Institutions, not People

In my tribe, I’m particularly fond of two people: Milton Friedman (1912 – 2006) and James M. Buchanan (1919 – 2013). Both were associated with the University of Chicago. Both were awarded the Nobel Memorial Prize in economics: Friedman in 1976 and Buchanan in 1986.

About Friedman, the wiki states:

His political philosophy extolled the virtues of a free market economic system with minimal government intervention in social matters. In his 1962 book Capitalism and Freedom, Friedman advocated policies such as a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, school vouchers, and opposition to the war on drugs and support for drug liberalization policies.

About Buchanan, the wiki notes:

In his 1964 article “What Should Economists Do?”, . . .Buchanan distinguished between economics and politics. The former studies “the whole system of exchange relationships” while the latter studies “the whole system of coercive or potentially coercive relationships.” . . . Buchanan told his contemporaries [at the 1963 Presidential address to the Southern Economics Association] in the field of economics that Adam Smith’s statement in his 1776 An Inquiry Into the Nature and Causes of the Wealth of Nations that the human “propensity to truck, barter, and exchange one thing for another” is what political economy is all about. Economists should therefore focus on the politics of exchange not on attempting to engineer efficient allocations of resources.

. . . The ultimate exchange process is not based on some romantic notion of public service that Buchanan roundly rejected. “Politics of exchange implies a shared exchange relationship or enterprise that is crucial as a way of “justifying political coercion of one person over another.” Buchanan encouraged individuals to be skeptical about bureaucrats’ and politicians’ motivations and behavior. Buchanan said that the “politics as exchange” contract on which the constitution is based precedes any economic enterprise.

Friedman was a public intellectual in the sense that he was read not just by his professional colleagues but also by the educated layman. Buchanan, in contrast, was an economist’s economist. He wrote primarily for economists. As it happens, my study of Buchanan began after my formal training in economics was done. I wish I had encountered his work sooner.

Here’s Friedman. Listen:

On that same theme, Buchanan wrote in his book The Limits of Liberty: Between Anarchy and Leviathan:

If men should cease and desist from their talk about and their search for evil men and commence to look instead at the institutions manned by ordinary people, wide avenues for genuine social reform might appear.

This focus on figuring out what institutions work best in organizing human societies goes back a long way — indeed to Adam Smith. Friedrich Hayek wrote that Smith’s “main concern” was

. . .  not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it . . . to “the good and the wise.” [Emphasis added.]

The important lesson here: figure out which institutions and which set of rules are robust to human failings. However hard we search, we are unlikely to find angels to occupy positions of power. All we have are imperfect people and we have to choose rules that work given given that fact.

Buchanan is a delight to read. His greatest influence was his economics professor Frank H Knight at the Univ of Chicago. The epigraph to the book Limits to Liberty is

And the main, most serious problem of social order and progress is … the problem of having the rules obeyed, or preventing cheating. As far as I can see there is no intellectual solution of that problem. No social machinery of “sanctions” will keep the game from breaking up in a quarrel, or a fight (the game of being a society can rarely just dissolve!) unless the participants have an irrational preference to having it go on even when they seem individually to get the worst of it. Or else the society must be maintained by force, from without—for a dictator is not a member of the society he rules—and then it is questionable whether it can be called a society in the moral sense.

Thank you, good night and may your god go with you.

Author: Atanu Dey

Economist. View all posts by Atanu Dey