James Buchanan, the Nobel laureate who died at 93 in January, was well known for his pioneering work in Public Choice (the application of economic principles to politics), constitutional economics (as a device for limiting government power), and many other key subjects in political economy. His voluminous work has long been of interest to libertarians and classical liberals for what it tells us about political behavior.
Less well known — but just as important to libertarians — is his thinking on the nature of economics itself. Considering his deep subjectivism and methodological individualism, Buchanan may be seen at least as a fellow traveler of the Austrian school of economics, and I commend his writings in this area to anyone interested in the tradition of Mises, Hayek, Rothbard, and Kirzner. Fortunately, Buchanan’s writings on the nature and scope of economics were collected in a volume published by Liberty Fund some years ago, What Should Economists Do? (available at Amazon.com). I’ll draw on those papers here.
Before turning to them, I should mention that Buchanan made an important contribution to our thinking about markets in a letter to the editor some years ago. In response to an essay about spontaneous order in Literature of Liberty, he took issue with the claim that an omniscient being could in principle predict the outcome of the market process. He thought that claim indicated an incomplete understanding of the nature of spontaneous processes and therefore made a regrettable concession to the market’s opponents. For him, the market doesn’t aim at some external objective (that in theory would be knowable to an omniscient being standing outside the market). Rather, Buchanan wrote, “the ‘order’ of the market emerges only from the process of voluntary exchange among the participating individuals. The ‘order’ is, itself, defined as the outcome of the process that generates it. The ‘it,’ the allocation-distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no ‘order.’” (Emphasis added.)
Thus, he continued, “if viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.” (Emphasis added.)
This is a killer argument against those who think the arrangement of resources that comes about through market processes could be achieved by nonmarket methods. That assumption is based on a misunderstanding of human action. When people act in the market, they are not merely trying to maximize utility, that is, optimally allocate their known resources to a predefined set of ends. Rather, they are entrepreneurs. I have written elsewhere that, as we know from everyday experience, when we make decisions about an uncertain future, we are speculative, risk-taking entrepreneurs who face the prospect, not only of spontaneously discovering means, but also of spontaneously discovering ends we never imagined were there. Serendipity happens! This possibility of dispelling what Israel Kirzner calls “utter ignorance” is not captured in the utility-maximizing model.
This insight on spontaneous order informs Buchanan’s other writings on the nature of economics. The “economic problem” that has been so much the focus of modern economics refers to the allocation of scarce resources among given ends. Economics is thus reduced to a mathematical problem, joining utility functions to resource constraints in order to find the optimal allocation.
“I want economists to quit concerning themselves with allocation problems per se, with the problem, as it has been traditionally defined,” Buchanan wrote in his essay “What Should Economists Do?” “I want them to concentrate on exchange rather than choice.”
Exchange of course requires at least two people. For Buchanan, economics doesn’t begin with Robinson Crusoe until the arrival of Friday. In fact, Buchanan doesn’t like the word economics for reasons similar to those Hayek gives. (The Greek word derives from the word for household, conceived as having a single set of ends and resource constraints, hence “home economics.”) Buchanan preferred a term that Hayek and Mises used, catallactics. He also like symbiotics: “the connotation of the term is that the association is mutually beneficial to all parties. This conveys, more or less precisely, the idea that should be central to our definition. It draws attention to a unique sort of relationship, that which involves the cooperative association of individuals, one with another, even when individual interests are different.”
Putting social cooperation at the center of the discipline — whatever it’s called — is highly significant. If the economic problem to be solved is seen as one of allocating resources among competing uses, attention may easily move to central decision-making, with bureaucracies filled with economists and computers. The social calculus of utilitarianism becomes prominent. But if the spotlight is on cooperation among individual persons, one’s orientation is different. Central decision-making is quickly seen as interference with cooperation among free individuals.
“The mutuality of advantage that may be secured by different organisms as a result of cooperative arrangements, be these simple or complex, is the one important truth of our discipline,” Buchanan wrote. “There is no comparable principle, and the important place that has been traditionally assigned to the maximization norm that is called the ‘economic principle’ reflects misguided emphasis.”
Buchanan went to great lengths to debunk misconceptions about the most fundamental matters of economics, even among economists favorable to free markets. “The market or market organization is not a means toward the accomplishment of anything. It is, instead, the institutional embodiment of the voluntary exchange processes that are entered into by individuals in their several capacities,” he wrote. “The network of relationships that emerges or evolves out of this trading process, the institutional framework, is called ‘the market.’ It is a setting, an arena, in which we, as economists, as theorists (as onlookers), observe men attempting to accomplish their own purposes, whatever those may be. And it is about these attempts that our basic theory is exclusively concerned if we would only recognize it as such.”
Pictures of the future
Note that Buchanan is saying that “the market” does not aim at anything, such as an optimal allocation of resources or the maximization of utility. People aim at things through exchange and cooperation, and the institutional outcome is what we call the market. (Similarly, I have insisted that “the market” does not ration resources, which is something even free-market economists regularly claim.) Properly conceived, economics cannot be about social welfare, since utility is not something than can be aggregated. Rather, it is individual and subjective, which means that costs (utility forgone) are also subjective. (Buchanan wrote about this earlier in Cost and Choice.)
“In this conception,” he continued, “there is no explicit meaning of the term efficiency as applied to aggregative or composite results. It is contradictory to talk of the market as achieving ‘national goals,’ efficiently or inefficiently.” Here, again, Buchanan corrects a misconception held by most free-market economists, who constantly tell us that markets are efficient.
Buchanan extended this thinking in at least two more essays, “General Implications of Subjectivism in Economics” and “Natural and Artifactual Man.”
In the second of the papers, he described the “central difference” of the human being as having a sense of “becoming.” “We, as human beings, … know that we can, within limits, shape the form of being that we shall be between now and the time of death,” he wrote. Reminding ourselves of this fact is important because “modern economic theory forces upon us patterns of thought that make elementary recognition of the whole ‘becoming’ part of our behavior very difficult to analyze and easy to neglect.” That is another way of saying that human beings are inherently entrepreneurial; they are not simply acting to maximize utility within known constraints. They project pictures of the future they wish to realize as they encounter alternatives that may have never been foreseen.
As noted, Buchanan rejected talk of “national goals” and other collectivist notions, but he went beyond others who do the same:
Traditionally, many of us who have been critical of such talk remark that “only individuals can have goals.” But I am here advancing the more radical notion that not even individuals have well-defined and well-articulated objectives that exist independently of choices themselves.
Out of all this there emerges a strong defense of individual liberty that cannot readily be advanced by the modern economist, influenced as he is by his utilitarian heritage.
Man wants liberty to become the man he wants to become. He does so precisely because he does not know what man he will want to become in time. Let us remove once and for all the instrumental defense of liberty, the only one that can possibly be derived directly from orthodox economic analysis. Man does not want liberty in order to maximize his utility, or that of society of which he is a part. He wants liberty to become the man he wants to become.
Buchanan’s body of work is not entirely immune from libertarian criticism. But at its core is something invaluable for the case for freedom. He was always someone from whom one could learn.
This article was originally published in the April 2013 edition of Future of Freedom.