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Yglesias on Buchanan’s Gibberish

January 11, 2013

Matthew Yglesias wrote a post complaining that while libertarians say great things about Buchanan, they don’t bother to actually elaborate and explain what he said. I think this is a fair criticism, especially since Yglesias is a smart guy, so if he doesn’t get it then we Buchanan followers need to do a better job explaining. Libertarians spend too much time on hagiography and not enough making the ideas of deep thinkers like Hayek and Buchanan accessible to normal people interested in the field (I’m looking at you Pete!). I never met Buchanan myself, despite going to GMU while he was there, but his influence was always present. I never really understood supply and demand, or choice at all for that matter until I read Cost and Choice. I’m going to focus on Kling’s Buchanan quote, which to me is quite insightful and profound, but Yglesias deems gibberish:

A century has elapsed since the subjective-value revolution in economic theory, but the subjective theory of value has not been fully reconciled with the classically derived objective theory. As the notes on the development of the concept of opportunity cost indicate, economists have not drawn carefully the distinction between a predictive or scientific theory and a logical theory of economic interaction. As subsequent chapters will demonstrate, this methodological confusion is the source of pervasive error in applied economics. The treatment and discussion of cost, especially in its relation to choice, provides a usefully specific context within which the more general methodological issues can be examined.

…The following specific implications emerge from this choice-bound conception of cost:

1. Most importantly, cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others.
2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else.
3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
4. Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed.
5. Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed.
6. Finally, cost can be dated at the moment of decision or choice.

Subjective vs. Objective Value
The whole subjective value stuff only makes sense in the context of economic history of thought. The classical economists, Marx included, wanted to figure out what caused value, and thought that it could be determined by objective factors, such as the quantity of work it required to produce. The subjectivists on the other hand, argued that a good’s value solely stemmed from its desirability to whoever bought it (point #2). I’m not sure why Kling included the first paragraph, as it’s clearly just Buchanan talking about the other chapters of the book. It doesn’t make much sense without context, but I think what Buchanan is saying is that when you are dealing with subjective preferences, you are in the realm of logical theory of economic interactions. Predictive or scientific theory require objective facts to base their predictions on.

Methodological Individualism and Opportunity Costs
Buchanan’s points 1 and 5 relate to methodological individualism. It’s pretty rare to find a methodological pluralist these days in the economics profession, but that wasn’t always the case. You can still find people who analyze institutions as if they were a single individual and Buchanan spent a fair bit of effort to get people to stop doing that. In Buchanan’s framework, all costs are opportunity costs (point 4). A cost is something that you give up to get something else. So you never actually see the cost of a decision since the next best alternative is never actually done. Hence, a cost is forever in the imagination of the decision maker. The cost of an action is the subjective value in the mind of the decision maker of the forgone alternate uses of their scarce resources. As an example, if you spend $20 and 2 hours at a movie theater, that is $20 and 2 hours you can’t spend on a meal at a restaurant. The cost of the movie is the subjective value of the restaurant meal. There is no way for an outside observer to objectively measure that because they can’t know how much you value movies or meals (point #5). There is no way to shift that cost, because the cost is your subjective value of whatever it is you didn’t do.

Time and Expectations
Finally, points 3 and 6 deal with when people make decisions. Before Buchanan, time was an underutilized factor in how economists analyzed decisions (and perhaps still is). When you make a choice, you can’t foresee the consequences of that choice. You have to imagine the future as if you took one option and then imagine it as if you took the other. Based on those two sets of expectations, you make a decision based on which one seems like it will be the best for you in the future. Buchanan is saying that when economists analyze cost, they must only look at the incentives and expectations that a person has at the moment of choice. After the choice is made, all costs are sunk and hence don’t matter anymore for the purposes of choice.

Conclusion
Maybe this seems esoteric or hair splitting, but I found this chapter to be quite insightful. It’s one of those insights that doesn’t seem like much when you first learn it, and maybe it even seems obvious, but over time I have come to appreciate it.

Update:
Tyler Cowen answers Yglesias’ call as well. My article corresponds to his item 9.
John Goodman takes a crack at it as well. His answer focuses on the political side.
Summary of Buchanan’s work

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3 Comments leave one →
  1. January 13, 2013 8:19 am

    That “methodolgoical individualism” seems like an interesting philosophical debate, and the Wikipedia article is woefully short. But in my intuition, economic actors may not necessarily always need be exactly coterminous with a single organism.

    • January 15, 2013 10:47 am

      I replaced the link, because the Wikipedia article is pretty bad. Obviously humans act as groups and base our decisions on what others do. This is a case where I don’t think one side or the other will “win”, but both approaches are important and should be considered by social scientists.

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