What are economists doing? What should they be doing? And how should they go about doing their job?
Economists don’t often pause and reflect on the nature of their work and the problems they deal with. We economists go about building and running models to solve ‘optimisation’ problems and even predict economic events and outcomes.
But, whether we’re aware or not, economists carry around a roadmap in our heads when we go about solving problems in our field. Is it not essential for us, every so often, to take a look at our map and see if it is giving us an accurate picture of our subject, let alone guiding us in the right direction?
Economist and Nobel laureate James Buchanan thinks so.
In his presidential address to the Southern Economic Association’s annual meeting in 1963 (later published as part of a collection of essays in What should economists do?), Buchanan challenges his colleagues to reflect on the subject matter of economics and, in light of this, reconsider the task of economics.
Going off track
Buchanan argues that economics has veered off from its original subject matter expounded by its founder, Adam Smith. In chapter 2 of his Wealth of Nations, Smith observes that it is the “propensity to truck, barter, and exchange” inherent in human nature that give rise to the division of labour, “from which so many advantages are derived”. Buchanan points out that the significance of this “propensity to truck, barter and exchange”, and the institutional arrangements that give rise to this form of activity, have surprisingly been overlooked by economists in their field of study.
Buchanan contrasts the Smithean insight of human exchange with Lionel Robbins’ famous definition of economics: as a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. Economics, as envisioned by Robbins, is framed as a problem of choice in allocation, necessitated by the fact of scarcity.
Are economists just calculators?
This subtle shift of focus from human exchange to human choice, from a characteristic form of human activity to a problem or set of problems in search of a solution, has made a world of difference in directing (or misdirecting, as Buchanan sees it) economists’ intellectual endeavours.
In particular, Buchanan criticised that this reframing of economics as a problem of resource allocation has reduced the field of economics to be merely a branch of applied mathematics:
Once the format has been established in allocation terms… Our whole study becomes one of applied maximization of a relatively simple computational sort. Once the ends to be maximized are provided by the social welfare function, everything becomes computational (p.24)
In other words, within the paradigm of allocation and choice, what we first conceive to be an ‘economic’ problem turns out to be just a calculative problem.
Well, one might object and say that there is a genuine distinction between an economic and a computational problem. One might maintain that the former arises when mutually conflicting ends are present and choices are required (e.g. how should a consumer spend her $10 at the mall), and the latter, by contrast, is characterised by the fact that there’s only one end to be maximised (e.g. how should a construction manager allocate $1m to build a dam to certain specifications).
But really, what’s the difference? On this view isn’t the ‘economic’ problem just one step short of the ‘computational’, the missing step being our knowledge of the consumer’s preferences (what economists call the ‘utility function’)?
Look more closely and you see this distinction is rather superficial. Once economists specify a consumer’s ‘utility function’ (if that’s at all possible), the supposedly economic problem becomes a computational one. But if economists leave her preferences undefined, they renounce their ability to predict how the consumer would choose. The alleged difference between ‘economics’ and ‘computation’ is just one of driving on a clear or foggy road. But it’s still the same road to applied mathematics.
Framing economics entirely in terms of allocation and choice, the economist is compelled to either pick up a calculator or go home.
Rediscovering Smith’s Invisible Hand
To get out of this dead-end, Buchanan urges his colleagues to refocus their subject matter from human choice to human exchange.
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- these are the proper subjects for the economist’s study. (p.19)
Central to economics, Buchanan explains, is its attention on how people associate with each other in a way that is mutually beneficial to all parties (i.e. Smith’s “invisible hand”):
It draws attention to a unique sort of relationship, that which involves the cooperative association of individuals, one with another, even when individual interests are different. (p.27)
Studying this kind of relationship (which Buchanan labels “catallactics” or “symbiotics”) requires seeing people not as isolated individuals but as economic actors that perceive (or fail to perceive) opportunities for mutual gain from cooperative association and voluntary exchange in relationships.
Now, Buchanan reassures mainstream economists that the content of their research is not thereby invalidated. Choice remains in human exchange; the exchange approach largely studies the same human activity as the allocation approach. What this approach does, however, is to rescue the economist’s study of choice from being a mere computational problem by situating it in its larger social (and thus economic) context. For example, economists have long screened out the “social-institutional context” of individual choice in market organisation and focused their attention on computing market ‘equilibrium’ that solves the allocative problem. But, in doing so, they have screened out the market process by which the equilibrium emerges (this, by the way, explains the neglect of the role of entrepreneurs in the market by many economists). And that process is brought about by the “evolving exchanges” between economic actors that voluntarily associate with one another.
Implications of exchange over choice
So what will the shift in the economist’s frame of reference from allocation to exchange produce?
First and foremost, Buchanan submits that economists should concentrate on studying the institutional environment and process in which individuals “participate in voluntarily organized activity” of trade and exchange. The focus of economics should zoom out of unilateral action to the limits of cooperative endeavours. And even when we reach the apparent limits of voluntary organisation, as in the case of the “free rider” problem, the exchange approach to economics can be extended to “cover the emergence of a political constitution” (thereby interlocking with social contract theory).
In any case, Buchanan maintains that economists shouldn’t consider their discipline as primarily computing ‘optimal’ solutions to resource allocation problems, a (mis)conception he thinks has fuelled much of the “social engineering” in our economy today.
Put in another way, economics isn’t merely a calculation of means-ends problems in society, but a lens to study how people achieve their unique ends through voluntary association and exchange.
Economics isn’t merely a calculation of means-ends problems in society, but a lens to study how people achieve their unique ends through voluntary association and exchange.
Check out James Buchanan’s What should economists do?