Man, Economy, and Liberty

9

Economic Efficiency and Public Policy

E. C. Pasour, Jr.

A great deal has been written about the wasteful habits of U.S. citizens. Individual decision makers and business entrepreneurs are alleged to be inefficient. Consumers are frequently criticized for driving large cars, keeping their homes too warm in the winter, and so on. Workers are said to operate below their potential because of ignorance or lack of motivation. Business entrepreneurs are accused of wasting money in many different ways, including wasteful advertising and unproductive mergers.

Allegations of economic inefficiency are not restricted to editorial writers and other such observers of the business scene. Hundreds of economic studies purport to measure efficiency (or inefficiency). However, Professor Rothbard demonstrates that the efficiency of human action measured against the conventional economic norm is a “chimera.”1 Moreover, as shown below, the inability of economists to measure economic efficiency is but one aspect of the more general problem that public policy can not be prescribed on the basis of marginal efficiency rules.

This paper first explores the implications of uncertainty and subjectivism in identifying examples of economic inefficiency. It is shown that neither economists nor other outside observers can identify inefficient behavior as is widely assumed in the conventional theory of the firm, including x-efficiency theory. It is further shown that efficiency measurements of group activities present an even greater challenge than efficiency measurements of individual actions. These findings are shown to be consistent with Rothbard’s argument that the advocacy of public policy must be based on ethical considerations rather than on marginal efficiency rules.2 The implication is that the focus of interest in economic analysis should be less on the outcome of the resource allocation process and more on the rules and institutions that permitted individuals to engage in mutually beneficial exchange. The challenge to economists is to further the understanding of this system, including the operation of the market process as it is fueled by subjectivist expectations of actors operating under conditions of uncertainty.

Economic Efficiency and the Perfect Competition Norm

Economic efficiency is conventionally defined as the ratio of the value of output to the value of inputs. Although there is general agreement among economists that efficiency must be measured in value terms, there is little recognition of the problems posed by subjectivism in making efficiency measurements.

Any test of efficiency must be based on some standard of comparison. The efficiency standard commonly used in economics is “perfect competition.” Perfect competition requires price-taking behavior and perfect markets.3 The features of a “perfect market” are perfect communication, instantaneous equilibrium, and costless transactions.

The forbidding requirements of perfect competition mean that it is useless as a norm in measuring the efficiency of actions of real world actors. If perfect competition is used as a standard, no individual or market operating in the real world of change and uncertainty will be judged to be efficient. The decision maker judged against the standard of perfect competition would be considered efficient only if he had perfect knowledge. On this basis, real world decision makers are never efficient because they are not omniscient.4

The conventional static perfect competition approach to the measurement of efficiency assumes away uncertainty and knowledge problems confronted by decision makers as they must operate in a constantly changing environment. However, it is not appropriate to use a model that assumes away problems facing the decision maker in assessing the performance of that individual. Thus, it is clearly inappropriate to measure the performance of an actor against the efficiency standard of perfect competition. Moreover, economists have yet to describe efficiency under real world conditions of uncertainty where knowledge is costly.5 Inefficiency in a meaningful sense implies both that a superior outcome is attainable and that the expected benefits of achieving this arrangement exceed the expected costs.6 However, the individual decision maker operating in an environment shrouded with uncertainty is motivated by costs and returns that are inherently subjective. The problems posed by uncertainty and subjectivism in identifying inefficient behavior on the part of other economic actors are described below in several different contexts.

Inefficiency of Individual Decisions

The first example is taken from the traditional economic theory of the firm. Consider the classical case of production involving a single variable input. As the number of cattle on a given amount of pasture (other resources being fixed) is increased, for example, the ratio of cattle to land eventually becomes so large that overgrazing results in a smaller amount of production than would be produced with a smaller number of cattle. Production under these conditions in conventional neoclassical theory is considered “irrational” or “inefficient” because an increase in the amount of the variable input results in a decrease in output. Thus, static neoclassical production theory holds that inefficient entrepreneurial behavior can be determined in this situation on the basis of production data alone.7 However, the inefficiency conclusion fails to take into account problems posed by time and uncertainty.

The most profitable number of cattle to have on a given amount of pasture in any time period cannot be determined independently of expected costs and returns in future periods.8 The decision maker presumably is interested in maximizing wealth over time—not in obtaining the most income in a single period. The entrepreneur may, therefore, have “too many” cattle on pasture in the current period because he expects cattle prices to be higher in a future period. If cattle prices are expected to be higher in future periods, “overgrazing” in the current period may be consistent with wealth maximization over time. Consequently, inefficient entrepreneurial behavior cannot be identified on the basis of production data alone. And, since expected costs and returns are inherently subjective (as shown below), there is no reason to expect the decision maker and the economist (or other outside observer) to assess the profitability of cattle management decisions in the same way. Thus, the outside observer cannot identify inefficient input use in situations involving production over time.

A second, and closely related, example is “x-inefficiency.”9 Leibenstein focuses on the difference between actual and potentially higher worker output attributable to factors such as ignorance, inertia, and custom. The shortfall in output arising from these factors is labelled “x-inefficiency.” Consider the farmer who doesn’t produce the most profitable amount of corn—choosing to go fishing instead of weeding at a crucial time because it is his custom to fish on that day each year. The corn producer might be labelled x-inefficient. Again, however, it cannot be concluded on the basis of observable data that the farmer is inefficient.10 The farmer doesn’t seek maximum profits from corn—he seeks instead the most overall satisfaction, and income from corn production is only one element affecting his wealth or state of mind. The farmer can devote more time to corn production only by reducing leisure or by diverting time used for some other purpose. Moreover, in the present example, leisure may be valued more highly by the farmer than the amount of corn foregone. And, as shown below, the outside observer cannot objectively measure the costs and returns that influence choice. Here, again, observable data are not sufficient to assess the efficiency of the decision maker.

It may be contended that the decision maker in the above example was “x-inefficient” because he had “too little” information about the costs and benefits associated with alternative courses of action. However, the outside observer faces problems similar to those described above in determining when another person has too little knowledge. The decision maker acquires information on the basis of expected costs and returns that vary from person to person. Thus, problems facing the outside observer in identifying inefficient behavior are similar, whether the issue is amount of labor to devote to corn production or amount of resources to devote to acquisition of knowledge. This problem is rooted in the subjective nature of the costs and benefits that influence individual choice.

Implications of Subjectivism

The conclusion that an outside observer cannot identify another decision maker’s inefficiency follows from the subjective nature of opportunity cost. The opportunity cost of an action is the expected value of the alternative sacrificed as a result of the action taken. Since the opportunities foregone are not actually experienced, the value of the rejected course of action hinges on the decision maker’s anticipations.11 Consequently, opportunity cost is inherently subjective and distinct from data that can be objectively measured by an outside observer. The problem in attempting to determine choice-influencing cost is not one of measurement. The real problem is that the information needed is knowledge of subjective tradeoffs that are nowhere articulated.12 The conclusion is that an outside observer cannot identify another person’s inefficient behavior since the expected value of the costs and benefits that determine choice are unique to the economic actor.13

It is often alleged that the actor’s decision would have been different if the chooser had possessed more information. This is correct but irrelevant in identifying inefficiency. After a choice is made, retrospective calculations of what the cost would have been if the actor had had additional information can not be relevant to that prior choice situation.14

Inefficiency of Group Decisions

The conclusion (of the preceding analysis) that the outside observer cannot measure the efficiency of another person’s actions is not generally accepted in welfare economics. However, some economists who agree that inefficiency and waste cannot be detected at the individual level, attempt to measure economic efficiency at the “societal level.”

The problem of identifying real world inefficiencies, however, is even greater at the group level than at the individual level. If the outside observer cannot assess the efficiency of an individual acting alone, such measurement is likely to be even more unfeasible when that individual acts as a member of a group. In assessing the efficiency of group actions, not only is there the problem that costs and benefits are subjective, these values are noncomparable from person to person.15 Hayek vividly describes the implications of subjectivism for empirical measurements in conventional welfare economics:

The childish attempts to provide a basis for “just” action by measuring the relative utilities or satisfactions of different persons simply cannot be taken seriously… . the whole of the so-called “welfare economics,” which pretends to base its arguments on inter-personal comparisons of ascertainable utilities, lacks all scientific foundation.16

Despite the misgivings of Hayek and other analysts skeptical of the usefulness of welfare economics as a basis for public policy, the social efficiency approach continues to be widely used for policy purposes—including pollution problems related to air, land, and water. Consider the classic example of the operation of a business firm that pollutes a nearby stream. In the conventional Pigouvian approach, it is recommended that a per unit tax equal to the difference between “marginal private cost” and “marginal social cost” be levied on the firm to induce it to consider the full (“social”) cost in making production and output decisions.17 However, a difference between private cost and social cost is simply postulated since neither private cost nor “social cost” can be measured objectively.18 The economist cannot measure the relevant private cost because the perception of the satisfaction foregone at the moment of choice is the only sense in which cost influences choice. Furthermore, once it is recognized that cost is subjective to the individual and that costs to different people are incommensurate, it follows that “social cost” cannot be objectively measured and that “… net social benefit is an artificial concept of direct interest only to economists.”19

It is no more feasible for the economist to identify inefficiencies in group decisions relating to pollution (or other) problems than it is to detect inefficiencies in actions of individuals. Despite this fact, economists continue to identify numerous examples of alleged “market failure,” including pollution and other “externalities,” monopoly, imperfections in the capital market, lack of information, and so on. In every purported example of individual or market inefficiency, however, the finding is wholly in terms of the observer’s estimate of the value scales of other people.20

Consider, for example, the rate of return on public investment in agricultural research. There is a widespread view that the level of public investment in agricultural research and educational activities is “too low.” This opinion is based on the results of cost-benefit studies which show that the rates of return to past public investments of this type have been quite high. Ruttan, for example, cites a host of empirical rate-of-return estimates of publicly funded research and educational activities that are in the 30 to 40% range. Because these rates apparently are higher than returns from competing investments, Ruttan concludes there is inefficiency or underinvestment in the elective choice process.21

The underinvestment conclusion in the case of public investment in agricultural research can be challenged on a number of grounds.22 Rates of return on public investment are subject to all of the problems of the “net social benefit” approach discussed above. Moreover, the high rate of return estimates in this case are suspect even if one overlooks the problems arising because costs and returns are noncomparable between individuals. First, about half of agricultural research is now privately funded. If the rate of return were, in fact, relatively high, one might expect the competitive process to bring about entry until the rate of return is similar to that of other investments of similar risk.23

Second, rate of return estimates on publicly funded activities are not comparable with private rates of return because state and federal research agencies pay no taxes. If a correction were made for taxes paid by private-sector firms, the rates of return on publicly funded research would appear much less impressive.24

Third, rate-of-return estimates from publicly funded research fail to consider the misallocation of resources resulting from taxation. These estimates implicitly assume that $1 of government expenditures has an opportunity cost of $1.25 Taxation to finance public expenditures, however, causes distortions in product and input markets so that the opportunity cost of $1 of public expenditures is actually more than the $1 collected from taxpayers. Thus, the rate of return estimates on public expenditures are biased upward because they fail to take into account this misallocation of resources.26

Fourth, it is important in policy advocacy to distinguish between ex post and ex ante costs and returns. Empirical rate of return studies are necessarily based on ex post data. Yet, investment choices are based on expectations of costs and returns. And, as demonstrated in the above examples, the economist has no way to measure the ex ante costs and returns that influence collective choice decisions. The opportunity cost of an additional expenditure of $1 billion by the federal government on agricultural research must take into account the value of the sacrificed alternatives in the private sector from tax collections and the opportunity cost of alternative public expenditures. The estimated return on such investments, however, is highly subjective. For example, what is the potential payoff from a $1 billion expenditure on prisons, law enforcement, and so on when there are no market price signals? It cannot be concluded that there is underinvestment in one area unless its rate of return is higher than that from other spending alternatives.

In summary, the social rate of return concept is subject to all the problems of social cost. In each case, choice-influencing costs are subjective and cannot be observed. Moreover, even if costs were given or known for different people, the magnitudes are incommensurable. Therefore, any efficiency measurements by an economist must be wholly in terms of the observer’s estimates of the value scales of other people.27

Existence versus Measurement of Efficiency

The conclusion that neither the economist nor any other outside observer can make meaningful efficiency measurements, however, does not mean that all individuals and markets are efficient in the sense that there is no scope for improvement. At each instant, decisions are not perfectly coordinated because knowledge is imperfect and the decisionmaking process is permeated with uncertainty. The partial ignorance and inconsistent plans mean that there are opportunities for individuals to better their lot. In a market context, imperfect coordination provides profit opportunities for alert entrepreneurs.28 Indeed, the market process is a reflection of how individuals search for opportunities that are present only when markets are in disequilibrium. Thus, even though an outside observer can neither identify inefficiency in the actions of other parties not specify actions that would necessarily improve their welfare, we can be confident that such opportunities frequently exist.

Much of the confusion related to efficiency measurements is associated with the neglected role of the entrepreneur.29 There is no role for entrepreneurship when data are assumed given to the decision maker. In this case, the choice problem is reduced to mathematical calculation. Under real world conditions of uncertainty, however, data on means and ends are not given and a key entrepreneurial function is to determine what they are.

In retrospect, decision makers’ actions often are incorrect. Actions are based on expected costs and returns, but expectations frequently are not realized. Kirzner defines an action as inefficient “… when one places oneself in a position one views as less desirable than an equally available alternative state.”30 In this sense, inefficiency results from error since the rational actor would not knowingly act to worsen his lot. Inefficiency defined in this way, however, is not helpful in assessing the efficacy of the actions taken by the decision maker. Any standard applicable only after the event is useless as a guide to choice.31

Success in decision making, however, sometimes is evaluated on the basis of results. Although this criterion is useful for some purposes, it is not a good measure of the correctness of decisions. If an economic actor undertakes to do something entailing uncertainty, he considers the chance of gain is worth the risk and whether he ultimately succeeds or fails has no relevance to this preference.32

Moreover, the relationship between purposeful behavior and success is ambiguous in a world of uncertainty. Success quite often is due to chance or unforseen circumstances rather than to superior foresight.33 Decisions are based on expectations and the future is not only unknown but unknowable. Consequently, human action, including the allocation of resources between uses, is an individual decision process continuously unfolding in time.34 As shown below, recognition of the implications of uncertainty and subjectivism is likely to have a profound influence on the economist’s approach to public policy questions.

Marginal Analysis, Economic Efficiency and Public Policy

The marginal efficiency conditions of economics in their briefest form “… are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”35 The fact that an independent observer cannot measure the costs and benefits that motivate choice suggests that marginal analysis cannot be used by economists for policy prescription. These efficiency conditions nevertheless are useful to the individual decision maker. If the potential chooser is aware of these conditions, he will weigh alternatives more carefully in terms of their opportunity cost and search more diligently for superior alternatives.36 Thus, knowledge of economic efficiency conditions can help the chooser make “better” choices as evaluated by the decision maker’s own standards.

As Hayek stresses, however, these efficiency conditions do not provide the solution to public policy issues. The reason is that the data necessary to apply such rules for the whole society are never given to a single mind. Consequently, marginal efficiency rules are not useful as guides to public policy. In reality, economic analysis intended to guide public policy frequently overlooks functions and requirements of entrepreneurial decision making and the costs necessary to carry out those functions.

Neoclassical monopoly theory is a good example of the failure to take into account the functions and requirements of entrepreneurial decision making. The problem of how to identify monopoly generally is downplayed in economic analysis. In conventional theory, competition implies that sellers have no influence on price, and the firm facing a negatively sloped demand curve is regarded as a monopolist.37 If every firm facing a negatively sloped demand curve were regarded as a monopoly, however, many firms operating under highly competitive conditions, including Grandma Moses, would be classified as monopolists. Yet, if monopoly in this traditional approach is not identified with a downward sloping demand curve, any demarcation of how inelastic demand must be for the seller to be considered a monopolist must be purely arbitrary.

The alternative suggested by the Austrians is to consider competition as a dynamic process rather than as a situation in which demand is perfectly elastic. Monopoly power is then defined in terms of restrictions on the market process rather than on the basis of the slope of the demand curve facing the seller. And, as Rothbard suggests, effective restrictions on the competitive market process are almost invariably the result of government intervention.38

Conventional monopoly theory is not consistent with the nature of the entrepreneurial market process.39 Alleged monopoly “profits” may be merely returns to entrepreneurship. A seller operating under competitive conditions, for example, may acquire a short-run advantage over other sellers through entrepreneurial ingenuity. Entrepreneurial profits are likely to be beneficial rather than harmful, however, since entrepreneurship fuels the market process. Thus, any appropriate model of the market process must permit above-average returns to alert entrepreneurs. Worcester describes why it is crucial to take a long-run view in assessing the effects of returns to entrepreneurial activity.

A longer run view of what may seem to be excessive profits or losses is appropriate because every successful penetration of the unknown (that is) successful because of artful foresight, scientific estimation, or plain luck gives the entrepreneur an edge … that can be classified as a monopoly return.40

The conclusion is that marginal efficiency conditions do not enable the economist to identify harmful monopoly power.41 Similar problems arise in other attempts to use marginal analysis for policymaking purposes.42

What does the conclusion that economic analysis is not suitable for policy making imply for the role of the economist? If it is recognized that marginal efficiency rules do not provide answers to economic policy questions, the focus of the economist changes. Marginal efficiency rules are concerned with the outcome of the resource allocation process, assuming that the necessary information is available to apply these rules. If such information is not available to policy makers, interest then is less on the outcome of the resource allocation process and more on the rules of the game and the operation of the market process itself.

An economist’s view of the importance of uncertainty and subjectivism generally will, therefore, determine or greatly influence the approach taken in economic analysis. The market is most accurately viewed as a ceaseless process of discovery and information dissemination in which no single individual or planning board can know the future relative scarcity of goods and services.43 Thus, providing a stable institutional framework and letting adjustments of actions by private economic actors occur on their own is likely to be the best way to ensure the increase and dissemination of knowledge.

If resource allocation by economic actors is viewed as a decision process unfolding over time, marginal efficiency conditions of static equilibrium receive much less attention by the economist in analysis of public policy issues. Instead, focus is placed on development of institutions and rules that permit individuals to engage freely in actions that are mutually beneficial.44 This implies that for resolution of public policy questions the expected payoff is likely to be higher from additional work on the nature and operation of these institutions and rules than from further refinements either in equilibrium theory or in quantitative techniques of economic analysis.45

The proposed approach is consistent with what Buchanan refers to as the “morally relevant” approach in economics. In this view, a logical goal in public policy is to develop an institutional framework that maximizes the scope for mutually beneficial behavior. A discussion of the specific characteristics of this framework is beyond the purview of this paper. This approach emphasizing the institutional framework is markedly different from the one that attempts “to control other people’s behavior with increasing efficiency” by measuring costs and benefits on an aggregate basis.46

Reductions in economic regulations that hamper the market process cannot be vindicated on the basis of comparisons of changes in income (or utility) of consumers and producers because the gains and losses are incommensurable. Thus, economic theory is not a substitute for ethical analysis in resolving public policy problems. A more promising approach is to consider economic freedom on the same level as freedoms guaranteed under the First Amendment. If economic freedom is considered an ethical issue, restrictions of economic freedom are bad because individuals have the right to engage in voluntary mutually beneficial exchange. The conclusion is that policy recommendations inevitably involve value judgments.47

The economist can play an important role in explaining the operation of the decentralized market economy and the effects of market impediments. Not only can knowledge of economics help make individual decisions more intelligible, but expertise in the market process is also useful in tracing out the direct and indirect effects of public policies.48 Much work remains to be done in exploring the implications of uncertainty for the operation and explanation of systematic market processes in which individual choice is inherently subjective.49

Conclusions and Implications

Economic efficiency inevitably involves valuation. Therefore, efficiency measurements require the use of a standard of comparison. When the commonly used perfect competition norm is used to measure efficiency, all decision makers operating under real-world conditions will be inefficient. Moreover, no one has developed an efficiency norm that is helpful in assessing the efficiency of decisions made under real-world conditions of uncertainty. Economic efficiency, then, is not useful as a touchstone of public policy.

Choice is motivated by opportunity cost, which is inherently subjective. Consequently, any efficiency measurement by an outside observer must be wholly in terms of the observer’s estimates of the value scales of other people. Therefore, the economist as an outside observer cannot measure or identify other decision makers’ inefficiencies because of the subjective nature of the costs and benefits that influence choice.

Rothbard’s correct assessment that efficiency is a chimera does not suggest that economists have no useful role in improving public policy. The existence of uncertainty and the subjective character of economic data do mean that the economist cannot use marginal analysis to select “optimal” public policies. However, economists can provide a useful service in explaining the workings of the market economy, including the consequences of free markets and the effects of different types of government intervention.50 Economists often fail to criticize harmful government programs on the grounds that it is not politically feasible to abolish them. The only serious defense of a policy recommendation hinges on whether the policy is good instead of whether it is realistic under the current political climate.51

Murray Rothbard’s numerous contributions have increased public understanding of the benefits and requirements of a free society. None of these works, however, is likely to have a larger and more lasting impact than his analysis of the uses and misuses of economics in the public policy arena. Rothbard’s contribution to public policy will become more widely recognized if and when uncertainty and subjectivism are taken seriously in economic analysis.

Notes

1. Murray N. Rothbard, “Comment: The Myth of Efficiency,” in Mario J. Rizzo, ed., Time, Uncertainty, and Disequilibrium (Lexington, Mass.: D. C. Heath, 1979), p. 90.

2. Murray N. Rothbard, The Ethics of Liberty (Atlantic Highlands, N.J.: Humanities Press, 1982).

3. Jack Hirshleifer, Price Theory and Applications (Englewood Cliffs, N.J.: Prentice-Hall, 1984), pp. 418-19.

4. In another sense it can be argued that individuals are always efficient. Under traditional economic assumptions where each individual is assumed to behave consistently with the postulate of constrained maximization, economic inefficiency presents a contradiction in terms (S. N. G. Cheung, “A Theory of Price Control,” Journal of Law and Economics 17 (1974): 53-71). That is, if the decision maker is assumed to maximize subject to the constraints faced, the individual is then necessarily efficient in the sense that the action selected is ipso facto at least as good as any feasible alternative (E. C. Pasour, Jr., “Economic Efficiency and Inefficient Economics: Another View,” Journal of Post Keynesian Economics 4 (1982): 454-59). This argument is consistent with the Mises view that human action is necessarily rational because individuals always act to improve their situation (Ludwig von Mises, Human Action 3rd ed. (Chicago: Henry Regnery, 1966), p. 19).

5. Harold Demsetz, “Information and Efficiency: Another Viewpoint,” Journal of Law and Economics 12 (1969): 1-22.

6. E. C. Pasour, Jr. and J. B. Bullock, “Implications of Uncertainty for the Measurement of Efficiency,” American Journal of Agricultural Economics 57 (1975): 335-39.

7. Edgar K. Browning and J. M. Browning, Microeconomic Theory and Applications (Boston: Little, Brown and Co., 1983), p. 169.

8. Louis DeAlessi, “The Short Run Revisited,” American Economic Review 57 (1967): 450-61.

9. H. Leibenstein, “Allocative Efficiency vs. ‘X-Efficiency,’” American Economic Review 56 (1966): 392415.

10. George J. Stigler, “The Xistence of X-Efficiency,” American Economic Review 66 (1976): 213-16.

11. James M. Buchanan, Cost and Choice (Chicago: Markham Publishing, 1969).

12. Thomas Sowell, Knowledge and Decisions, (New York: Basic Books, 1980).

13. “When it is understood that a reckoning of cost … depends upon the forecasting of events and outcomes of the future, and when it is understood that any individual is uniquely situated in relation to past events on which such forecasts are based, it becomes clear that the result of the reckoning is dependent for what it is upon the unique knowledge and attitude (towards uncertainty or risk) of the unique and uniquely situated individual who calculates it, and that the validity, correctness or authoritativeness of an overriding calculation by somebody else would often be dubious in the extreme,” (G. F. Thirlby, “Economists’ Cost Rules and Equilibrium Theory,” in James M. Buchanan and G. F. Thirlby, eds., L. S. E. Essays on Cost (London: Weidenfeld and Nicolson, 1973), pp. 280-81).

14. Gerald P. O’Driscoll, Jr. and Mario J. Rizzo, The Economics of Time and Ignorance (New York: Basil Blackwell, 1985), p. 48; such calculations may, of course, influence actions in future choice situations.

15. Rothbard, The Ethics of Liberty, p. 204.

16. F. A. Hayek, Law, Legislation and Liberty, vol. 3, The Political Order of a Free People (Chicago: University of Chicago Press, 1979), p. 201.

17. For a comprehensive critique of the social efficiency approach to pollution problems, see Murray N. Rothbard, “Law, Property Rights, and Air Pollution,” Cato Journal 2 (1982): 55-99.

18. “… static maximizing models cannot explain (rationalize) suboptimality; they can merely postulate it. Either an equilibrium is suboptimal in an irrelevant and unexplained sense, or it is optimal in an explained but trivial sense. Statist welfare economics thus self-destructs” (O’Driscoll and Rizzo, The Economics of Time and Ignorance, pp. 89-90).

19. Stephen C. Littlechild, “The Problem of Social Costs,” in Louis M. Spadaro, ed., New Directions in Austrian Economics, (Kansas City, Kans.: Sheed Andrews and McMeel, 1979), p. 9. Lionel Robbins explains why prices and incomes before and after an event cannot be used to compare the satisfactions of different persons involved, “… whenever we discuss distributional questions, we make our own estimates of the happiness afforded or misery endured by different persons or groups of persons. But these are our estimates. There is no objective measurement conceivable” (Lionel Robbins, “Economics and Political Economy,” American Economic Review 71 (1981): 5).

20. James M. Buchanan, “Positive Economics, Welfare Economics, and Political Economy,” Journal of Law and Economics 2 (1959): 126.

21. “There is little doubt that a level of expenditures that would push rates of return to below 20 percent would be in the public interest” (Vernon W. Ruttan, “Bureaucratic Productivity: The Case of Agricultural Research,” Public Choice 35 (1980): 531.

22. E. C. Pasour, Jr. and M. A. Johnson, “Bureaucratic Productivity: The Case of Agricultural Research Revisited,” Public Choice 39 (1982): 301-17.

23. It is frequently contended that privately funded agricultural research is not feasible because the fruits of this research are “public goods.” However, developers of new technology generally can appropriate the returns from new plant varieties, new machinery, and information through patents, copyrights, and fees. Thus, public funding of agricultural research generally cannot be justified on the basis of public goods theory.

24. Glenn Fox, “Is the United States Really Under-investing in Agricultural Research?” American Journal of Agricultural Economics 67 (1985): 806-12.

25. Fox, ibid.

26. Ronald H. Coase, “The Theory of Public Utility Pricing and Its Application,” Bell Journal of Economics 1 (1970): 113-28.

27. Buchanan, “Positive Economics, Welfare Economics, and Political Economy.”

28. Israel M. Kirzner, Perception, Opportunity, and Profit (Chicago: University of Chicago Press, 1979).

29. Ibid.; Israel M. Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).

30. Kirzner, Perception, Opportunity, and Profit, p. 120.

31. G. L. S. Shackle, Epistemics and Economics (Cambridge: Cambridge University Press, 1972).

32. Ronald H. Coase, “Business Organization and the Accountant,” in James M. Buchanan and G. F. Thirlby, eds., L. S. E. Essays on Cost (London: Weidenfeld and Nicolson, 1973), 104-05.

33. Armen A. Alchian, “Uncertainty, Evolution, and Economic Theory,” Journal of Political Economy 58 (1950): 211-21.

34. Jack Wiseman, “Economics, Subjectivism and Public Choice,” Market Process 3 (1985): 14-15.

35. F. A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), p. 77.

36. James M. Buchanan, What Should Economists Do? (Indianapolis, Ind.: Liberty Press, 1979), p. 41.

37. Milton Friedman, Price Theory (Chicago: Aldine Publishing, 1976), p. 126.

38. “It is clear that the term ‘monopoly’ applies only to governmental grants of privilege, direct or indirect” (Murray N. Rothbard, Power and Market (Kansas City, Kans.: Sheed Andrews and McMeel, 1977), p. 79).

39. E. C. Pasour, Jr., “Monopoly Power, Taxation, and Entrepreneurship” in Taxation and the Deficit Economy, Dwight R. Lee, ed., (San Francisco: Pacific Institute for Public Policy Research, 1986), pp. 381-405.

40. Dean A. Worcester, “On the Validity of Marginal Analysis for Policy Making,” Eastern Economic Journal 8 (1982): 83-8.

41. Rothbard, The Ethics of Liberty.

42. “Economic analysis suitable for policy must provide a negative answer to the first and a positive answer to the second of these questions: (1) Is any unavoidable task ignored or excluded by assumption? (2) Has an equally skeptical investigation been made of the viable alternatives?” (Worchester, “On the Validity of Marginal Analysis for Policy Making,” p. 87).

43. Karl-Heinz Paqué, “How Far is Vienna from Chicago?” Kyklos 38 (1985): 412-34.

44. Leland B. Yeager, “Economics and Principles,” Southern Economic Journal 42 (1976): 392-415.

45. “The social action which the study of economics has as its function to guide, or at least to illuminate, is essentially that of ‘rules of the game,’ in the shape of law, for economic relationships” (Frank H. Knight, On the History and Method of Economics (Chicago: University of Chicago Press, 1956), p. 174).

46. James M. Buchanan, “The Related But Distinct ‘Science’ of Economics and Political Economy,” British Journal of Social Psychology 21 (1982): 97.

47. Murray N. Rothbard, “Value Implications of Economic Theory,” The American Economist 17 (1973): 35-40. “Economics cannot be purged of moral content if it is to be concerned with the question of welfare; and economists must be concerned with this question, at least implicitly and indirectly, if economics is to be anything more than an intellectual game” (G. Warren Nutter, “Economic Welfare and the Welfare Economics,” in The Methodology of Economic Thought, Warren J. Samuels ed., (New Brunswick, N.J.: Transactions Books, 1980), p. 395-96).

48. Kirzner, Perception, Opportunity, and Profit.

49. Israel M. Kirzner, review of The Economics of Time and Ignorance by Gerald P. O’Driscoll, Jr. and Mario J. Rizzo, Market Process, 3 (1985): 1-17.

50. Rothbard, Power and Market, pp. 256-61.

51. Ibid.; and Clarence Philbrook, “‘Realism’ in Policy Espousal,” American Economic Review 43 (1953): 846-59.