Reading James Buchanan
MANILA — What Should Economists Do? is a set of essays published in 1979 that every economics student should read. With shame, I admit that I hadn’t. The author was James M. Buchanan, the 1986 Nobel laureate, recognized for his work on public choice theory, a part of economics that views politicians as guided by both public and private interest. He also wrote a paper on something he called ‘an economic theory of clubs,’ which was a theory of ‘cooperative membership.’
Buchanan is an economist’s economist. If you wanted to clear up loose ends, you may end up reading Buchanan. Other economists somehow add to the confusion; I won’t name them here.
So where was my confusion? Let me list my favorite economics questions. Where does economics begin, and end? Why do many think economics is hard or deep? What is the relationship between economics and morals? Between the economy and social order? Why are economists employed by governments? How should economists study inequality — or its opposite, equality? How much mathematics should an economist know? Can economics save the world?
In today’s column, I will discuss the beginning and end of economics.
My view – after reading Buchanan – is that economics begins with Adam Smith’s Invisible Hand metaphor for how humans engage in ‘exchange’ so that they can eat. Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”
For Buchanan, the metaphor rings true because, quoting Smith, the thing we call ‘division of labor’ is “not originally the effects of any human wisdom” but it is “the necessary consequence of a certain propensity (of humans)…to truck, barter, and exchange one thing for another.”
The human propensity “to truck, barter, and exchange” is, therefore, foundational to economics.
I do not claim that other beings do not trade. If we study our pet dogs and cats enough, we may well conclude that they trade their ‘tricks’ for food and other goodies, and we can conceive of an economy — or an economic interaction — between humans and animals. Whether stray dogs or wild animals can have a similar ‘economy’ is mentioned below.
But humans elevate this trading thing to high art. (We even trade the output of computer programs and call it crypto, though nowadays this kind of trading seems to produce more grief than fun.) This leads Buchanan to focus on economics as a study of trading or of markets. This focus differs from the textbook definition of economics, attributed to Lionel Robbins, as the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.
Robbins also thereby defined the economic problem as one that “involves the allocation of scarce means among alternative or competing ends. The problem is one of allocation, made necessary by the fact of scarcity, the necessity to choose.” Note that in Robbins’s definition, the ends are “given;” the economist is precluded from manipulating them.
Admittedly, the contrast between ‘allocation’ and ‘markets’ is also subtle — trading is itself a way of changing resource allocations. Buchanan focuses on markets as a means of human interaction, while Robbins emphasizes scarcity as an underlying motivator for humans.
Buchanan then points out that Robbins had seemingly set up a neutrality of sorts — as to who does the allocation, and as to whose ends are to be met. Robbins’s definition sets up “human behavior” as a “relationship” between ends and means. The behavior involved can be a market process or something else entirely, such as central planning in a ‘command’ economy.
The alternative focus favored by Buchanan squarely confronts the question of who makes the decisions. Within a market process, participants — buyers and sellers — choose their respective roles because they recognize that their (two) sides have something to trade – be it money for a good, or one good for another. We can then see that the ‘supply’ side of the market determines the allocation (of ‘inputs’), but the buyers on the ‘demand’ side are the ones choosing from the competing ends to be met.
To Buchanan, there is no economics as a science in a communist state, for example, where economic decisions are not made through a trading or market process. By similar reasoning, there would also not be an economy involving stray dogs who act as hunter/gatherers.
So there we are. Economics begins with the idea that humans like to trade, and it ends with a certain division of labor in Smith’s universe. This division of labor allows humans to achieve whatever ends they happen to want to meet. In between the beginning and the end is the necessary existence of a trading process.
Students find out later on that the trading or what we call ‘the market’ takes place because humans have also come to conceive of something we recognize today as ‘property rights.’ There cannot be a market if either the buy or sell side did not have confidence in their property rights over the objects being traded. Buchanan then rightly emphasizes the need to study the history of ‘institutions’ or rules that govern the exchange process.
Before the advent of markets, resources were allocated by violence or force, and, ironically, those who decry the role of markets in the global economy must necessarily desire a return to a ‘state of nature’ that features the rule of the powerful or the predator.
We can then also see the market as a mechanism that is driven from an initial distribution of wealth (or incomes) – what economists call ‘the initial state’ – while also acting through an ensuing trade that produces an outcome that benefits all.
Economics, thus, gives us an explanation, if not a prediction, of the definable outcomes for an economy that relies on markets. The outcomes may, however, not be ideal because they are tied to an initial state that usually involves some form of (undesired) inequality. (One of the paradoxes in economics is that if humans were equal and identical, they wouldn’t bother to trade!)
Thus, for example, we find that an unequal society will produce more of certain goods, and less of other goods. Dinner is dinner, but Lamborghinis are another matter. We may then also conclude that inequality is an important but complicated facet of an economy. (This is a topic for another column.)
Buchanan concluded his essay on the question of What Should Economists Do by recalling an adage for the confused economics student. The adage said: “The study of economics won’t keep you out of the breadline, but at least you’ll know why you’re there.” In other words, learning economics will not make you rich, but it can explain why you’re poor.
Somehow I disagree. If economics can explain how you stay poor, presumably there are elements in the explanation that you can adjust or control. In short, you can overcome poverty by studying economics.
But don’t expect great riches.
________________________________________________________
Author’s email: ORoncesval4@gmail.com; Twitter: @ORoncesvalles
