Online Library of Liberty

A collection of scholarly works about individual liberty and free markets. A project of Liberty Fund, Inc.

Advanced Search

James Buchanan on “process” and the market order (1982)

In a discussion prompted by an essay on “Spontaneous Order” by Norman Barry, the economist James M. Buchanan (1919-2013) provides one of the most succinct descriptions of how a market order emerges spontaneously by a process of free exchanges:

I want to argue that the “order” of the market emerges only from the process of voluntary exchange among the participating individuals. The “order” is, itself, defined as the outcome of the process that generates it. The “it,” the allocation-distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no “order.”…

Individuals do not act so as to maximize utilities described in independently-existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of “as if” functions that are maximized. But these “as if” functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.

ORDER DEFINED IN THE PROCESS OF ITS EMERGENCE [A note stimulated by reading Norman Barry, “The Tradition of Spontaneous Order,” Literature of Liberty, V (Summer 1982), 7–58.]

Norman Barry states, at one point in his essay, that the patterns of spontaneous order “appear to be a product of some omniscient designing mind” (p. 8). Almost everyone who has tried to explain the central principle of elementary economics has, at one time or another, made some similar statement. In making such statements, however, even the proponents-advocates of spontaneous order may have, inadvertently, “given the game away,” and, at the same time, made their didactic task more difficult.

I want to argue that the “order” of the market emerges only from the process of voluntary exchange among the participating individuals. The “order” is, itself, defined as the outcome of the process that generates it. The “it,” the allocation-distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no “order.”

What, then, does Barry mean (and others who make similar statements), when the order generated by market interaction is made comparable to that order which might emerge from an omniscient, designing single mind? If pushed on this question, economists would say that if the designer could somehow know the utility functions of all participants, along with the constraints, such a mind could, by fiat, duplicate precisely the results that would emerge from the process of market adjustment. By implication, individuals are presumed to carry around with them fully-determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront. As I have noted elsewhere, however, in this presumed setting, there is no genuine choice behavior on the part of anyone. In this model of market process, the relative efficiency of institutional arrangements allowing for spontaneous adjustment stems solely from the informational aspects.

This emphasis is misleading. Individuals do not act so as to maximize utilities described in independently-existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of “as if” functions that are maximized. But these “as if” functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.

The point I seek to make in this note is at the same time simple and subtle. It reduces to the distinction between endstate and process criteria, between consequentialist and nonconsequentialist, teleological and deontological principles. Although they may not agree with my argument, philosophers should recognize and understand the distinction more readily than economists. In economics, even among many of those who remain strong advocates of market and market-like organization, the “efficiency” that such market arrangements produce is independently conceptualized. Market arrangements then become “means,” which may or may not be relatively best. Until and unless this teleological element is fully exorcised from basic economic theory, economists are likely to remain confused and their discourse confusing.

About this Quotation:

The great free market economist James M. Buchanan (1919-2013) died this week. His contribution to the resurgence of interest in free market economics and limited constitutional government in the post-war period cannot be underestimated. Not only did he make pioneering contributions to an entirely new field of economic theory, the so-called “Public Choice” school, winning the Nobel Prize for Economics in 1986 as a consequence, he also taught several generations of young economists who continue to work in this important area. The key insight he developed was the apparently obvious one that politicians and bureaucrats are also human beings and have the same motivations which spur their fellow creatures to action (or inaction). It is a common place that “consumers” and “producers” attempt to maximize the “benefits” which are available to them and to minimize the “losses” or “inconveniences” which they face. So too do politicians and bureaucrats, only for them the things they attempt to “maximize” are not profits or monetary gains but power, privilege, re-election, promotion, expanded departments and budgets, and dare one also say renown and an historical “legacy”. Buchanan spent a lifetime developing these ideas and they have become very influential. Liberty Fund is very proud to be the publisher of a 20 volume edition of his Collected Works, 9 volumes of which are online here at the OLL.

More Quotations