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Quotation of the Day…

… is from page 242 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:

That which is generated in the economic interaction process, whether or not represented as a formalized, abstractly defined equilibrium or solution, emerges from the separate and interdependent choices made by many participants, choices that are coordinated, whether efficaciously or not, through the institutional arrangements that define the economic structure.  The economywide aggregated variables, such as national income or product, rates of employment, capacity utilization, or growth, are not variables of choice, either directly or indirectly, by individual participants in the economy or by political agents who may presume to act on behalf of all participants as a collectivity, or any subset thereof.

It is intellectually confusing even to model “the economy” as if its normative purpose is one of maximizing income and/or employment, or, indeed, as if “the economy” has normative purpose at all.

DBx: Jim’s point is easy for the careless thinker to dismiss as being either trivially true or obviously wrong.  (Many deep points have this strange quality.)  Yet in fact this point is indeed true but in a profound and productive way.

The point is this: there is no singular purpose that the economy serves, or should be thought of as serving.  Instead, the economy is that complex pattern of interactions that emerges, unplanned, from the countless daily choices and actions of many individuals who engage with each other in exchange relationships.  Each individual actor in the economy has purposes, and he or she – sometimes individually and sometimes as a member of a ‘team’ of other individuals – makes plans in pursuit of his or her goals.  Operating according to these individual, local plans, individuals exchange with each other.  Some exchanges are successful, others are not.  The information generated by the success and failure of various plans causes individuals to revise their plans and sometimes also their goals.  This process is on-going; it never ends.  And this process ought not be thought of as reaching for, or as moving toward, some end-state or equilibrium.  The economy is not a machine to be engineered.  The economic problem is not one of engineering.

A number of problems arise from failure to grasp this point.  Some of these problems plague only the practice of academic economics.  But others of these problems unleash consequential errors in reality.  Perhaps the most troublesome of these errors is that talking about “the American economy” or “the German economy” or “the global economy” creates the false impression that these complexes of interactions are akin to firms.  By talking, for example, about “America’s” trade deficit, the economically uninformed business executive can be forgiven for interpreting this deficit as representing for the nation what a profit-and-loss statement in the red represents for the firm.  Yet such an interpretation – although commonplace and at the heart of Trump’s trade policy – is utterly mistaken.

More generally, by thinking of – and by talking of – “the” economy as if it itself has a purpose, we too easily slip into the dangerous error of thinking of – and talking of – flesh-and-blood individuals as if they are but cogs in this economy.  Individuals’ choices and actions are assessed not according to how well these choices and actions further the individual purposes that give rise to each of these myriad choices and actions but, instead, by how well these choices and actions further the imaginary and mythical ‘purpose’ of “the” economy.  In turn, thinking and talking of “the” economy in this way gives rise to a demand for an economic engineer to make “the” economy “work” better – or at least to a demand for, or an acceptance of, an overseer whose task it is to ensure that “the” economy never deviates too far from the path that it must travel to fulfill its (mythical) purpose.