On Wednesday, Nobel laureate James M. Buchanan of George Mason University died at the age of 93. Best known for his pioneering work in Public Choice — or “politics without romance,” as he described it — and constitutional economics as a way to limit government power, he also made important contributions to subjectivist economics. His book Cost and Choice (1969) examined the evolution and implications of the theory of subjective opportunity cost, contrasting it with the objectivist theory of the classical and later economists. Buchanan thereby situated himself in the tradition of Menger, Mises, and Hayek. (More of his writings on subjectivist economics can be found in his collection .)
Buchanan made another contribution of interest to students of Austrian economics — this time in a mere letter to the editor.
In 1982 the classical-liberal political theorist Norman Barry penned a bibliographic essay on “The Tradition of Spontaneous Order“ (Literature of Liberty, Summer 1982). Spontaneous, or unplanned, order is of course an essential concept in the case for individual liberty and the free market. Although counterintuitive, it is indispensable to explaining how the activities of free people can be orderly without coercive central control. Barry’s essay prompted Buchanan to write a brief note to the publication, “Order Defined in the Process of Its Emergence.” This note reveals how radically subjectivist Buchanan was.
He began with Barry’s observation that the orderly patterns that spontaneously emerge from free people’s interaction “appear to be a product of some omniscient designing mind.” For Buchanan this seemingly innocuous point “may have, inadvertently, ‘given the game away,’ and, at the same time, made [the advocates’] didactic task more difficult.”
How can that be?
The answer lies in the distinction between a self-sufficient order and one that aims at the achievement of some external objective. Buchanan rejected the latter conception as a proper description of the market order.
“I want to argue that the ‘order’ of the market emerges only from the process of voluntary exchange among the participating individuals,” he wrote. “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.)
No Alternative to the Market
What the market order “achieves,” then, is not something that even in theory could be ascertained apart from the playing out of the real-world market process itself and then achieved by nonmarket means. If you want the resource arrangements the market would produce, you have no alternative but the market. This is what F.A. Hayek was getting at when he jousted with “market socialists” in phase two of the socialist-calculation debate in the 1930s. (Ludwig von Mises launched phase one in the 1920s by showing that without private property, free exchange, and market prices, economic calculation and hence state socialism were impossible.) Advocates of central planning thought they could defeat Mises and Hayek by showing that the bureaucrats could simulate the market and achieve its results without private property in the means of production.
Buchanan went on to explore what it means to say that the “order generated by market interaction is … comparable to that order which might emerge from an omniscient, designing single mind.” He suggested that “if pushed on this question, economists would say that if the designer could somehow know the utility functions of all participants, along with the constraints, such a mind could, by fiat, duplicate precisely the results that would emerge from the process of market adjustment.”
This assumption here is that human beings are mere calculating utility maximizers.
“By implication,” Buchanan continued, “individuals are presumed to carry around with them fully determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront.”
But, as a few moments’ thought should reveal, this is a terribly impoverished portrait of flesh-and-blood human beings. It is a picture of decision-making that is distinctly non-entrepreneurial — if it qualifies as decision-making at all. 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.
“Individuals do not act so as to maximize utilities described in independently existing functions,” Buchanan insisted. “They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of ‘as if’ functions that are maximized. But these ‘as if’ functions are, themselves, generated in the choosing process, not separately from such process.” (Emphasis added.)
Thus, Buchanan wrote, “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 no mere hairsplitting, for the debate over whether there are alternative paths to the rational use of resources hangs in the balance. If “rational use” is something definable apart from decision-making through the market process, then in theory one might come up with an alternative method of achieving it. But if “rational use” is an idea that makes sense only in light of the choices free people make entrepreneurially as they encounter unforeseen, and unforeseeable, alternatives in the marketplace, there is no alternative path. Fundamentally, the market is not a means.
“The point I seek to make in this note is at the same time simple and subtle,” Buchanan concluded.
It reduces to the distinction between end-state and process criteria, between consequentialist and nonconsequentialist, teleological and deontological principles. Although they may not agree with my argument, philosophers should recognize and understand the distinction more readily than economists. In economics, even among many of those who remain strong advocates of market and market-like organization, the “efficiency” that such market arrangements produce is independently conceptualized. Market arrangements then become “means,” which may or may not be relatively best. Until and unless this teleological element is fully exorcised from basic economic theory, economists are likely to remain confused and their discourse confusing.