Adam Smith's methodological approach shaped both his analysis of the economy and his determinations concerning government policy. More abstract metho-dologists base their arguments on reasonably tight theoretical structures. An abstract theorist might conclude, for example, that markets without government intervention result in an optimum allocation of resources because, in the long run under competitive markets, firms produce at the lowest possible average cost. Another abstract theorist might argue against markets and for government intervention, using theoretical constructs such as those dealing with externalities or third-party effects. In short, the more theoretical economists judge whether markets work or fail on the basis of abstract arguments separated from historical or institutional context. Adam Smith's argument for laissez faire is, of course, based in part upon a theoretical model of how markets produce certain results. But, significantly, his arguments are more than just theoretical; they are contextual—that is, they are based on his observations of the existing historical and institutional circumstances. Smith's advocacy of laissez faire is rooted in a methodological approach that asks this question: Does experience show that government intervention will produce better results than will the unimpeded workings of markets? Smith conceded that markets often fail to produce ideal social results, but current reality convinced him that the results of government intervention were less acceptable than those flowing from free markets. Hence Smith advocated laissez faire not because he believed markets to be perfect but because, in the context of history and the institutional structure of the England of his time, markets usually produced better results than did government intervention.
In Chapter 1 we revealed and illustrated the concepts of the art of economics, the science of economics, and normative economics. The science of economics deals with positive, matter-of-fact relationships between economic variables— often expressed as "what is." Normative economics involves questions of what should be—often expressed as "what ought to be." The art of economics is policy-oriented. It takes our knowledge of how things are (the science of economics) and our goals (normative economics), and it makes recommendations on the best ways to achieve our goals given our understanding of the science of economics and our comprehension of how policies are put into operation through government actions.
Adam Smith's particular proclivities were not those of an abstract theorist. Instead, he was a policy formulator par excellence. His broad knowledge of history and of how people behave in practice, if not in theory, made him a master of the art of economics. Contextual economic policy, then, is just another way of expressing the idea of the art of economics.
Later economic thinkers varied in their approach. Ricardo's advocacy of laissez faire was noncontextual, in accordance with his abstract, ahistoncal methodology. J. S. Mill and Alfred Marshall returned to the Smithian tradition of judiciously trying to blend theory, history, and contemporary institutions in their analyses and policy conclusions.
Modern economics is moving away from abstract theorizing, and a number of modern economists and political scientists are examining how governments and governmental policies actually work. One unintended result of the work of these modern public-choice theorists may be a renewed interest in contextual economic policy—the art of economics.