The Individual and the Sphere of Economics

Thoughts on some Buchanan essays

This week, I read some papers by Buchanan for the reading group we do as part of the PhD Fellowship. Sharing some reflections below.

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In his paper, What Should Economists Do?, Buchanan emphatically argues that the proper subjects for economist’s study are: man’s behaviour in the market relationship, reflecting the propensity to truck and to barter, and the manifold variations in structure that this relationship can take. I argue that by defining economics as exchange, Buchanan limits the scope of an economist’s study along two dimensions. First, it is no longer a study of choice. Second, it can potentially exclude the study of (pure) conflicts. Further, I argue that it might be more fruitful to define economics by its approach rather than its scope.

Buchanan states, “The theory of choice must be removed from its position of eminence in the economist’s thought process. The theory of choice, of resource allocation, call it what you will, assumes no special role for the economist, as opposed to any other scientist who examines human behaviour.” (p. 217). Focusing on the allocation paradigm allows an economist to easily slip from the individual to the collective as the decision-maker. As a methodological individualist and subjectivist, this slip is not permissible for Buchanan. He does not want to remove the contents of economics related to choice, but rather, he wants economists to look at human activity through another window: “exchange.”

I am not sure that the theory of choice and the theory of resource allocation can be used interchangeably. Yes, economic choices involve the allocation of resources, but situating choice exclusively at the level of the individual can help prevent the problematic slippage between individual and collective decision-making.

Second, in defining economics as exchange, Buchanan wants economists to focus on associations between individuals that are mutually beneficial to all parties. He proposes replacing the term “economics” with “symbiotics,” which carries a positive connotation of association. However, this term “does not include the strategic choices that are present in situations of pure conflict.” (p. 218).

By this, he does not exclude conflict completely from the ambit of economics. Conflicting values exist, which is precisely why markets are beneficial. When non-market decisions are concerned—which, to Buchanan, are matters of governance—the problem is elevated to the constitutional level, which he views as a voluntary contract through unanimity.

This focus on exchange is perhaps a result of Buchanan’s optimism, and Alain Marciano has argued likewise in a recent review of the same paper this essay is concerned with. But Buchanan builds his optimism into his analysis by arguing that conflict is not the end of an economist’s study—cooperation is. People will recognize that conflict is undesirable and will ultimately arrive at cooperative solutions through exchange.

Restricting the study of economics to exchange might place topics like domestic violence outside the purview of economics. In defense of Buchanan’s definition, one might argue that domestic violence represents costs within the voluntary association of marriage. However, is this voluntary association the most fruitful lens through which to view conflicts such as domestic violence? Similarly, what does this perspective mean for two nations at war? Elevating such conflicts to the constitutional level might be a non-solution.

Consequently, I also disagree with Buchanan’s distinction between economics as “the study of the whole system of exchange relationships” and politics as “the study of the whole system of coercive or potentially coercive relationships.” (p. 221). This is not because there is violence in mutually beneficial exchanges, but rather because economics does not have to restrict itself to the study of mutually beneficial exchanges. Although, I still believe that voluntary exchanges being mutually beneficial is the most important lesson of economics.

Like Ludwig von Mises and Gary Becker, I believe that economics should be seen as an approach to looking at the world. It is the study of how individuals make decisions and the consequences of these decisions. Like Buchanan, I also hold that the two foundational methodological principles of economics are methodological individualism and subjectivism. These two principles underlie the four papers of concern here.

As a subjectivist, Buchanan argues not only that no external observer can fully know individuals’ preferences but also that individuals can change their preferences through different social processes. In Social Choice, Democracy, and Free Markets, Buchanan contends that the assumption of constancy in preferences, which is essential for the development of economic theory, “disregards one of the most important functions of voting itself. The definition of economics as ‘government by discussion’ implies that individual values can and do change in the process of decision-making.” (p. 120). He reiterates this argument in Positive Economics, Welfare Economics, and Political Economy, first recognizing that unanimity in a democracy is a very high standard and may be impractical. However, majority rule entails coercion. For Buchanan, majority rule is merely a step in the discussion process leading toward final agreement. The purpose of political discussion is “precisely that of changing ‘tastes’ among social alternatives.” (p. 136).

The difference between Buchanan’s political economy and that of the mainstream, then, perhaps lies in the approach. Economists should embrace methodological individualism and subjectivism more strongly, as Buchanan does. The focus must be on the processes through which individuals choose. Real choice is the only way to discover individual preferences. This is also Buchanan’s primary argument for the compensation principle in Positive Economics, Welfare Economics, and Political Economy. While the principle may appear to introduce a status quo bias, Buchanan argues that compensating those who might face losses due to policy changes is “desirable here because only through the compensation device can appropriate criteria for ‘improvement’ be discovered.” (p. 131).

These readings also raise some interesting questions for me. First, as I pointed out, how should we think about our role as economists? I share Buchanan’s optimism, and if I may say so, I am even more optimistic about individuals’ ability to reach solutions through voluntary association. However, recognizing and understanding conflict is important. Second, elevating non-market conflicts to the constitutional level as a unanimous decision may seem like a cop-out, but there’s more under the hood that needs to be seen. And, as Buchanan argues, we need to focus on the processes through which individuals make decisions.