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Quotation of the Day…

… is from page 239 of my late George Mason University colleague James Buchanan’s contribution to the 1989 volume, edited by Werner Sichel, The State of Economic Sciences: Views of Six Nobel Laureates, as this contribution is reprinted in Choice, Contract, and Constitutions (2001), which is volume 16 of The Collected Works of James M. Buchanan (link added; footnote deleted):

And, at least in the 1940s, everyone knew that “the economic problem” was defined by Lionel Robbins as the allocation of scarce resources among alternative ends.  Scarcity, the inability to meet all demands, implies that choices must be made, from which it seems to follow directly that a criterion for “better” and “worse” choices is required.  This criterion emerges as some common denominator that allows the differing demands to be translated into a single dimension, which we [economists] then label as “utility” or “value.”  The “economic principle” offers the abstractly defined normative solution to the economic problem.  Scarce resources are allocated among alternative uses so as to secure maximum value when a unit of each scarce resource  yields equivalent value in each use to which it is put.  Satisfying this norm maximizes value subject to the resource scarcity constraints.  Economics, as a realm for scientific inquiry, does indeed seem to be reducible to applied maximization; the calculus seems surely to be its basic mathematics.

I want to suggest here that this economics, which is the economics that I learned both as a student and as a young professional, generates intellectual confusion and misunderstanding because it focuses attention inappropriately on scarcity, on choice, and on value maximization, while shifting attention away from the institutional structure of an economy, with the consequent failure to make elementary distinctions among alternative structures.

DBx: ‘Optimal’ resource allocation is certainly desirable – that is, such an allocation is better than any allocation that by any widely accepted criterion would be described as ‘suboptimal.’  And mainstream economics supplies just such a criterion, one that, were it understood more widely, would surely receive more widespread acceptance.

But mainstream economics, while it brilliantly and beautifully describes what such an optimal allocation of resources looks like, has never supplied a compelling explanation of just how such an allocation might be brought about – might emerge – in reality.  Mainstream economics, as such, supplies very little understanding of the processes that occur in reality to improve patterns of resource allocation.  One feature of Austrian economics that I’ve always appreciated is its focus on these processes.  And one very attractive feature of the economics of scholars such as Buchanan, Ronald Coase, Armen Alchian, Harold Demsetz, Lin Ostrom, and Oliver Williamson is its attention to the institutional processes and structures that we human beings create, stumble upon, and alter in on-going and never-ending processes to better achieve our ends.

Useful economics should better explain how people engage with each other to solve problems – how we exchange with each other in the many ways that we do, not just arms-length commercial contracting.