James Buchanan and the Austrians

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JAMES BUCHANAN AND THE AUSTRIANS:

THE COMMON GROUND

Charles W. Baird

In June 1974 at a conference on Austrian economics in South Roy-

alton, Vermont, Milton Friedman assertedthat There is

no Austrianeconomicsonly good economics and bad economics (Dolan 1976,

p. 4).According to Friedman,what is good about Austrianeconomicscould,and eventually would,be incorporated intogenerally accepted

mainstream analysis. My theme in this paper is that the economics

of James Buchanan, the 1986 Nobel Laureate in economics, already

incorporates much ofwhatis goodin Austrian economics. I do not

claim thatBuchananconsciously and purposefully adopted Austriananalysisin his own work. I merely claim that theeconomics of James

Buchanan hasmuch in common with modern Austrian economics,especially the workofF. A.Hayekand Israel Kirzner.

In the first two sections a broad outline ofthe relevantfeatures ofmodern Austrianeconomics is presented. This broad sketch is fol-lowed by aconsiderationofthreesignificant statementsofBuchanan

regardingAustrians and Austrian economics. Next,the influence ofKnut Wicksell and FrankKnight on Buchanan is discussed. Theirinfluence, I believe, is the source ofthe Austrian link. The paperthen explores the alleged common ground by considering, in turn,general economics, cost, and political economy. Abriefconcludingsectionrounds out the paper.

Whats in a Name?The adjective Austrian, ofcourse,refersto thehistorical roots of

the analysis, not tothe nationality ofits present adherents. Unfortu-

Cato Journal, Vol. 9, No. 1 (Spring/Summer 1989). Copyright Cato Institute. Allrights reserved,

The author is Professor ofEconomics atCalifornia StateUniversityHayward.He isgrateful to Gregory Christainsen, Sanford Ikeda, Shyam Kamath, IsraelKirzner, Kurt

Leube, and StephenShmanske for their comments onan earlierdraft.The usual caveat

applies.

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nately, the label carries a strong negative affect with many main-stream economists. There are two reasons forthis. First,Austrianshave steadfastly refused to acceptmathematics and statistics as the

sine qua non ofgood economics. Theyhave clung tothe view thatgood methodology in the physical sciences is not necessarily goodmethodology in economics. To economists who wish to claim forthemselves the same scientific stature as physicists, the Austrianview is anathema. (We will returnto the question ofmethodologylater.)

Second, some Austrians often appearto act as guardians ofmeta-physical truth. As Buchanan ([1976] 1979a, p. 84) puts it,there is atendency to form a priesthood, with the converted talking onlytoconverts, There is such a tendency among some Austrians, and I

think it is due, in large measure, to the derision that has greetedAustrianattempts todiscount mathematics and statisticsin econom-ics and towarn insistently ofthe limitsofeconomistsabilityto writehelpful public policy prescriptions. Such attempted prescriptions,Austrians assert, are likely to makethings worse ratherthan better.Austrians are often dismissed by practitioners ofneoclassical ortho-doxy as free-market ideologues who cannot count. If mainstreameconomists will not take them seriously, the Austrians cannot befaultedfoi talking onlytoconverts.

Friedmans assertion that there is only good economics and badeconomics does not imply that there is no such thing as Austrian

economics. After all, Friedman distinguishes between monetaryeconomics and,say, environmental economics. Austrian econom-ics is afieldofeconomicsthatcan be viewed, ifprotagonists onbothsides are sufficiently tolerant, as an analytical complement to theneoclassical,comparative static analyses foundin mostundergradu-ate and graduate microeconomics textbooks. I have often thoughtthatAustrians need toadoptan alternative label for theiranalysisalabelthat describes the nature oftheanalysisrather thanits histor-ical roots. Market-process economics, or subjectivist-discoveryeconomics are good candidates. Ifsome new namewere adopted,attention could be focused,as itoughttobe, onwhether theanalysisis goodeconomics or bad economics. I think itis good economics,and,judgingfromthe extensive commonground he shares with theAustrians,sodoesJames Buchanan.

Distinguishing Characteristics ofAustrianEconomics

Accordingto Ludwig vonMises(1969, p. 41), heand most econo-mistsused the termAustrian Schoolin the 1920s onlyin ahistory-of-thought context.The significant insightsofthe Austrians had been,

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it was thought, incorporatedintocontemporary mainstream analysis.

Itwasnot until the 1930s, duringthe heightofthesocialistcalculationdebate, that Mises and Hayek came to realize that, although main-

streameconomists and Austrian economists frequentlyused thesamewords in their analyses, they did not attach the same meanings tothose words. For example, the mainstream understanding of suchconcepts as marginal utility and opportunity cost was substantiallydifferent from the Austrianunderstanding ofthe same terms.

Because ofsuch differences of interpretation, Oskar Lange andAbba Lerner couldclaimthattheirmodelofmarketsocialism refutedthe Mises-Hayek claim of the impossibility of calculation under

socialism. The Lange-Lerner model forced Mises and Hayek totryto clarify their use of termsin the debate. The processofclarification

continued into the 1940s with the result noted by Kirzner (1988,p. 1):

[T]he Mises-Hayekposition at the end oftheforties wasarticulatedin terms fardifferent from those presented in the Misesian state-

ments of the early twenties. Moreover, this more advanced Mises-

Hayekposition pointed beyond itselftoward (and decisively helped

generate) the moreexplicit Austrian statements ofthe seventies and

the eighties.

My taxonomy ofthose more explicit Austrian statements includes

thorough-going subjectivism; consistent methodological individu-

alism; an emphasis onexchange, orcatallactics, rather than on econ-omizingand optimizing; focuson real-world marketprocessesratherthan on equilibrium states; and aview ofeconomicsas an explan-

atory,ratherthanan exact,sciencewithin which there is aseverelycircumscribed role for mathematicsand statistics.

Subjectivism

The Marshallian synthesisclaimed tohavejoinedthe marginalistssubjectivism oftastes on the demandside withthe classicists objec-tivism of realcost on the supply side to produce neoclassical pricetheory. However,Austrian subjectivism on thedemand sideis more

radical than a mere subjectivism of tastes, and Austrians apply anequally extensive subjectivism tothe cost side.

Austrians begin their analysis with the action axiom: People actpurposefully, attempting to apply available means to the achieve-

ment of their many and varied ends. Their ends, or goals, or,touseneoclassical language, the arguments in their utility functions areboth pecuniary andnonpecuniary. Altruism, prestige, power,knowl-

edge, and wealth arerecognized as common human ends. In short,the action axiom asserts that individuals attempt todo the best they

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can for themselves,as theysee it, within the context ofthe constraints

and opportunities they confront.In illustrating how Austrian subjectivism is different from neo-

classical subjectivism, we needto consider the differentmeaningsattached to the marginal utility concept byneoclassicaland Austrian

economists. To the former, utility is a psychology-based notion of

satisfaction. Utility from successive increments ofa good issimplyassumed todecline. ToAustrians, however, utilityis anaction-based

notion of subjectively evaluated significance. Declining marginalutility (significance) is a logical inference oftwo priors: the action

axiom and the empirical postulate ofscarcity.The significance thatpersonAs mind attaches toa unit ofX depends on the significancethatAattaches tothe end towhich the unit ofX is serviceable. Starting

with zerounitsofX,when A receives a gift ofone unit, he willdevotethat unit to what he regards as the most urgent use it will serve,becauseheknows he willneverhaveall theX he would liketo have.WhenA receivesa secondunit ofX, itmustbe less significant to him

because he has already carefully applied the first unit to the mosturgentuse towhichX is serviceable.

Austrians make no attempt to explain which ends any particularperson may choose to pursue. Whateverthe ends, there is a purelogicofchoice and action that always applies. Moreover, Austrians

are quite comfortable with the fact that ends frequently changesometimes exogenously and sometimesendogenously.

To an Austrian, the cost that person A weighs in thedecision ofwhetherto takeaction Xis thesubjective value that personA attachesto the most highly valued alternative action that cannot be under-taken ifX is undertaken. The cost isthe value the decisionmaker

attaches to the sacrificed alternative, not the sacrificed alternativeitself. A moneymeasure ofa cost is only an indirect representation

ofthecost. IfthecostofactionX is $100,thatmeans merelythat theactualcost that is weighedin the decision of whethertoundertakeX isthe valueattached to the most highly valued alternative use ofthe $100.The costis notthe $100 itself.

Cost and supply are no less subjective than wants and demand.Bothendsand meansare subjectively definedand evaluatedby eacheconomicactor.

Methodological Individualism

Carl Menger, the founder of the Austrian School, was the first

economist to spell out the principle that Joseph Schumpeter was

later to call methodological individualism (Menger [18831 1963).Hayek ([19521 1979, chap. 4) calls theprinciple the compositive

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method.Modern Austrians, along with practitionersofthe Chicago!UCLA variant ofneoclassical pricetheory, base their analyses onthisprinciple. Only individuals think, evaluate, plan, and act.Clubs,

firms, states, nations, and publics are merely groups,or collectives,of individuals. These wholes do not think, evaluate, plan, and act

independently oftheir parts. The onlyway to explain and understandwhat a group ofpeople do is to explain and understand what theindividual members ofthe group do. The public interest is merelythe sum of the interests of the individuals who constitute thecollective called the public. According to Hayek ([19521 1979,

pp. 12425):

Words like government.., stand notfor singleobservable thingsbut for structures of[interpersonall relationships which can be

described only by a schematic representation or theory of the

persistent system ofrelationships between theever-changing ele-ments. These wholes, in other words, do not exist for us apart

from the theory bywhichwe constitute them, apart fromthe mentaltechnique by which we canreconstructthe connections betweentheobserved elements and followup theimplications ofthis par-

ticularcombination.

Exchange, Not Optimization

Eversince Lionel Robbins(1932) definedeconomicsas the studyofthe allocationofgiven scarce means among givencompeting ends,theattentionofmostmicroeconomists hasbeen onthe identification

ofoptimal values. Constrained maximizationthe mathematics oftheLagrangian multiplierhas prideofplacein most intermediate-

and graduate-level price theory textbooks. Microeconomics andoperations analysishave become almost indistinguishable.

Modern Austriansdissentfrom the Robbinsian view ofeconomics.They ask, Towhom is the knowledgeofthe scarcemeans and thecompeting ends given? Once the knowledge that is depicted intextbook budget constraints and indifference curves and in Lagran-gian equations is known to a decisionmaker, the only thing thatseparates the decisionmaker from the correct identification ofthe

optimum is arithmetic. Indeed, there is no human action left toexamine.To a modernAustrian, the much more interestingquestionis how

dopeople acquire the knowledge thatRobbins simply takesasgiven

(Kirzner 1973, pp. 3236).The answer to that question is that theycometo discoverbits and pieces ofthe relevantknowledgeas theyformulateand attempt toexecute their plans to exchangewith otherpeople. Exchange with others in pursuit of broadly conceived per-sonal gain is the quintessential economicaction. It isthe action on

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whicheconomicanalysis shouldfocusits attention.The studyoftheexchange processand its implicationsis called, following ArchbishopWhately, catallactics(Mises 1949, pp. 23357; Hayek[1968a} 1978,

pp. 18184).To a modernAustrian, economicsis thestudy ofthe logical impli-

cations ofthe fact that people try to do the best they can for them-selves, as they seeit,within the contextofthe constraints and insti-tutions they confront. Economics involves an examination of bothintended and unintendedconsequences ofhuman action. These con-sequences arelogicallyinferred from theeconomists understandingofthe exchangerelationship and its results, thatis, its spontaneousorders (Hayek [1968a]1978, pp. 18184).

MarketProcess, Discovery, andEntrepreneurship

The knowledge involved in the process by which the pattern of

productionofgoods and services becomes consistentwiththe patternof individuals wants exists nowhere in its entirety (Hayek 1945).Each economic actor possesses onlypieces ofthe relevant knowl-edgethepieces thatpertainto him orher. Nooneprivate citizenor government functionarypossesses all the pieces. Nor is it pos-

sible, because ofthe subjective nature ofmostrelevant knowledge,forthehighlyscatteredbitsofknowledge tobe gatheredfor a centralauthority or collectivist decisionmaker touse. Any individuals per-ceptions ofthe bits ofknowledge pertinent to him or her may be

inaccurate.Afortiori, any individualsperceptions regarding thebitsofknowledge pertinent toothers are almost always flawed.

Only through the marketprocesscan individuals discover relevantknowledge about the intentions,plans, and actionsofothers,as well

as knowledge ofobjective real-worldconstraints. Muchofthe rele-vant knowledge is summarized and transmitted by movements ofrelative prices andthe profit andlosspossibilities such pricemove-

mentsimply. Duringthis discoveryprocesspeopleconstantly adapttheirplansand actionsto newly acquiredknowledge. Thisadaptation

ofplansandactions leadsto moreand more plan-and-actioncoordi-nation. Full consistency, or coordination, ofthe plans and actionsofrelevant economicactorsis whatAustriansmean byequilibrium.

The concept ofequilibrium isusedonlyas areference point. Itisthe result ofthe marketprocess, butAustrians are moreconcernedwiththe journeyitselfratherthanthe destination. Inthe real world,marketsare usually in disequilibrium,and the actions ofeconomicagents are best understood and evaluatedin that context.For exam-ple, inan openmarketa monopoly thatexists at themoment isusuallythe result ofentrepreneurial alertness to some hitherto unnoticed

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profit opportunity. The economicprofit earned today results in imi-tationofentrepreneurial success and the gradual dissolution ofthemonopoly as more and more people discover the relevantknowledge.

The key dynamic force in theAustrians market-process analysisisentrepreneurship (Kirzner 1973). An entrepreneur is aperson who

is alertto theprofit opportunities that areimplicit in every disequi-librium situation. Whether through arbitrage, speculation, orinno-

vation, an entrepreneur attemptsto make economicprofitby taking

advantage of opportunities that others have failed to notice. Theintentofthe entrepreneur isto gain wealth. But successfulentrepre-neurshipwill be imitated, so the disequilibrium situationsthatgaveriseto the profitopportunitieswillgraduallybecorrected. The desire

to earn profits andto avoid losses fuels entrepreneurial alertness to

disequilibrium and makes it inevitable thatcorrectivepressures willbebrought to bear in every disequilibrium situation.That is notto say, however, that general equilibrium isever achieved.

As economic actors adapt to newlydiscovered knowledge in dise-quilibrium states,new instancesofdisequilibrium may emerge.Tastesmay change, and new production and marketing processesmay be

tried as competitorstry to stayaheadof eachother (Lachmann1986).In additionto theseendogenous changes, thereare exogenous changesin tastes, technologies, and resource availabilitiesthatalsoimplythatnew instances of disequilibrium will emerge as old instances ofdisequilibrium are coordinated.

Methodology

Austrians may be considered quaint because of their focus oncatallacticsrather than optimization, buttheyare consideredhereticsbecause they insist that economics is notan exactscience and thatthe methodology ofexact sciences is notappropriatein economics.Itis with regard tothisissue that Milton Friedman,George Stigler,and mostofthe economics profession most vigorouslydissentfromAustrian analysis. Milton Friedmans famous 1953 essay on meth-odologyclaims that an economictheory should bejudged purely onthe basisofits usefulness. A theoryis useful ifitmakes predictionsthat are confirmed (or at least are not falsified). Everyworthwhiletheory must have at leastconceptually testable (falsifiable) implica-tions. In practice the tests are most often statistical. A theory that

fails the testmust be discarded. Atheory that passesthe testis helduntil an alternative theory comes along that does a better job ofpredicting.

Austriansrejectthis instrumentalist viewofeconomicsbecause itis always possible foran economist to explain away any statistical

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results he orshe doesnot like.Everytheory ofhuman actionisladenwith subjective components, and subjective variables cannot be

quantified. Thus, forexample, ifa correctlyexecuted regression study

ofa demand relationship indicated a positive ownprice elasticityofdemand, theresult couldbe easilydismissed.All theanalystwouldhavetodo isassert thata negativelysloped demandcurvehas shifteddue toa change oftaste.The positive slopecouldbe explainedawayas anidentification problem. Since tastescannot be quantified, thereis no way this convenient excuse can befalsified. Inbrief, theceteris

paribus conditions needed for econometric testing of theories areunavoidably elusive.

Since econometric testing cannot separate goodmodels frombadmodels, care must be taken to build economic theories on realistic

assumptions. Good analysis to a modernAustrian consistsofcorrectchains oflogical inference fromself-evident propositions such asthe

action axiom and scarcity. The term self-evident refers to propo-sitions that analysts and theiraudiences readilyaccept becausethepropositions seem, through introspection and common personal

experience, to becorrect.Introspection is a legitimatetool forgainingunderstanding in economics because the object ofinquiry in eco-nomics is what humans do, and analysts and their audiences arehuman. Introspection is not alegitimatetoolinthe physical sciencesbecause the objects ofinquiry in physical sciences are quantifiablephenomena that areexternal tohuman analystsand their audiences

(Mises 1962).Alogically correct model is notalways applicable to a particular

real-world situation.Allstatistical studies are numerical descriptionsof history. As such, they may be useful to illustrate principles ofeconomicsby descriptionofpastapplications ofsuchprinciples and

to discover phenomena to beexplained byeconomic theory,but theycannever be groundsforrefuting suchtheory.

The neoclassical mainstream is wont to express assumptions anddevelop modelsby the manipulation ofmathematical equations.Aus-

triansclaimthat such exercisesare redundant atbest andoftencom-

pletely misrepresentthe actual character andessence ofhumanaction.First and most important, the subject matter of economics is thechoices, actions,and interactions ofpeople. Objectively observablephenomenaat time t,suchas labor, capital, money, andother insti-tutions, about which equations mayconceivablybe written, are the

results ofchoices, actions, and interactions of peoplebefore time t.They matterat time tonlyinsofaras peoples subjectiveperceptionsofthem influence the choices that people then make. Human per-ceptions, purposes, and intentions cannot be mathematized in any

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meaningful way. Interpretation and understanding (Verstehen) ofhuman action, not mathematicalmodeling, are the essentialtools ofeconomic inquiry (Mises 1949,pp. 4758).

Mathematical economists arbitrarily use either specific mathemat-ical forms or empty general functional forms as representatives ofrealpeople. They then dismiss therealpeople asredundant totheir

analyses. In Paretos words, Theindividual can disappear, provid-ing heleaves us [a] photographofhis tastes (quotedin Littlechild1979, p. 13). Butthephotograph must leave out whatought tobe to

economists the most important characteristics of an individual: thepersons purposes, intentions, interpretations, and perceptions. Onthe basis ofthis flawed photograph, the mathematical crankis thenturned to generate either well-known results that are more easily

generatedby the purelogic ofchoiceandaction (suchasnotions ofmarginalequivalences) orresultsthatare more complicated but irrel-

evant (such as, ifwe assume a person spends all his income, theweighted sum ofan individuals income elasticities of demand forall goods in his utilityfunction must be one).

The modern Austrian view ofeconometrics and mathematics isthatthey may, from timetotime, beuseful for purposes ofillustration

and/or clarification, butthey are not the sine qua non ofgood eco-nomics. Most of what economistsshould be doing doesnot lend itselftothe use ofthese tools and methods. Thus economists waste a lotof time trying to master such tools, given their relatively limited

usefulnessin economics. The effort spent in that endeavorwould be

better redirected to the further understanding of market processesand institutions.

The onlypredictions that economicsis capable of generatingarewhatHayek(l

968a)callspattern predictions. Thatis, economic anal-ysis,correctlyunderstood,can predictthegeneral directionsofrela-tionships between variablesand general patterns of exchangeinter-

action, but itcan nevermakereliablequantitative orexact numericalpredictions. Economists can explainpatterns, but exactquantitativemeasurement ofthosepatterns is beyond their reach.

Hayek (1952)usesthe term scientismfor the application oftoolsthatareappropriate inthe physical sciencesto fieldsofinquiry suchasin economics, where they are inappropriate. He isunequivocal inhis condemnationofthis common practice.

Buchanans References to Austrians

Before we get to specific consideration of the common groundbetween Buchananand the Austrians,we shouldnote that, withthe

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exceptionof the priesthood observation quoted above and a ref-

erence to sin, which we will consider later, all of Buchanansexplicit references to Austrian economicsand Austrian economists

ofwhich I am aware have been very favorable. For example, in arecent op-edpiecein the WallStreetJournal Buchanan (1986a),afteroutlining the real-world conditions that led in the 1970s to wide-

spreaddisillusionment with theresults ofgovernment intervention,wrote:

The ideas ofProf.Hayek,Austrianeconomists, Armen Aichian,andthe philosopher Robert Nozick, along with those of the public choiceschool helpedmake sense of these conditions.... The ideas thatallowed such understandings and explanations came from the veryscholarswhose teachings had beenscornedby the academic-intel-lectual mainstream in the 1960s, and these scholars came to be

tolerated, respected, and,occasionally, honored by their peers.

In a paper originally published in Austria and laterreprinted asthe introductory essay toavolume ofpapers on public choice theory,Buchanan ([1979c] 1984,p. 11) wrote:

Austria has a veryproud and importantheritageinthedevelopmentofeconomictheoryas I have here definedit, and I may say. . .thatone ofthe mostexcitingandmost encouraging developmentswithineconomicsin the United States today is theobservedresurgence ofinterest in Austrian economics, and notably as among youngresearch scholars.

Likewise, in a lecture delivered ata conference on subjectivist

economics and later published ina collection ofhispapers,Buchanan

([19761 1979a, pp. 9091)wrote:

I challenge any ofyou to take any issue ofany economicsjournalandconvince yourself, and me,that a randomly chosen paper willhave asocial productivity greaterthan zero. Most modern econo-mists are simply doing what othereconomists aredoingwhile livingoffaform of dole that will simply not stand critical scrutiny.... Ithink Iknowwhat I am doing, andI thinkthat most ofthose whoespouse a variant ofAustriansubjectivist economics know what they

are doing.And I think thatour efforts aresocially productive, highlyso.

The Influence ofWicksell andKnight

Buchanan acknowledges Knut Wicksell and Frank Knight as the

two dominant influences in the formation ofhis analytical perspec-

tives on economics and the world ofideas. Two photographsone

ofKnightand theotherofWicksellareproudly placedon his officewalls (Buchanan 1986b). Wicksells A New Principle ofJust Taxa-

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tion was the article that launched Buchanans inquiries into theeconomics ofpolitics (Buchanan 1987a). Knight was one of Buchan-

ans graduate school professors at theUniversity ofChicago, the onethat Buchanan calls my professor. Knightwas responsible for Buch-

anans views on methodology and the primacy ofsubjectivism in

economics (Buchanan1969b,p. xi).

Although neither Wicksell nor Knightwere Austrians, to a largeextent thecommon ground between Buchananand the Austrians can

be traced to their influence. According to Hayek (1968b, p. 460),Wicksells interest in,andperspectives on, theemergenceand char-

acteristics ofthe institutions ofpolitical economywerestrongly influ-enced by Menger. Moreover, the views ofKnight on methodologywere verycloseto theviews ofmodernAustrians.

In a scathing review ofT. W. Hutchisons The Significance andBasic Postulates ofEconomicTheory,Knightcondemnsthe positiv-

ist viewthat good methodology in economics is the same as goodmethodology in the physicalsciences. Andhe does soinalmostthe

same terms that modern Austrians use to make the same points.Knight([19401 1956, p. 151) wrote:

Hutchisons methodology or philosophy of economics is of a sort

that is particularly irritating to this reviewer, especially because it

is so common, among people who ought to know better. Theauthor is a positivist, i.e., oneofthose who always thinkofscience

with acapital S (if they do not always write it thatway)and use itin a context which conveys instructions pronounced in the awe-

inspiredtone chiefly familiarin publicprayer.... The attempt tobuilda social scienceon these foundations suggests that the human

race, and especially a large proportion ofits best minds, having

at long last (avery long last)foundout that the objects ofnature arenot like human beingsare not actuated by love and hate andcaprice and contrariness, and subject to persuasion, cajolery,andthreatshave logically inferred that human beings must be likenaturalobjects, and so viewedby the seeker of knowledge aboutthem.

Knightgoes on in this extensive reviewto emphasize the signifi-canceofthe fact that humanshave purposes and that naturalobjects

theobjects ofthe physical sciencesdo not. Withexplicit referenceto Wieser, Knight (p. 163) endorses introspection as avaluable tool

ofanalysisineconomics. He explores the implicationsofthe subjec-tivenature ofthe knowledge thatisrelevant to understanding human

action, and he presents human action in a subjectively perceivedmeans-endsframework (see especiallyp. 173).He statesthat predic-

tions in economics must be limited topattern predictions (p. 175),

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and he asserts that, unlike the natural sciences, economics requiresinterpretive study (verstehende Wissenschaft) (p. 177).

Inan earlier methodological essay, The Limitations ofScientificMethod in Economics,Knight (1924)examines the nature andlim-itations ofpositivist scientificmethod and concludesthat mathemat-

ics, statistics,and otherpositivist scientifictoolshaveonlyvery lim-ited applicability in economicsand othersocial sciences. For Knight

([1924] 1969, p. 147)

[R]ealsociology andeconomics must be branches ofliterature asmuch as of science. In factthey needto be both, and commonlysucceed in being neither. It is no wonder that these sciences arestill inthe stage of violent disagreementamongtheir followersasto what they are and what they are about. The first step toward

getting out of this slough, we suggest, is to recognize that mansrelationswith his fellowman are ona totally differentfooting fromhis relations with the objects ofphysical nature andto give up,

except within recognizedand rather narrow limits, the naive projectofcarrying over a technique which has been successful in the one

set of problemsandusingit to solve another set ofa categorically

differentkind.

There are two methodological conventions associated with theChicago School: the empiricist instrumentalism ofFriedman andStigler, andthe methodological pluralismofKnight.Buchanan takeshis cuesfromthe latter.

Common Ground in General Economics

Buchanan is best known for hispioneering workin public choice:

theeconomic analysisofpolitics.The Buchananand Tullock classic,The Calculus ofConsent(1962),set the stagefor whatis now known

asthe public choice revolution. Two types ofanalyses comeunderthe rubricofpublicchoice:constitutionaleconomics and operationalpublic choice analysis. The former, Buchanans main interest, is

concerned with constitutional choice and constitutional reform.Wewill discuss constitutional economics in the penultimate section of

this paper. The latteris concerned with political processes withinexistingconstitutional regimes. Here theanalysis, based onpoliticalentrepreneurshipand focusedon the anatomy ofgovernment failure,parallelsAustrianmarketprocess theory.

InThe Calculus ofConsent, Buchananand Tullock(1962, pp. 1213)forthrightly declaretheir analysis to be based on methodologicalindividualism. Along with modernAustrians they recognizethat theonly way to understandwhat anycollectivedoes is to understand thechoices, plans,and actions ofthe individual members ofthe collec-

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tive. To understand what governments do within a given constitu-tional regime, itis necessaryto understand the plans and actions ofthe politicians and bureaucrats who wield governmental authority

within that regime. Andthe way that understanding is pursued inpublic choice theory is to beginwiththe assumption thateach person

pursues broadly conceived self-interest. (Austrianswould say thateach person acts in accordance with the action axiom.) All people,whether employed in the government sector or the market sector,attempt todo the best theycan for themselves,as they see it,withinthe set ofconstraintstheyconfront.Peoplewhomakedifferentdeci-sions in the government sectorfrom those theywould makein themarketsector do so only because of the differences in incentivesthey confrontin the twosectorsthat is, onlybecause institutional

constraints are different inthe governmentthan in the marketsector(see, forexample, Buchanan 1987a,pp. 24546).

Inhis presidential addressto theSouthernEconomic Association,

Buchanan ([19631 1979a) explained why he thinks thatthe conven-tional focus ofeconomists on constrained maximization or optimi-zationis misplaced.The famous Robbinsiandefinition ofeconomicsserved to retard progress in economicunderstanding (p. 20), TheRobbinsian formulation pays no attention to the important task ofidentifying properly the entity for whom the defined economic

problem exists (p. 21). He takes Friedman to task for his holisticcharacterizationofeconomicsas thestudy ofhowa particular soci-

etysolves its economic problem (p.21).He says he wants econo-mists to concentrate on exchangerather than onchoice (p. 26). Ifhe could start all over again, Buchanan would recommendthat theword economics bereplaced withthe word catallacticsor sym-

biotics to emphasize that the proper objects of analysis are theimplications of individuals seeking to further theirbroadly definedintereststhrough mutually beneficial relationships with otherindi-

viduals(p. 27).

In words that Mises and Hayek must have applauded and thatKirzner (1965) explicitly acclaimed, Buchanan (p. 29) called for a

redirectionofattention away fromthe comparative statics ofperfectcompetition and monopoly and ofWalrasian general equilibriumtoward market process:

A market is not competitive by assumption or by construction. A

market becomes competitive and competitive rules come to beestablished as institutions emerge to place limits on behavioralpatterns. It is thisbecomingprocess, brought aboutby the contin-uous pressure of human behavior in exchange,that is the centralpart ofourdiscipline, if we have one, not thedry rotofpostulated

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perfection.Asolutionto a general-equilibrium set of equations isnot predetermined by exogenously determined rules. A generalsolution, ifthere is one, emerges as aresult ofa wholenetworkof

evolving exchanges, bargains, trades, side payments, agreements,contracts which, finally at somepoint, ceasestorenewitself. Ateachstage in this evolution toward solutionthere are gains to be made,there are exchangespossible, andthis beingtrue, the direction ofmovement ismodified.

Buchanan (pp. 3031) clearly shares the views ofHayek on insti-tutions, suchas themarket,as spontaneousordersthatare the result

ofhuman action rather than human design:

The marketor market organizationisnot a means toward the accom-plishment ofanything. Itis, instead,the institutional embodimentof the voluntary exchange processes that are entered intoby indi-

viduals in their several capacities.... It is a setting, an arena, inwhichwe, as economists, astheorists (asonlookers), observe menattempting to accomplishtheir ownpurposes, whatever these may

be. And it is aboutthese attempts that our basic theory is exclusively

concerned if we would only recognize it as such.

In General Implications ofSubjectivism in Economics, Buch-

anan ([1976] 1979a,p. 84) endorses Hayeks criticism of scientism

and recognizesthatKnight and Hayekshare common methodologicalground:

Hayekand Knightwere sharplycritical ofany attempts to convert

economics intoa discipline analogous to a naturalscience. Econom-ics is,or canbe, scientificin a sense that is, I think, unique. Theprincipleofspontaneousorder isa scientific principle, in that it canreadily be divorcedfromnormativecontent. Unlesswe stay withinthe exchange paradigm, however,welose the legitimately scientificprinciple, and, instead, launch offinto the scientistic implicationsthat emergefromthe maximization paradigm.

Is Economics the Science ofChoice? was Buchanans (1969a)contribution toa HayekFestschrift. It is his most systematic consid-

eration ofmethodological problems. He opens the paper with aquotefrom Hayeks Economics and Knowledge (1937), and, adopting

someofHayeks insights inthatessay,he goeson to divide economictheory intothree categories:the logicofeconomic choice,the abstractscience of economic behavior, and the predictive science of eco-nomic behavior.

The Logic ofEconomic Choice

The first category consists of purely a priori reasoningbased on

the notion that individualsattemptto pursue their broadly conceived

self-interests. This category is what Mises regarded as the central

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domain ofeconomictheory. Since whatis inapersons interest (the

goodsin his utility function) is wholly undefined, thelogical infer-ences obtained inthis category are empiricallyempty.Thatis, theinferences are notconceptually refutable. Any observed action can

be interpreted tobe in the actors interest. But Buchanan ([1969a]1979a, pp.4142)tells us:

[Elmpirical emptiness should not ... be equated with useless-ness. ... Commencing with the factthat choosers choose and thattheydo so underconstraints which include the behavior of others,theeconomistcan begin tomake meaningful statementsabout theresults that emerge from the interaction among several choosers.Certain laws can be deduced, even if conceptually refutablehypotheses cannot be derived. . Thelaw ofchoicestates onlythat the individualdecision-maker will select that alternative thatstands higheston his preference ordering. Defined in purely logicalterms, this produces the law of demand. In this way, tradeorexchangecan be explained, even insomeofits mostcomplexvari-eties.Characteristicsofequilibriumpositionscanbe derived,thesebeing defined in terms of the coordinationbetween expected andrealizedplans of the separate decision-makers.

In EconomicsandKnowledge, Hayek(1937), too, discussedthelimitationsofwhat he calledthe purelogicofchoiceand explainedwhat he considered to bethe onlymeaningful notion ofequilibrium:

theinterpersonal coordination of plans and actions.Actually,Hayek

applied the term pure logic ofchoice to two different types ofanalyses: first, to the pure a priorism ofMises (Buchanans first cat-egory) and second, tomodels wherein the utilityfunction and con-straints are fully specified as mathematical equations orcurves inCartesian planes. In the latter (standard neoclassical) case there isno real choice at all. With theutility function and constraints fullyspecified, anexternal observercan, with certainty, predictthe out-come. All that separates the observer (and the chooser) from theansweris mere calculation or computation.

Hayek ([1937] 1948, pp.4445) states that while the pure logic of

choice, in the first sense, is sufficient to understand the nature of

equilibrium, the questionof whether thereis inmarketsatendencytoward equilibrium isan empiricalone.

Toanswer that question, thQeconomist must gobeyondthe pure

logicofchoiceto examine the processes by which agentsacquire theknowledgethey must possess forplans tobe fully coordinated.

TheAbstractScience ofEconomicBehavior

And thattakes usinto the realm ofBuchanans second category ofeconomic theory: theabstract science ofeconomic behavior. Here

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the content ofself-interest is specified, but the analysis remainsqualitative rather thanquantitative. Conceptually refutable pattern

predictions canbe made. As Buchanan([1969a] 1979a, p. 45) states:

In thepure logicofchoice,the argumentsin the utilityfunctionarenot identified: goods and bads are unknown to the externalobserver. Inany science ofeconomic behavior,the goodsmust beclassified assuch.Butunderminimallyrestricted utilityfunctions,specific trade-offsamongthese mayremain internal to the actingunits. The individual chooses in the sense that his selectionfromamong several desirable alternativesremains unpredictableto theobserver. Whatwe have here isan extremely limited science ofbehavior combined with an extensive logic of genuine choice.Wemovebeyond this essentially mixedframeworkwhen the trade-offsare more fullyspecified. Additionallawsof behavior canthen

be derived; and, more important, predictions can be made abouttheresults of the interaction process.

Buchananplaces mostofhisown economictheorizing inthis sec-ond category. I think that Kirzners analysis ofthe entrepreneurialmarket process also falls in this category (Kirzner1973, 1979, 1985).

The entrepreneur is the key actor in that analysis. In neoclassicallanguage, Kirznerspecifiespecuniary profit as agoodand pecuniaryloss as abad in the entrepreneurs utility functions.Because ofthatrestriction on utility functions, Kirzner is able to make concep-tually refutablepattern predictions, for example, theexistence ofa

strong tendency to equilibrium inthe market process. Everyinstanceof plan discoordination based on lack ofrelevant knowledge is apotential profitopportunityfor an entrepreneur who noticesthe sit-uation and acts on it. As the entrepreneur acts, others imitate theprofitable actions and thus the discoordination (disequilibrium)diminishes. To justifyhis confidence that the knowledge necessaryfor interpersonal plancoordinationwill be discovered bythosewhoneed to discoverit, Kirzner(1979, chap.2) relies on the propensityof entrepreneurs to noticethatwhichis in their interest tonotice.

Curiously,Kirzner(1976a, pp.4647)interpreted Buchananscon-tribution tothe HayekFestschrifttobe anegative appraisal ofAus-

trianmethodology:

Critics ofAustrian methodologyoften argue that sincepraxeology[Misespure apriorism] deals with unobservables, it is inherentlyincapable oftellingus anything scientific about observables. Thelatest (and perhaps the clearest andmostsympathetic)statement ofthis argument was byJames Buchanan, in his contribution to theHayekFestschriftwhenhe drewattentionto thedistinction between(1) the logic ofchoice (whathe called theabstract science ofeco-nomicbehavior)and (2) the predictive scienceofhuman behavior.

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BUCHANANAND THE AUSTRIANS

Buchanan argued that if we treateconomicsas thelogic ofchoice,itcannot in principle lead to refutable hypotheses becauseno par-ticular preference ordering has beenspecified,and tothat extent it

cannottell usanythingabout the realworld.In answer toBuchanan,our discussionindicates that thetruth isthe otherwayaround. We arenot onlyable tosay somethingaboutthe realworld;we are also able tosaya great deal abouta large andimportantarea ofhuman experience about which other disciplinesarenecessarily silenttherealm ofpurpose.

I thinkKirzner misunderstood Buchanan in the above. Perhaps

because he wasusedto criticism by economists whothought that theworst thing you could say about an analysis was that it was notconceptually refutable or that it was empirically empty, he simplyassumedthat Buchananhad the same attitude.But, aswe have seen,

to Buchanan the termempirically empty is not a term ofoppro-brium, and he does recognize that useful conclusions can emergefrom the purelogic ofchoice. Moreover, Buchanandoes not equate

thepurelogic ofchoice with theabstract scienceofeconomic behav-ior. The latter ishis second category,and heplaces his own worktherein. I claim that much ofKirzners work is also in thiscategory.

Finally, in lightofBuchanans recognition, quoted above from his1963presidential address, that ourbasictheory is exclusivelycon-cerned with men attempting to accomplish their own purposes,whatever these may be, Kirzners answer to Buchanan is not

appropriate.

The Predictive Science ofEconomic Behavior

Buchanansthird categoryof economic theorythe predictivesci-ence ofeconomic behavioris economics as an exact science that

attempts to makequantitative predictions based onfull specificationsofobjectivefunctions andconstraintsand on statisticaldata analyses.

Here, according to Buchanan ([1969a] 1979a, p. 49),the economistgoesbeyond conceptual refutability to actualempiricaltesting againstreal-world observations. But,in Buchanansview,actual quantita-

tive empirical testing is nextto impossible,and inthe end it cannotever refute the generallaws ofthe firsttwo categories.

In the concluding paragraph of this important paper Buchanan(p.63) once againexplicitly alignshimselfwith Hayekian methodology:

The critical methodological oversightwasthatwhich Hayekempha-sized, with clarity but to littleavail, in severalof his fundamentalpapers in the late1930sand early 1940s. Thefailureofeconomiststo recognize that the sense data upon which individuals actuallychoose in either market or political choice structures are dimen-sionally distinctfromany datathat can be objectivelycalled upon

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byexternal observers led directly tothe methodologicalchaosthatcurrentlyexists. . .. Few economists are whollyfree of theconfu-sionsthat I have discussed. Formyself,Iadvancenoclaim that my

ownthinking hasyet fullyrid itself ofthe paradigmsofneoclassicalorthodoxy.

Inhis foreword to GordonTullocks The Politics ofBureaucracy,Buchanan ([1965] 1979a,p. 171) indicates his agreement with theAustrians on the question ofthe usefulness of introspection in thesciences ofhuman action:

[H]ypotheses about individual behavior are ... important in Tul-locks analysis, and the absence ofexternal variablesthataresubjectto quantificationmakes the refutation of positive hypothesesdiffi-cult in theextreme. Forassistance here,Tullock introduces asim-ple, butneglected,method. He asks thereader whether or nothisown experience leads him to accept or to reject the hypotheses

concerning the behaviorofthe politician inbureaucracy.

Evidence on Buchanans attitude toward the use ofmathematics

andstatisticsto make economics seem like an exact, predictive sci-encecan be foundin severalofhispapers. For example, inhis essayPoliticswithoutRomance, Buchanan ([1979c] 1984, p. 11) writes:

Ecciesiastes tells us that there is nothingnewunder thesun,andin a genuine sense, such a claimis surely correct, and especially in

the so-called social sciences. (I am remindedof this every weekwhen I seemy mathematically inclined younger colleaguesin eco-

nomics rediscovering almost every wheel that older economistshave ever talkedabout.)

In General Implications ofSubjectivism in Economics, Buch-anan([1976] l979a,p. 88)writes:

Theyoungand aspiringeconomistwho becomes the expert em-piricist has necessarily sacrificed training time in learning moreabout the process to which his highly polished technical tools areto be applied. These gapsinthe trainingofmoderneconomistsarebeginning toshowup inmanyforms,not the least of which is thedeadly dullnessthat dominates whole departments in many uni-versities andcolleges.

Inthesamepaperhe states that there may be somelegitimateusesofmathematics,such asaidingthe understanding ofthe relationships

between parts of ananalysis, solongas itis keptin its proper placeasa tool and is notpermitted to define thescope ofwhatisconsideredgoodeconomics (p. 89).

In Retrospectand Prospect, Buchanan(1979a, p. 280) penned

the following passionate condemnation ofabuse of statistics andmathematics ineconomics:

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I see a continuing erosionof the intellectual (andsocial)capitalthatwas accumulatedby political economy in itsfinest hours. I lookatyoung colleagues trained tomaster regression routineswho are

totallyuninterested in, and incompetent to examine, elementaryeconomicpropositions. The graduate schools attract and turn outdullards, and the exciting young minds turn increasinglytolaw,tophilosophy, and to thecommune. Forthose among these minds thataretrappedintoeconomicsand thatmay,witheffort, partiallyfinessetheempiricist rage, I seethemcompelled toutilize theirconsider-able mental potentials, resolving the escapist puzzles of modernmathematics.

Itis notsurprising, then,to note that Buchanan makes little useofmathematics, and in noneofhis publications, notevenone, hashe undertaken statistical estimates (Christainsen 1988, p. 11).

BuchanansSummary Statements

Buchanans 1979essayRetrospect andProspectconsistsmainlyof an enumerated list of eight cryptic statements or assertionsthat Buchanan uses to restate some ofthe main points ofthe earlieressays and to suggest possible directions thatseem ripefor furtherinquiry (Buchanan 1979a,p. 280).Inorder, his statements concernmethodology, limited usefulness ofequilibrium analysis,entrepre-neurship, exchange over maximization as the basis ofeconomics,institutions, economics as politics, spontaneous order, and mathe-

maticsas excess baggage. Only the sixth statement, economics aspolitics, is notobviously Austrianesque. Theothers couldhave beenwrittenby a modern Austrian as forcefulsummary statements ofmuch

ofwhat is distinctive about Austrian economics. What follows are

briefexcerpts from eachof the remaining seven statements (Buch-anan 1979a, pp.28082).

On MethodologyThe problems in economicsarenotamenableto scientific solutions[inthe sense ofphysical-biological sciences],andprogressis notto be expectedby pushingback the frontiers ofscience. The stric-tures ofboth FrankKnight and F.A. Hayek against scientismrequire

repeated repetition.OnEquilibriumTheequilibrium constructions areuseful only if their limitationsare appreciated. These allowus to discuss dijections ofadjustment

rather thanstates ofpotential attainability.

OnEntrepreneurshipIncreasingly, I have come to the view that the role ofentrepre-neurship has been the most neglected area ofeconomic inquiry,with significant normative implications for the general understand-

ing ofhowthe wholeeconomyworks.

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OnExchangeversusMaximizationThe behavioral paradigm centralto economics isthat of the traderwhose Smithean propensity to truck and barterlocatesand creates

opportunities formutualgains. . . .

[T]he maximizationparadigmisthefatal methodologicalflawinmodern economics.

On institutionsChoicesare made by actors,by traders,constrainedwithin specifi-cally determined laws and institutions, a central emphasis ofAdam Smith and one that has been lost tomodern minds. Institu-

tionsmatter.

On Spontaneous OrderAs a discipline or area ofinquiry, economicshas social value inoffering an understandingof the principle oforder emergentfromdecentralized processes, ofspontaneouscoordination. (The market

is the classic example.)Such an understanding is necessarilypriortoaninformed decisionon alternativeformsofsocial order.

On Mathematics[D]espite the attemptsbymodem scholarstocloaktheir own inse-curity in complexity, the central principles ofeconomicsare ele-mentary. We do not need the excess baggage ofmodern mathematicsto grasp and to convey thebasic wisdom that Adam Smith discov-ered and that hissuccessors emphasized.

Evaluating Economic Policy

Buchanan and the Austrians also share common ground on themeans by which itis legitimate foreconomists to come to normative

conclusions regarding various governmental policies. Mises was often

accused ofcarelessly mixing normativejudgments with positive anal-ysis. In one place Buchanan ([1969c1 1979a, p. 77) writes: It is asmuch ofa sin forvon Mises or his followers to decry governmentfailure on the basisoftheir empiricallyempty model asit is for Bator

to neglectgovernmental failure in his extremelyrestrictedmodel.

However, as Kirzner (1976b, p. 82) explains, Mises negativeassessmentsconcerning governmental economic policieswere basedon positive conclusions ofhis pure logic ofchoice. Those conclu-

sions, Misestaught,demonstratethat theoutcomesofproposed gov-ernmental economic policies will almostalways be different fromthe outcomes that theprotagonists ofthe policies claim they intend.This is precisely the view adopted by Buchanan ([1977] 1979a,p. 180) for the use ofpublic choice theorynormatively to evaluate

governmentpolicy:

Public-choice analystshavenobusiness telling President CarterorJim Schlesingerjustwhat energy policy ought to be proposed.Nor do they even have any role in delineating what would be an

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ideal policymix. Positive public-choice analysts can tellus,how-ever, and within broadlimits, roughlythe sortofenergy policythatis likely to emergefromthe collective decision-making institutions

that we observe in operation. This is, and has been, our majorcontribution, And our predictions can tell us that the emergentresults areunlikelyto bear much relationship to those resultsdesired,even by those who make the final normative decision as to theought.

Common Ground in Cost Theory

Hayek ([1952] 1979, p. 52) wrote, It is probably no exaggerationto say that every important advance in economic theory during the

lasthundredyears wasafurther stepin the consistent applicationof

subjectivism. That is certainly the case with costtheory. There isnonotion more basicin economicsthan that individualsmakechoiceson the basis ofcomparisons ofcosts and benefits, The costs that

influence choice,the costs onwhicheconomistsshouldfocus,are as

thoroughly subjective asthebenefits thatinfluence choice.Buchananandthe Austriansunderstandthisbetterthan most other economists.

In Cost andChoice, Buchanan(1969b,pp. 1215)even partscom-pany with Knight on the issue of subjectivism in costs. Knightsconception of opportunity cost was the market value of alternativeproduct. But, as Buchanan and the Austrians recognize, cost, thusdefined, hasno connection withchoice at all.

Buchanan adopts sucha thoroughly subjectivist view ofcost thatLelandYeager (1987), theLudwig von MisesDistinguished Profes-sor ofEconomics at Auburn University, calls his views exaggera-tions. Before we evaluate Yeagers objectiontoBuchanans subjec-tivistunderstanding of cost, however,we must see what Buchananhasto sayabout the subject.

Buchanan (1969b) identifies his subjectivist views on cost with

thosedeveloped in the 1930s and 1940sby Hayek and Robbins atthe London School of Economics, and extended in the mid-1940s

and 1950s byG. F. Thiriby.Althoughhe calls hisviews theLSEcost

tradition, he writes, Latter-day Austrians especially may suggest,withsomejustification, that the theory developedisproperlylabeledAustrian (p. ix). He goeson tosay, however,as Kirzner(1988)alsosays,that early Austrianattemptsto explain costwere so unsatisfac-tory that they contributed to some ofthe misdirections and misun-derstandings embodiedinorthodox cost theory.InBuchanansview,misstatements of subjectivistcostby Misesand Hayekearly in thesocialist calculation debate provided Lange and Lerner with groundsfor claiming that market socialism solves the calculation problem

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(pp. 2223, 26). Clarifications ofthe subjectivist cost theory weremade by non-Austrians, such as Thiriby and Robbins, as well as

Austrians,suchas Misesand Hayek.Buchanan (1969b, pp.4445) makes adistinction between choice-

influencing and choice-influenced costs. The former are subjective

and enter into theprocess ofmaking choices. The latter are objec-tively observable accounting costs that are the result ofthe actionstaken on the basis of choice-influencing costs. Money measures of

cost ofproduction, for example, depend on prices oflabor, capitalservices, materials, and supplies. These prices emerge outof themarket processes of production and exchange. But the actions ofpeople in production and exchangeare based on the choices thosepeople make, and those choices are influencedby subjective evalu-

ations attachedto sacrificed alternatives,In his development ofthedistinction between subjectivechoice-

influencing costs and objectivelymeasurable money costs, Buchanan(1969b, p. 49) adopts the Austrian views that what is important ineconomics is the process by which markets in disequilibrium arenudged towardequilibrium and thatthe specialconditions that existinequilibrium have littlepractical value:

Ifthe whole economyis not operating at fullcompetitiveequilib-rium, profits-losses may occurand, hence,observed outlays cannotbe taken to reflect foregone opportunities of the actual decision-

takers in any generalsetting.In fullequilibrium,on the otherhand,observed outlays directly represent the maximum contribution of

resources in different uses. Therefore, to the extent that decision-

takers behave economically, the observed outlays reflect genuine

opportunitycosts, even ifsomewhatindirectly.... [Tihewholepurpose of the economic theory in which cost is relevant is todemonstrate how choices made in nonequilibrium settings willgenerateshiftstowardequilibrium. And choices in nonequilibriummustbe informed by opportunity coststhatcannot,even indirectly,be represented by measured outlays.

Buchanan (1969b, p. 43) lists six implications of a choice-based

conceptionofcost:

(1) Most importantly, cost must be borne exclusively bythe deci-sion-maker; it is not possible for cost to be shifted toor imposed onothers. (2)Cost is subjective; it existsin the mind ofthe decision-maker and nowhere else. (3) Costis based on anticipations; it isnecessarily a forward-looking or exante concept. (4) Cost canneverbe realized because of the factofchoice itself: that whichis givenup cannot be enjoyed. (5) Cost cannot be measured by someoneotherthan thedecision-maker becausethere is no way that subjec-tive experience can be directly observed. (6) Finally, costcan bedated at the moment ofdecisionor choice.

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Yeager (1987) takes strong exceptiontothefirsttwo implications.Hesays that externalities such as air pollution clearly represent an

imposition ofcost on others, and dirty airis not subjective. Butthesesix implications referto choice-influencing, not choice-influenced,

cost. Externalities, by definition, do not influence the choices madeby the person whose actions result in the spillovers. Externalities

are choice-influenced cost. Moreover, the choice-influencedcosthereis not the dirty air; it is the sufferers subjective evaluations ofthedirty air. Yeagers objection simply misses the point.

Kirzner (1973,ch. 5)uses thechoice-influencingnotionofcost(he

does notuse that language) to clarify the meaning oflong-run andshort-run cost and to establish that a marketprocess which is seenascompetitive from onepoint ofview may turn out tobe monopolisticwhenevaluated from adifferentvantage point (p. 198). Inso doing,

he is implicitly employingBuchanans third and sixthimplications.

Kirzners concern is withan entrepreneurial decision to acquireall the available supply ofa resource that is needed to produce a

product. At the pointof decision, the marketprocess is competitive

because others could attempt the samething. After the acquisitionoftheresource supplies, the subsequentmarket processwould havetobe considered monopolistic becausethe earliercompetitive deci-sion resulted in a closedmarket. Were the entrepreneurial actions

competitive or monopolistic? The answer depends on the perspec-

tive fromwhichthe question is examined.

Common Ground in Political Economy

Buchanan is acontractarian inconstitutional choice. InTheLimits

ofLiberty (1975) and with Geoffrey Brennan in the The Reason of

Rules (1985), he spells outhis views on the social contract idea of

politics as exchange. The basic behavioral assumption is what Aus-trians would callthe actionaxiom. The methodological perspectiveis individualistic. The purpose ofthe analysis is first of all tojustify

the existence ofa constitutionally circumscribed state and then todiscern what sort ofconstitutional rules could conceivably receive

unanimous consent at the stage ofconstitutional choice. The basictool ofanalysis is conjectural historythe construction ofa story ofhowa proper constitutional order logicallycould have emerged. Thepointis not to explain how actual governmentsemerged in history;

rather, itis tojustifya particular formof stateon the groundsthat itcouldlogicallyhaveemerged as a unanimously approved socialcon-tractamongself-interestedpeople.

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Buchananadopts the unanimity principle from Wicksell (1896).

The importance ofunanimity as abenchmarkis that, because ofthesubjectivity ofpersonalcosts and benefitsattached to each collectiveaction, it is impossible, without unanimousconsent, ever to deter-mine whether anycollective action isgenuinely in thepublic inter-est. In collective decisions the counterpart to mutual consent in

market exchange is unanimity. Buchanan modifies the Wicksellianprinciple by transferring it to the constitutional stage of collectivechoice.

Buchanans contractarian approach isuseful today because it pro-

vides away ofnormatively evaluatingproposedconstitutional revi-sions. Clearly, in the United Statesin the 1980s no actual constitu-tional changewould receive unanimous approval. There are simply

too manyvested interests in the statusquo. Nevertheless, the polit-ical economist can use the unanimitycriterion as a benchmark nor-mativelytoevaluate existing constitutional provisionsand proposed

constitutional changes. Ifa plausible argument can be made that,startingfrom ground zero with each personmakingevaluations undera veil of uncertainty asto his orher specific interests in an indefi-nite number offuture applications ofthe constitutional rule, a pro-posedconstitutional changewould receiveunanimous consent, the

ruleshould beadopted. Ifit is clearthat, in thatartificial setting, therule could notreceive unanimous consent, the rule should notbe

adopted.Accordingly Buchanan (1987a, p. 248)writes:The political economist who operates from within the Wicksellian

research program, as modified, and who seeks to offer normative

advice must, ofnecessity, concentrate onthe processor structurewithin which political decisions are observed to be made. Existing

constitutions, or structures ofrules, are the subject ofcritical scru-

tiny. The conjectural question becomes: Could these rules haveemerged fromagreement by participants inan authentic constitu-tional convention?

Itis crucial to seethat Buchanan appliesthe unanimity principle

at the stageofconstitutional choicethestage ofchoosing the rules

bywhich thecitizensofthe political economywill live.The principleneed notapply at the stage ofpostconstitutional, day-to-day oper-

ationsofthegovernment set up by the constitution. Forexample, atthe constitutional stage people could unanimously agree thatpostconstitutional, annual national-defense budgets would bedeter-

mined by majority voting among elected representatives. A losingminority at the postconstitutional stage could not then,accordingtoBuchanan, legitimately claim that they were being coerced by thevictorious majority.

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Buchanan hasnot spelled out the details ofwhat hethinks acon-sitution constructed on the unanimity principle would contain. His

concern has beento understand and exposit the process by whichsuch a constitution could beidentified. He thinks that the postcon-

stitutional political process inthe United States has produced some

disastrous results,and hethinksthatit istime inAmerica for scholarsto do some serious thinking about constitutional change. Settingconstitutional choice in the context ofan initial zero-government

state of nature withall self-interestedparticipants makingdecisionsunder a veil of uncertainty makes unanimity conceivable. If theparticipants do not know their relative positions in an indefinitenumber of future applications ofthe constitutional rules, theywill,Buchanan conjectures, adopt process rules that areperceived to be

fairones that promote equality of opportunity (Brennan andBuchanan 1985).

The unanimity principle is applied routinely in Paretian welfareeconomics. The earlierPigouvian welfare economics failedbecause

ofthe incomparability ofsubjective costs and benefits. Individualbenefits and costs cannot be measured on any objective scalethat

wouldpermit interpersonal comparisons ofgainsand losses;hence,theformalistic application ofPigouvianmarginalequivalences isanemptymind game.In Paretian welfareeconomics,a collectivepolicyis said to be inthe interest ofthe collective ifthe policybenefits at

leastone personwithout makinganyoneworseoff. The evidence forsuch Paretoefficient changesisthe consent ofthe individuals involved.The impossibility ofa socialwelfare function(Arrow 1951)makesitimpossible tomake nonarbitrary collective choices from the set of

Pareto optimal outcomes. Inbrief, because ofthe subjectivityofallrelevant costs and benefits, welfare economics is reduced to the

search formeasures thatreceive unanimous consent.Murray Rothbard ([1956] 1977, p. 28), an Austrian, was one ofthe

first explicitly to call for the application ofthe Paretian unanimityrule toan analysis ofthe stateitself:

Until quite recently,welfareeconomics has never analyzedthe roleofthe State. Indeed, economics ingeneral hasnever devoted muchattention to this fundamental problem. Specific problems, such as

public finance or price controls, have been investigated, but the

State itselfhas been a shadowy figure in the economic literature.

Usually, ithas vaguely beenconsidered asrepresenting society

or the public in some way. Society, however, is not a real entity;itis only a convenient shorthand term for an array ofall existing

individuals. The largely unexplored area of the State and Stateactions,however, can be analyzed with thepowerfultoolsofDem-

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onstrated Preference [actual choices made by people in realchoicesettings] and theUnanimityRule.

Although Buchanan and Tullock did not refer tothis statement byRothbard in The Calculus ofConsent, it could well be taken as aprologue to what later emerged as public choice theory.

But itis with Hayek thatBuchanan shares themostcommonground.

Indeed, I thinkthat Buchanan has strongly influenced Hayeks ideas

about an ideal constitution. Buchanan frequently refers to Hayeks

work. In Public Choice and Ideology, Buchanan ([1978] 1979a,

pp.27475) explicitly acknowledges thatHayeks political economyis consistent with,but significantly differentfrom, his own.Hayeksviews are Panglossian because, according to Buchanan, Hayekexpresses confidence that efficient institutions inevitably emerge

fromthe on-going process ofpoliticalevolution. Thus the best thingtodo is avoid interfering withthe process. The institutions we haveare the best we can have at the moment. Buchanan calls his ownviews meliorist becausehe recognizesa need toconstructconsti-tutions and rules toconstrain the self-seeking propensities ofman.

However, when it comes to design ofconstitutions, Hayek hasmorein common withBuchanan than the Panglossian/meliorist dis-tinction implies. It is not truethatHayek thinksthatexistinggovern-mental institutions are the best we cando. For example, in Eco-nomic Freedom and Representative Government, Hayek ([1973]1978, p. 107) explicitly states that majoritariandemocracy has gotten

out ofhandand has planted theseeds of destructionofthe marketorder.

While Hayekhas consistently taken an anti-constructivist,evolu-tionary approach to nongovernmental social institutions, he hasnotdone so when itcomesto governmental institutions. His insights onthe division ofknowledgeimply that itisimpossiblefor oneor afewpersonsto construct social institutions that embodythe sameamountofknowledge and understandingthat is embodiedinspontaneouslyformedsocial institutions.All relevantbits ofknowledge andunder-standing are brought to bear inthe process by which social institu-

tions spontaneously emerge simply because all individuals, withtheir own fragmented, subjectively held knowledge, play a part inthe process. In Hayeks words ([1937] 1948, p. 54), understandingthe advantages ofspontaneous orders over constructivist designsrequires acknowledgment that the combination[s] offragments ofknowledge existing in differentminds bring about results which, iftheywere tobe broughtabout deliberately, would require aknowl-edge on thepart ofthe directing mind which no single person canpossess.

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But when it comesto governments, Hayekrecognizesthe negativesumconsequences ofpolitical entrepreneurship underexistingcon-stitutional regimes. He also recognizes, on public choice grounds,

that minorities can rule ina majoritarian democracy. More to thepoint, he proposes a constructivist constitutional solution, demar-

chy, and states that ifhis constructivist design were tried by anycountry, the resulting prosperity would create a consensus that

demarchy ought tobe imitated elsewhere. Approximate unanimitywouldbe the result ofsuccessfulinitial trials.

Hayek(1979) lays outthedetails ofdemarchy involume 3ofLaw,Legislation, andLiberty. He recognizes, asdoesBuchanan, that thereare really two levels ofcollective choice. There is the level ofthegeneralrules of just conductconstitutional process rules that are

intended to apply to every individual situation irrespective ofthepeopleand interests involvedand there is theleveloftheroutine

operations ofgovernment. Heproposes twoassembliesofrepresen-tativesto handle the twodifferent activities. The legislative assem-

bly would beresponsible fordiscovering, articulating, and applyingthe gradually evolving universal rules ofjust conduct. Itwould also

specifylimitson what the otherassembly,the governmental assem-

bly, may do and how it must go about its authorized tasks. Thegovernmental assembly would be responsible forproviding publicgoodssuch as national defense, roads, schools, and dams. Itwould

decide which projects to adopt outofthe permissible setand howmuch to spend on them. But the legislative assembly would deter-mine the tax system. Spenders would have no power to alterthe

formsoftaxation. Spendinglobbyists could no longer shift and dis-guise the taxburden,

The governmental assembly could be set upas present legislaturesare, but the legislative assembly would consist of men and womenbetween 45 and 60 years old, serving l5-year terms. Although nomembercould run for reelection, uponcompletion oftheir 15-year

termsmemberswouldbe guaranteed honorific butneutralpositionsas layjudges so they would not have to return to employment in

the marketsector. Each year,the45-year-old age cohortofthe elec-torate would elect oneofitsown for a15-yearterm.Thus each citizenwould voteonly once for a representative to the legislative assembly.

Thoserunning for election would be people who had already proventheirleadership qualities inthe marketsector.People who hadserved

in the governmental assembly would be ineligible to serve in thelegislative assembly.

Good government is limited government. To keep governmentlimited, Hayek (1979,chap. 16)attempts,in hismodel constitution,

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to insulate themembers ofthe legislative assembly from the temp-tations and pressures of the rent-seeking, negative-sum politicalentrepreneurship that characterizes present majoritarian democracies.

Buchanan does not offer a model constitution, buthe and Hayekagree on theexistence and nature oftwo separate levelsofgovern-mental activity.They agreethat limited government includes morethan just the protective andjudicial services ofthe classical nightwatchman state. It includes what Buchanan calls the productivestatethe provision ofa limited number of genuine, butnonpro-

tective, public goods such as schools,general-accessroads,and mos-

quitoabatement.Theyalsoagree that the provisionofnonprotectivepublic goods is a slippery slope that easily leads to excessive gov-ernment. Hayek tries toavoid the hazards ofthe slippery slope by

separatingthe provisionof public goods from the determination ofpermissible governmentactivities. Buchanan is less explicit on howto avoid the danger. Presumably constitutional revision under theconceptual unanimity principle would include such safeguards.

Conclusion

Austrian economics occupies the middle groundbetweenthezeroinformation cost or rational expectations view of the neoclassicalorthodoxy that says markets are always at or near equilibrium andthe Shackelianview thatwe can neverknow whatwe havetoknow

for equilibrium, so equilibrium is impossible (Garrison1982). Publicchoice occupiesthe middle ground between the view that govern-ment is pure conflictand the viewthat governmentis the embod-

iment oftruth and light(Buchanan 1987b, p. 311). Inmy view, realsolutions torealproblemscan befoundonlyinsuch middle ground.

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