James Buchanan’s Cost and Choice may be “[his] little book,” but it is jam-packed with economic wisdom. It is easily one of my favorite books. In it, Buchanan discusses in detail what he calls the LSE Theory of Choice (although it also shows up in the UCLA tradition of Armen Alchian as well). Costs are forward-looking, Buchanan states. Since they influence our behavior, they must occur in the future, and thus they are “ephemeral” (as Thirlby puts it).
Since costs are forward-looking, someone or something must be choosing. For costs to exist, a decision-maker must be present. “Choice” is an action, which implies an actor.
Thus, the question in economic analysis must be “who chooses?” The problem with using collective-choice language like “the government does X” or “society does X” is, especially to the uncritical mind, it can mask the truly-choosing agent. Society does not choose. A nation does not choose. Individuals choose.
Of course, there may be times when it makes sense to talk of a collective-actor: the Washington Nationals won a World Series, for example. No single person could have done that alone; it was a team effort. So it makes sense, then, to say the team is the actor. The same goes for a firm. A firm is a form of collective action.*
But for many economic decisions, it is not collective per se. There may be collective outcomes (eg, the market process), but it is the result of a multitude of decisions. To say “the market” does X or Y is confusing if one does not realize it is shorthand for the multitude of decisions. Confusion arises when one treats the agglomeration as the choosing-agent. There may be heuristic or pedagogical reasons for talking about a “nation” choosing this or that, or a “social preference function” for this or that good. But we must always remember the underlying economics: who is the chooser?
*None of this is to say there still aren’t collective-action problems within these agencies. Nor should we discount the roles individuals play here. But a firm or a team operation is not the spontaneous and unplanned outcome that a market outcome is.
P.S. Look for an online #EconlibReads group on Cost and Choice coming next year!
READER COMMENTS
Phil H
Dec 25 2019 at 9:39am
“…it can mask the truly-choosing agent. Society does not choose. A nation does not choose. Individuals choose.”
I like this. It’s incorrect in the middle: nations do choose, and how they choose is often written down on a piece of paper. Certainly this is true in the case of the USA. But the enquiring spirit is correct: how do things actually work? How are decisions actually made?
Unfortunately, the follow-up paragraphs are muddled.
“Confusion arises when one treats the agglomeration as the choosing-agent.” Yes! That’s a good distinction.
“But we must always remember the underlying economics: who is the chooser?” No! Because you’ve just said: often, there isn’t a chooser. And when there is, it’s often not an economic question, but a question of law, or convention.
For example: if 60 senators vote yes on an issue, what is the view of the Senate? This question has a definite answer, and it depends on the the legal nature of the issue being debated – it’s not economics.
Jon Murphy
Dec 25 2019 at 10:11am
Show me the entity of “the nation” choosing. Not the end result of a collective decision-making process, but the entity known as “the nation,” which has agency all its own, making a choice.
My point is there is no such entity. Saying “the nation makes a choice” is shorthand for the collective process. For analytical matters, that distinction is vitally important (and part of Buchanan’s point in his book).
Loquitur Veritatem
Dec 25 2019 at 2:28pm
There is confusion here between the fact of the matter — that 60 senators vote yes — and the formalism which says that “the Senate” has approved something if 60 senators vote yes. The fact is that 60 senators are the “choosers” because in this example they vote the same way on the same issue. The rules of the Senate say that the body has approved something if (in most cases) a majority of senators voting say yes to it. The Senate doesn’t actually do anything. It takes some number of senators voting a certain way to do something, and the something is called an act of the Senate merely as a formality. Buchanan’s observation holds universally, not just in economics.
Phil H
Dec 25 2019 at 7:21pm
“The Senate doesn’t actually do anything. It takes some number of senators voting a certain way to do something, and the something is called an act of the Senate merely as a formality.“
A person doesn’t actually do anything. It takes some number of physical parts moving in a certain way to do something, and the something is called an act of the the person merely as a formality…
Do you see what I mean? The claim that my finger typed out this reply is a misunderstanding of how Phil works, though it is certainly true that only my finger is interacting with the phone screen. Similarly, the claim that individual senators make decisions is a misunderstanding of how the Senate works.
Jon Murphy
Dec 25 2019 at 3:39pm
This is precisely the confusion to avoid. “The Senate” has no view. It is an agglomeration. Who does have the views are the 100 senators. They are the decision-makers. They face costs. “The Senate” faces no cost. “The Senate” is not a choosing entity.
Phil H
Dec 25 2019 at 7:13pm
…I barely know what to say to either Jon or LV. I mean… you’re both just wrong. “The Senate is not a choosing entity”? Of course it is. That’s why it exists. It chooses which bills should become law. Only the Senate can do that. Individual senators make decisions on whether to support or oppose bills. But their individual votes/decisions have no legal force. The decision of the Senate (arrived at by simple majority or 2/3 majority vote) does have the force of law.
I don’t really see the point of the argument that either of you are making. Companies exist. Clubs exist. Families exist. Countries exist. And American democratic institutions exist. If you don’t think government institutions work well, then critique them. But simply denying the Constitution doesn’t make an argument.
Jon Murphy
Dec 26 2019 at 12:40pm
Again, do not confuse the agglomeration for the choosing entity. “The Senate” does not exist as a choosing entity. It exists as a collective of individual senators, whose collective actions lead to an outcome. The Senators make choices. The Senate does not.
Comparing the mechanical behavior of your hand to the actions of individuals is an incorrect comparison. Human beings are not mechanical things, devoid of choice. They make choices. Your fingers do not choose; you choose. You, the choosing agent, give “orders” to your fingers to enact your choice to write. Your fingers do not give “orders” to you to write.
Again, point to me the entity known as “The Senate” that is making the choice. Not the end result of a decision-making process made of individuals choosing, but the actual agent choosing called “The Senate.” If you cannot point to me the choosing agent, the one that evaluates costs-benefits, then that entity is not a choosing agent.
Phil H
Dec 26 2019 at 10:26pm
As a side note, this “point to the chooser” argument really, really doesn’t work. I see what you’re trying to do with it, but it doesn’t succeed. I can make exactly the same point about a person: Point to the decision maker… no, that’s the person’s hand… no, that’s their mouth… Once you dig into the neuroscience, you can even question which bit of the brain is making decisions. The fact that a decision process is complex, and maybe not embodied in any single physical object, doesn’t mean it’s not happening.
Jon Murphy
Dec 27 2019 at 9:40am
If there is no chooser, there is no economic problem, there is no political problem, there is no legal problem. It’s all just math, in which case all this doesn’t matter.
Jon Murphy
Dec 26 2019 at 1:39pm
Part of what inspired my original blog post is a response to Warren Platts on an earlier post, where he drew a distinction between “individual comparative advantage” and “national comparative advantage” and found the two to be in conflict with one another. What I, and others, tried to explain to him was the example of “national comparative advantage” given in textbooks is a heuristic device meant to help show the logic of trade. It was not a literal description of what occurs, as that would require an entity known as “The Nation” to be making choices. After all, opportunity cost requires choices to be made; if there is no choice, there is no opportunity cost, and thus there is no comparative advantage. The resulting emergent order of a “nation” and the trade patterns thereof are a result of billions of individual decisions, and billions of opportunity costs/comparative advantage decisions, rather than a single choice done by “the Nation.”
It is the same thing with “The Senate.” The emergent order that comes from “The Senate” is the result of many individual decisions (“if 60 senators vote yes on an issue, what is the view of the Senate?”). If “The Senate” was the choosing agent, your question wouldn’t be about the actions of 60 senators, but rather it would be “If The Senate votes ‘yes’ on an issue, what is the view of The Senate?” But “the view of the Senate,” as you properly state, “depends on the legal nature of the issue being debated.” This, we can clearly see that “The Senate” does not have a “view,” but rather it is the individual senators. “The view of the Senate” is shorthand for the whole process, not the choosing-agency of the entity known as “The Senate.”
James Buchanan’s big insight, and the one that won him a Nobel Prize, (one which Gordon Tullock should have shared), was that treating a collective as a single choosing entity, as welfare and Samuelsonian economics did up until about the ’60s, lead to incorrect conclusions. By examining the collectives as individuals facing their own cost curves, rather than a single individual facing a single cost curve, lead to much more accurate explanations and predictions about how collective bodies, like a Senate and a firm, work. This was the foundation of his and Tullock’s book The Calculus of Consent. Several other Nobel works (Ostrom, North, Coase, Vernon Smith, Hayek, just to name a few) and many Nobel-worthy works (Alchian, Demsetz, Gary Millar) have been completed separating the individual from the collective.
In short, an individual does not cease to be an individual if he is part of some collective. And the collective does not become an individual just because there are emergent or planned orders.
Phil H
Dec 26 2019 at 9:25pm
Hi, Jon.
So, I think I see what you mean, but I think you’re now obscuring a distinction that you yourself made in your original post (“the team is the actor”).
I think there is a three-way distinction to be made, and any binary is going to fail to capture it.
One set of entities is individual people – to which you rightly accord a special place. (Note that this not a necessary given: in history, families have often been regarded as the fundamental unit of society. But I agree with you that the individual is a much better choice.)
A second set is defined collective entities. These include companies, teams, clubs, families, etc. These collectives are actors, too, and it can make sense to talk about their interests and their decisions. For example, companies are generally set up to make money; that is their interest (very narrow compared with the interests of individuals). They can suffer losses and opportunity costs. Government bodies also have interests (to run the country well, to reflect the will of the citizens, to protect the environment, etc.), but the common critique of them is that their interests are captured by their employees.
Defined collectives also have decision processes, and it is meaningful to talk about their decisions, at least insofar as they are decisions to act. (Individuals can decide to think a certain thing, and it’s not obvious that collectives can do that, so collective decisions are not exactly the same as individual decisions.)
The third set of entities are what you called agglomerations, and they produce outcomes, but not through a defined decision process. The classic example is markets, where a market might produce 1, 2, 3 or 4 very successful companies. But that’s not a decision in any meaningful sense. It’s simply something that happened. Markets don’t have any interests, and they don’t act.
I think trying to redefine my second set as being just the same as markets – i.e. treating the Senate like a market and saying that it is just the sum of Senators’ decisions – erases an important distinction. It’s entirely legitimate to say that you don’t think the Senate achieves its stated interests (to govern well) because it’s been captured by private interests. That’s just institutional analysis. But it’s a different thing to deny that the Senate “decides” at all, when there are clearly lots of documents and institutions that are set up to treat it like it does.
Jon Murphy
Dec 27 2019 at 9:45am
I set up the original three-part distinction above. It’s not binary at all. That’s the whole point I’m making. Trying to treat “The Senate” as akin to “the individual” does not work. Treating “The Senate” as akin to a firm works. Treating “The Senate” as akin to a market process does not work.
But, to the uncritical mind, the shorthand that saying “The Senate does X” or “the firm does Y” leads to critical errors. You must be able to point to the chooser.
Now, if you want to say there is no such thing as choice, as you do above, then that’s fine. It just means there is no economic problem, no political problem, no problems at all. Everything is merely applied mathematics. There are no choices to be made and we are nothing more than mindless machines. If one cannot identify the chooser, then there is no choice.
Phil H
Dec 27 2019 at 11:24am
Blimey, this is hard work sometimes. What I said above was *not* a claim that there is no chooser; it was a reductio argument. I specifically *don’t* think that there aren’t choosers. I think that there are choosers, and that sometimes you can point to the choosers, and sometimes you can’t.
Anyway, yes, I agree that you set up the three-way distinction in your original post. The argument arose because you then denied the distinction that you yourself had made. For example, above, you said:
““The Senate” has no view. It is an agglomeration. ”
You now seem to have realized that this was a mistake:
“Treating “The Senate” as akin to a firm works. Treating “The Senate” as akin to a market process does not work.”
At this point, I feel like we’re in agreement on the Senate.
Now the next two problems are the government, and the nation.
The government can sometimes be treated in the same way as the Senate. When we’re talking about explicit decision processes, or the deliberate actions of government bodies, it seems reasonable to say “the government decided this” or “the government did this”. But the government is also made up of many people, and sometimes its actions may be more like market processes.
And finally the nation. Here we may simply never agree. I think governments are legitimate, by which I mean that most actions of democratic governments are to be understood as actions of the citizenry. My impression is that you think governments are not/are much less legitimate, in which case I agree that you wouldn’t have any reason to see the actions of government as being the actions of the citizenry.
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