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James Buchanan on Methodological Individualism and the Market Process

A rigorous application of methodological individualism is perhaps what most separates the Austrian and Public Choice schools from most others. The idea that the individual should be the unit of analysis has spared public choice and Austrian economists from many of the mistakes of what might be called collectivist economics. The Austrians, for example, have exposed a great deal of macroeconomic nonsense due to the fact that Keynesian theory largely ignored aggregation problems. The Austrian conception of markets, based on the interaction among individuals and on man’s inherent “propensity to truck, barter and exchange,” is also more useful and informative, in my view, than the perfect competition model.

Buchanan and other public choice theorists have greatly improved our understanding of the political process by scrapping the “organic” view of collective action, which describes government, more or less, is a benevolent despot, making decisions that are assumed to be in the public interest.”

Not so long ago, in 1968, Buchanan remarked:

Most ... economists take an approach different from my own, and one that I regard as both confused and wrong. In my vision of social order, individual persons are the basic component units, and “government” is simply that complex of institutions through which individuals make collective decisions, and through which they carry out collective as opposed to private activities. Politics is the activity of persons in the context of such institution.1

Of course, the economics profession has changed significantly since then, particularly in light of the public choice revolution. Methodological individualism has replaced more collectivist views in academic circles.

Nevertheless, it is far from clear that there has been a decisive “victory.” Social welfare functions still clutter the economics journals. Moreover, there is no shortage of recommendations for government intervention in the name of the mythical “public interest.” Proponents of methodological individualism have made great strides, but the collectivist mind set dies a slow death.

Buchanan has also long been considered a proponent of the Austrian view of the ‘market process. In this regard he is more than jus a “fellow traveler”; his work has played an important role in helping to distinguish between the theory of the market as a process and the alternative, neoclassical theory of competitive equilibrium. Thus, in addition to his seminal work on subjective cost theory, Buchanan has helped clarify the Austrian view of the market as a process.

In his 1963 presidential address to the Southern Economic Association, Buchanan explained how the economics profession was apparently being led astray by its focus on the “theory of resource allocation.” He forcefully argued that the standard neoclassical definition of economics as the study of the allocation of scarce mean among competing ends “has served to retard, rather than advance scientific progress.2 “ The reason for this, according to Buchanan, is that there is very little economic content in much of modern economics. What neoclassical economics, all too often involves is a computation problem, the computation of equilibrium prices, for example which “to the subjectivist, [seems] an absurd exercise.’”’3

A good example is the work of Nobel Laureate Tjalling Koopmans who began his career by working out the optimal allocation of a set of tankers carrying oil across the Atlantic during World War II. Buchanan properly labels such work as engineering, not economics and claims that he must have been “a confirmed subjectivist long before I realized what I was because I recall thinking in 1946, when Koopmans was lecturing...at the University of Chicago, that there seemed to be absolutely no economic content in what he was doing.”4

Buchanan has attempted to persuade the economics profession to abandon its fixation on allocation problems per se, for “if there is really nothing more to economics than this, we had as well turn it all over to the applied mathematician.5 “ This does appear to be the direction the profession has been heading; for “developments of note ...during the past two decades consist largely of improvements in...computing techniques, in the mathematics of social engineering.”6

Instead of becoming weakly-trained mathematicians (at least by the standards of professional mathematicians), Buchanan suggested replacing the theory of resource allocation with the theory of markets.

This would require paying more attention to 

a particular form of human activity, and upon the various institutional arrangements that arise as a result of this form of activity. [Namely,] man’s behavior in the market relationship, reflecting the propensity to truck and to barter, and the manifold variations in structure that this relationship can take.7

These, Buchanan has written, are the proper subjects of economics.

This approach helps us understand why, in perfect competition, there is no competition (or any trade, for that matter). It also reveals how a market is not competitive by definition, as in the neoclassical model, but that a market becomes competitive. “It is this becoming process, brought about by the continuous pressure of human behavior in exchange, that is the central part of our discipline...not the dry rot of postulated perfection.”8

Thus, Buchanan’s view of the market system may properly be labeled Austrian. Furthermore, he has urged us to apply this same notion of the economic process to the study of political institutions. This is why public choice theory is largely a study of political processes, with policy recommendations usually focusing on altering institutional processes, rather than political outcomes or end states. 

Excerpted from The Subjectivist Roots of James Buchanan’s Economics 
  • 1JamesBuchanan, “An Economists’s Approach to Scientific Politics,” in M. Parons, ed., Perspectives in the Study of Politics (Chicago: Rand McNally, 1968),p. 78. 
  • 2JamesBuchanan, “What Should Economists Do?” Southern Economic Journo (January 1964): 213-22.  
  • 3JamesBuchanan, “General Implications of Subjectivism In Economics,” In Geo frey Brennan and Robert D. Tollison, eds., What Should Economrsts Do? (Indianapoh Ind.: Liberty Press, 19791, p. 85. 
  • 4Ibid.
  • 5JamesBuchanan, “What Should Economists Do?”p. 217. 
  • 6Ibid.
  • 7Ibid.
  • 8Buchanan,Cost and Choice, p. 83. 
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