thinking of constructivism in the context of current policy debates. According to Congress and the President, people are spending too small a share of their disposable income on housing and too large a share on health care. (Not to mention driving the wrong cars, consuming the wrong foods, etc. etc.) Perhaps the government should simply email each person a mandatory budget at the start of each year?
2. cpirrong | 21 December 2009 at 6:52 pm

Peter–hear, hear. But it’s even crazier than that, as hard as that is to believe. One narrative of the financial crisis/great recession is that Americans consumed too much, saved too little, and bought too much housing. But now, the same people who advanced that narrative say OMG, Americans are saving too much! They’re not consuming enough! They’re not borrowing enough!

So they prescribe that the government must absorb these “excess savings” through borrowing on behalf of the very same individuals (taxpayers) and consume for them. And not stuff that the taxpayers in whose name the debt is accumulated might actually want themselves, but stuff that the politically connected want. Because, you know, C is C, and 1 of G is as good as 1 of C, regardless. Just one big, undifferentiated, aggregate lump of stuff.

Arrrrrggggghhh.
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[…] Constructivist and Ecological Rationality in Economics “What fascinates Smith is the ineffable process by which an ecologically rational order emerges from the actions of myriad imperfectly informed and incompletely rational (in the constructivist sense) individuals. This process — a sort of economic transubstantiation — is the most fascinating economic mystery. [Organizations and Markets]“ […]