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Quotation of the Day…

… is from page 409 of my late Nobel-laureate colleague Jim Buchanan‘s 1977 paper “Notes on Justice in Contract,” as this paper is reprinted in Moral Science and Moral Order (2001), Vol. 17 of The Collected Works of James M. Buchanan:

Adam Smith did use the word “just” in application to voluntary trading. And his system of “natural liberty” was evaluated in terms of justice as well as efficiency. Economists since Smith have perhaps concentrated too much on the efficiency property of markets and have neglected the application of norms for justice.

DBx: “Efficiency” means the ‘best’ use of means to achieve given ends. Therefore, to advocate normatively the achievement of “efficient” outcomes – or, what is the same thing, to advocate the taking only of actions that pass a cost-benefit test – implies that the ends are agreed-upon. It implies also that the set of possible means to choose from in pursuit of the ends consists only of means deemed normatively appropriate.

Neither of these two implications refers to a question of science or of engineering.

Suppose that Suzy and Sam are going to take a trip by car this afternoon. If Suzy’s goal is to get from Baltimore to Boston while Sam’s goal is to get from Baltimore to Atlanta, the question of which direction the car will be driven is not one of efficiency, at least not one that any person other than Suzy and Sam can hope to answer as such. Suzy and Sam will have to somehow make that decision amongst themselves.

Suppose that the decision is made to drive to Boston because Suzy promises to pay Sam $100 for his agreement to go with her to Boston (rather than she going with him to Atlanta). It appears that this manner of answering the question of which direction to drive is fine. The means used to answer it appears to be acceptable. But note that this conclusion is correct only if, for example, the $100 in question belongs to Suzy. If she plans to steal the $100 in order to pay Sam, the decision to drive to Boston is no longer normatively acceptable.

Note also that neither of these alternative car trips from Baltimore would be normative acceptable if Suzy and Sam plan to use a stolen car.

Questions of efficiency are important and economists are good at asking and answering them. But economists – even many of the most celebrated ones – too frequently ignore important background factual and normative considerations that always loom. The so-called “economic problem” – how to use a given set of means to achieve the greatest number of desired ends – is really an engineering problem. It’s a problem of optimization. But the following background questions – and others – must be answered before any “efficient” outcome can be judged to be normatively acceptable: What are the appropriate means? What are the ends? Are the ends appropriate?

To ignore such questions because they are not strictly “economic” is to ignore a central issue for all human actions in society.