Who Chooses? A Short Appreciation of Cost and Choice By Jon Murphy

James Buchanan’s Cost and Choice may be “[his] little book,” but it is jam-packed with economic wisdom. It is easily one of my favorite books. In it, Buchanan discusses in detail what he calls the LSE Theory of Choice (although it also shows up in the UCLA tradition of Armen Alchian as well). Costs are forward-looking, Buchanan states. Since they influence our behavior, they must occur in the future, and thus they are “ephemeral” (as Thirlby puts it).

Since costs are forward-looking, someone or something must be choosing. For costs to exist, a decision-maker must be present. “Choice” is an action, which implies an actor.

Thus, the question in economic analysis must be “who chooses?” The problem with using collective-choice language like “the government does X” or “society does X” is, especially to the uncritical mind, it can mask the truly-choosing agent. Society does not choose. A nation does not choose. Individuals choose.

Of course, there may be times when it makes sense to talk of a collective-actor: the Washington Nationals won a World Series, for example. No single person could have done that alone; it was a team effort. So it makes sense, then, to say the team is the actor. The same goes for a firm. A firm is a form of collective action.*

But for many economic decisions, it is not collective per se. There may be collective outcomes (eg, the market process), but it is the result of a multitude of decisions. To say “the market” does X or Y is confusing if one does not realize it is shorthand for the multitude of decisions. Confusion arises when one treats the agglomeration as the choosing-agent. There may be heuristic or pedagogical reasons for talking about a “nation” choosing this or that, or a “social preference function” for this or that good. But we must always remember the underlying economics: who is the chooser?

*None of this is to say there still aren’t collective-action problems within these agencies. Nor should we discount the roles individuals play here. But a firm or a team operation is not the spontaneous and unplanned outcome that a market outcome is.

P.S. Look for an online #EconlibReads group on Cost and Choice coming next year!