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Quotation of the Day…

… is from page 110 of my late Nobel laureate colleague Jim Buchanan‘s 1980 paper “Rent Seeking and Profit Seeking,” as it is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty:

If allowed to function within a set of laws and institutions that protect individual property rights and enforce contracts, markets will allocate resources among alternative uses so as to ensure tolerably efficient results.  But economists have concentrated far too much attention on efficiency and far too little on the political role of markets.  To the extent that markets are allowed to allocated resources among uses, political allocation is not required.  Markets minimize resort to politics.  Once markets are not allowed to work, however, or once they are interfered with in their allocative functioning, politics must enter.  And political allocation, like market allocation, involves profit seeking as a dynamic activating force.

DBx: Many opponents of markets find the open quest for profits in market economies to be unethical or unaesthetic, and they blame markets.  What these opponents miss is the fact that the self-interest that is typically – and even the greed that is sometimes – on display in markets is not created by commercial markets.  Commercial markets are merely a forum in which individuals act on these motivations.  One of most profound errors committed by market opponents is to suppose that when activities are transferred from commercial markets into the realm of politics human imperfections and self-interest are replaced by superhuman perfection and altruism.  But as Buchanan argues, it’s naive to suppose that the mere shifting of activities from one resource-allocation forum to another changes the underlying human motivations.  (And such shifting certainly does not change the underlying human cognitive limitations.)

So profit seeking occurs in political settings no less than in market settings.  But the kinds of information and constraints in political settings differ greatly from those in market settings.  Therefore, the kinds of actions taken in one setting, and the consequences of those actions, differ from the actions and consequences in the other setting.  One important difference is that in markets, profits are earned only through voluntary payments while in politics profits are typically extracted by forcibly transferring property from the politically weak to the politically strong.  The fact that such transfers are not overtly called “profit seeking” – and the fact that political activities are camouflaged with public-interest rhetoric – doesn’t change the underlying reality.

In summary, in the market Smith profits only by building a better mousetrap or by devising a process that reduces the amount of resources used to build a familiar mousetrap.  (Smith might do so directly, as a mousetrap producer, or indirectly, as someone who secures the financing for a mousetrap producer.)  In politics, Jones typically profits by confiscating mousetraps from Smith or from Smith’s customers, or by confiscating the inputs that Smith would otherwise use to make mousetraps.