What Should Economists Do? An Appreciation
By Donald J. Boudreaux
I‘m thankful to my undergraduate mentor, Bill Field, for things too many to count. Among these is his introducing me during my junior year to public-choice scholarship. “Dr. Field” (as I then called him) did so by suggesting that I read James Buchanan’s and Richard Wagner’s 1978 monograph, published by the Institute of Economic Affairs (and with a contribution from John Burton), titled The Consequences of Mr Keynes.1 In this monograph’s main essay, Buchanan and Wagner use straightforward economic logic to expose with crystal clarity a core political flaw of Keynesian economics—namely, even if Keynesianism is fully correct as a matter of theoretical economics, in practice democratic governments have poor incentives to implement it.
The reason for this political failure is that politicians’ incentives to spend more than they bring in are dominant regardless of prevailing macroeconomic conditions. And so while democratic governments will eagerly heed Keynesians’ counsel to run budget deficits during economic slumps, these governments will, with equal eagerness, ignore Keynesians’ counsel to balance their budgets under conditions of full employment.
One consequence of Mr. Keynes, therefore, was to release governments from what was formerly the binding expectation that in times of peace they follow a rule of fiscal prudence by always at least attempting to balance their annual budgets. After Keynes, government budgeting came to be seen as a discretionary macroeconomic ‘tool,’ yet, as Buchanan and Wagner argued, a tool that a direct application of economics to politics reveals should not be entrusted to politicians.
This public-choice criticism of Keynesian economics struck the 20-year-old me, as it continues to strike the 60-year-old me, as being not only brilliant in its simplicity, but also indisputably correct and highly relevant. Reading this monograph so early on in my training as an economist taught me that the economic way of thinking is indispensable for understanding not just conventional markets but a wide range of human activities, including politics. It also instilled in me an appreciation for the reality that the state is no superhuman agency that looms above society and governs with godlike solicitude, wisdom, knowledge, foresight, and courage. Since first firmly grasping this reality, I’ve been unable to take seriously the many economists who, when they recommend government intervention to correct alleged market failures, ignore the possibility of government failures.
But not until I read, during my senior year, Buchanan’s What Should Economists Do?2 did I learn just how deep, profound, and pioneering are Jim Buchanan’s ideas. The man was far more than a co-initiator (along with Gordon Tullock) of the sub-discipline of public choice economics.
Edited by Geoffrey Brennan and Robert Tollison, What Should Economists Do? is a 1979 collection of 16 of Buchanan’s most philosophical papers, half of which were published in this Liberty Fund collection for the first time. More than once I’ve heard the papers collected in this volume described as ones that deal with methodology. But this description is inaccurate. Nowhere in this volume does Buchanan prescribe or proscribe any particular methods of doing economic or political-science analyses.
What Buchanan does do in most of the papers—and in different ways—is remind us economists what our subject matter is and what it is not.
What Economists’ Subject Matter Is Not
Buchanan’s identification of what economists’ proper subject-matter is not is, I believe, even more important than his identification of what this subject-matter is. According to Buchanan, economists’ proper subject matter is emphatically not resource allocation.
Buchanan’s rejection of resource allocation as the proper subject matter of economics strikes most economists as odd and certainly mistaken. For almost 90 years now we economists have been taught from our freshmen days that economics is the study of how to allocate scarce resources, each with multiple possible uses, in ways that satisfy as many human wants as possible. If using a particular patch of land in Bordeaux as a vineyard satisfies a larger quantum of human wants than would be satisfied by using this land in any of the many other ways that are possible, then this patch of land should be used as a vineyard. And therefore (boasts the typical economist) economic theory is all about (1) understanding how markets allocate scarce resources, (2) determining if the allocation achieved by markets is optimal, and (3) giving government officials the guidance necessary to correct any sub-optimal pattern of resource allocation.
Buchanan demurred. He did not deny the conceptual distinction between ‘optimal’ and ‘suboptimal’ patterns of resource allocation. He would not disagree that building, say, a Barbie-doll factory on land now used as vineyards by Chateau Latour would almost certainly cause that land to be ‘misallocated.’ But Buchanan did insist that the economist’s task is different and more important than studying resource allocation.
Determining the optimal pattern of resource allocation is a problem for engineers. Such a problem differs in no relevant ways from those that must be solved by, say, a Walmart executive in charge of finding the profit-maximizing manner of transporting inventory from Walmart’s warehouses to its many retail stores. Solving such problems is important for society; we’re all made wealthier the more fully and quickly such resource-allocation problems are solved. But, Buchanan argued, finding such solutions is not what economists, as such, “should” do.
What Economists’ Subject-matter Is
So what is economists’ proper subject matter? What should we economists do? Buchanan’s answer is that we should study the entire universe of voluntary exchange.
One unique expression of our humanity is the ability of each of us to envision how our lives can be improved by exchanging—by trading—with others. This rational pursuit, by each individual, of improvement of his or her life by exchanging with others forms the foundation of society. Economists “should” want to understand society and the social processes that constitute it. And to gain this understanding requires careful study of the motives and the consequences—especially the unintended consequences—of exchange. To gain such an understanding requires an appreciation of, and analysis of, the full range of exchange possibilities. This range is much larger than the typical neoclassical economist realizes.
Exchange includes, of course, that which occurs in private-property markets for partitionable goods and services—markets as small as neighborhood garage sales to those as vast as the globe-spanning market for petroleum. But the arms-length exchanges that occur in such markets are only one of the many varieties of exchange that we humans employ in our attempts to improve our lives. Most significantly for Buchanan’s purposes, we often organize ourselves collectively to achieve outcomes that, for whatever reason, are not achieved by ordinary market arrangements.
In the title essay of this collection—”What Should Economists Do?” (his 1963 Presidential address to the Southern Economic Association)—Buchanan used the example of members of a community wishing to drain a nearby swamp in order to protect themselves from mosquitoes. Any freshman economics student with a passing grade can explain why, despite every member of the community placing high positive value on draining the swamp, no conventional market will arise to carry out this task. “When asked to help pay to drain the swamp,” the freshman explains, “each person will refuse because he hopes to free-ride on other people’s payments. But with everyone behaving in this way, the final result is that the swamp never gets drained.”
Most economists back then—and still today, 55 years later—would award this freshman an A+ for her response. “Market failure!” declare neoclassical economists. These economists then immediately proceed to insist that the only way the swamp will be drained is if the state coerces the community members into paying for the project. This conclusion appears to be the only one supported by objective, scientific analysis.
Buchanan again demurred. He did so because he took seriously Adam Smith’s emphasis on the human propensity to truck, barter, and exchange, and because he understood that Smith never meant his observation to be interpreted as narrowly as economists came to interpret it. Writing about the swamp-draining example, Buchanan explained that
- [d]efined in the orthodox, narrow way, the “market” fails; bilateral behavior of buyers and sellers does not remove the nuisance. “Inefficiency” presumably results. This is, however, surely an overly restricted conception of market behavior. If the market institutions, defined so narrowly, will not work, they will not meet individual objectives. Individual citizens will be led, because of the same propensity [to truck, barter, and exchange], to search voluntarily for more inclusive trading or exchange arrangements. A more complex institution may emerge to drain the swamp. The task of the economist includes the study of all such cooperative trading arrangements which become merely extensions of markets as more restrictively defined.
The richness of Buchanan’s understanding of the role of (good) economists is immense.
When we economists do what Buchanan advises we should do, we naturally come to see economic activity as an on-going process of trial, of error, and—if incentives are correct—of improvement through time in economic arrangements and outcomes. Buchanan’s point of view here is quite close to that of Ludwig von Mises, Israel Kirzner, and other Austrian economists who see the central role that entrepreneurship plays in economic affairs.
These scholars understand that real-world markets at each moment are chock-full of outcomes that mainstream economists identify as “failures.” But unlike mainstream economists, Buchanan and the Austrians also understand at least two additional facts. First, these “market failures” are potential profit opportunities for entrepreneurial people who can figure out ways to correct the failures. Second, the ways that entrepreneurial people can and do devise to correct these “failures” are many. These ways are far more varied than the two polar extremes featured in textbooks: at one pole, conventional arms-length market exchange and, at the other pole, government regulation or taxation as recommended most famously by A.C. Pigou.
Buchanan especially pleaded with economists to recognize the many non-market ways that entrepreneurial people creatively devise to solve collective-action problems. Some of these ways are private, such as clubs and homeowners’ associations. But often, in Buchanan’s view, they are governments—organizations (in Buchanan’s view) voluntarily established and agreed to by people, and invested with circumscribed powers to coerce, for the purpose of doing tasks that cannot effectively be done by conventional markets or by other private arrangements.
Thus did Buchanan see politics, no less than he saw any conventional market, as an arena of exchange. It’s just that what is exchanged in political markets are agreements to abide by rules: I’ll agree to be governed by a popularly elected legislature that operates according to majority rule if you agree to keep from that legislature the power to regulate the press.
Buchanan’s work on a social-contract theory of the state proves that much insight can be drawn from this perspective. He insisted on modeling democratic states as products, not of force unilaterally imposed, but of complex exchange among all of the many people whom the states govern. Yet Buchanan’s adherence to this theory led him, ironically, to endorse a form of legal positivism—namely, his insistence that social order must ultimately be rooted in consciously designed constitutional rules—that I believe to be wholly at odds with his appreciation of the reality of emergent order.
In What Should Economists Do? Buchanan devotes little ink to his social-contract theory. This essay, therefore, is no place for me to rehearse my criticisms of this theory. But my passing mention of it here is warranted because Buchanan’s well-known attachment to the social-contract theory of the state is an understandable result of his insightful insistence that, because we humans are very clever and entrepreneurial at devising exchange arrangements that are far more complex than are the relatively simple ones that we use in conventional private-property markets—and because economists “should” study exchange in all of its many manifestations—economists’ natural subject matter includes political exchange no less than it includes commercial exchange.
We see here how Buchanan came naturally to extend his understanding of economics to the domain of politics. And we see also that, contrary to what has sometimes been said over the years about Buchanan by poorly informed scholars and pundits, Buchanan’s motivation was always to better understand politics rather than to portray it in an unfavorable light. Indeed, while analyzing politics realistically rather than romantically does scrub the luster off of dreamy schemes of using the state to engineer society, Buchanan’s exchange theory of politics clearly is no tool that libertarians can use to disassemble support for the state.
A Deeper Case for Liberty
My favorite chapter in What Should Economists Do? after I’d first read this collection decades ago remains my favorite today: the 1978 lecture “Natural and Artifactual Man.” As with all genuinely deep and pioneering ideas, those developed by Buchanan in this lecture, while not easily summarized, cry out to be shared.
Buchanan’s “natural man”—or, updating Buchanan’s language, “natural person”—is that person within each of us whose behavior is wholly predictable. If you accidentally put your hand on a hot stovetop, you immediately pull your hand away. If the price of a Honda Accord falls relative to the price of a Toyota Camry, you become less likely to buy a Camry.
Artifactual person, in contrast, is that part of each of us that each of us creates. If you are currently overweight and you choose to lose weight, you envision a future in which you are a somewhat different person from the person you are today. Not only is your choice to lose weight much less predictable than is your ‘choice’ to remove your hand from the hot stovetop, but also by choosing to lose weight you create tomorrow someone who doesn’t exist today. Your preferences and expectations tomorrow will differ in their details from those that guide you today. As such, when you choose to become a different person from the person you are today, you cannot really know what preferences and expectations the future you will have.
Your choice to become a different you requires a leap of faith that the future you will be a person whom you prefer to be than the current you. Also requiring a leap of faith is your hope that the future you will judge as worthwhile the ‘cost’ that you bear to bring about this transformation. But because the future you will have preferences different from the current you, the current you—the person who must now make the choice to ‘become’ the future you—cannot know for sure if the future you will judge the transformation to be worthwhile.
This choice setting differs fundamentally from the choice setting confronted by agents in economics textbooks. In textbooks, choices are mechanical and wholly predictable given that each person’s preferences are assumed to be fixed and fully known at least to each person who holds them. As Buchanan notes, these textbook choices are not really choices at all because the persons who make them cannot within the confines of the theory behave otherwise than how they behave. To “choose” in such models is nothing more than to solve an optimization problem.
Yet in reality—as Buchanan reasonably infers from introspection and observation—each of us does far more than merely mechanically optimize a utility function. What makes each of us distinctly human is our propensity to change the details of who we are and of what we want. In stark contrast, neither dogs nor dolphins seek to be dogs and dolphins that differ tomorrow from the dogs and dolphins that they are today. The same is true for chipmunks and cheetahs and you name the non-human creature.
From this insight that each of us is constantly creating a slightly different each of us Buchanan draws a crucial normative conclusion—namely, the case for individual liberty is not ultimately a case for government to leave us free to maximize our utility. Instead, in Buchanan’s memorable words, “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.”
Whenever the state obstructs our choices and actions, it blocks our ability to travel down paths that would lead us to becoming persons different from the persons we are today. If these state obstructions were limited to those that prevent each of us from privately obstructing the paths-of-becoming open to our fellow human beings, such regulation by the state would be acceptable.
But the state does far more than merely protect us from each other. Nanny-statism and the mountains of rent-seeking restrictions that today loom large are unjustified infringements on our liberty not because they keep most of us (as economists inelegantly say) on a lower utility surface. These are unjustified infringements of our liberty because they prevent each of us from becoming who we want to become. They are shackles on the exercise of what makes us distinctly human. And by shackling our humanity, these interventions not only treat us like animals, they make us more like animals—and less like humans—than we would otherwise be.
Reading What Should Economists Do? at so young an age spoiled me. This work represents all that is best in economics and scholarship. Encountering later in graduate school, and in the pages of professional journals, mostly a combination of dreary modeling of static relationships and pointless puzzle-solving, I often despaired—as I still despair—that so few of my fellow economists do what Jim Buchanan argued economists should do, for economics done in this way is economics at its very best.
 What Should Economists Do? by James M. Buchanan. Preface by Geoffrey Brennan and Robert D. Tollison. Liberty Fund, Inc., November 1979. Sixteen of Buchanan’s essays collected in book format. Available through the Liberty Fund Book Catalog.
*Donald J. Boudreaux is Professor of Economics at George Mason University and Senior Fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at George Mason’s Mercatus Center. He blogs at Café Hayek (www.cafehayek.com).
For more articles by Donald J. Boudreaux, see the Archive.