Originally published December 29, 1986
JUDGING from newspaper reports, Professor James M. Buchanan of George Mason University won the Nobel Memorial Prize in Economics last October for discovering that politicians try to get re-elected, and that bureaucrats try to keep their jobs. This, you will admit, is a very great discovery and something that had not occurred to anyone else, before. How we got along until now, I can’t imagine; and how our new knowledge will change us, I can’t guess. It is reputed to be a powerful tool for prophesying, but it leaves me so breathless I haven’t the strength to wield it.
The professor is said to have come to his world-shattering notion as a result of studying economics at the University of Chicago, where he learned about Adam Smith and the invisible hand that produces results more socially desirable than those (if any) intended by profit maximizing economic men. However, declares the professor, the self-seeking of economic man is good, while the self-seeking of political man is bad. On the basis of this distinction, he joins (or leads a phalanx of) the radical Right that wants to do away with most government (except, perhaps, the Department of Defense), to deregulate everything, to require a balanced budget by constitutional amendment, and all the rest.
There is another distinction to be made: that between elective and bureaucratic officials. The elective is not all bad. On the positive side, “Persons or parties that seek to represent the interests of voters compete for approval or favor much in the manner as do the sellers of products in imperfectly competitive markets for private goods and services.” On the negative side, “Re-election prospects tend to keep the self-interests of politicians within the reasonable range of the median voter, but there is nothing to channel outcomes toward the needs of non-median voting groups.” (The professor is probably unaware of how ill the private producers of movies serve non-median curmudgeons like me.)
As for bureaucrats, they are all bad. “The bureaucracy can playoff one set of constituents against the others, insuring that budgets rise much beyond plausible efficiency limits.”
What Professor Buchanan says about politicians may well be true, yet it does not follow that the world of laissez- faire is free from questionable consequences. It is in the self-interest of a sharp fellow like the original Rockefeller to persuade suppliers to give him kickbacks, and it is in the self-interest of moneybags like the original Morgan to water stock. It is in the self-interest of surgeons to advise unnecessary surgery, and it is in the self interest of brokers to form pools in which suckers can take a bath while losing their shirts (see Junk Bonds and Watered Stock, NL, March 24, 1986).
I fail to see the public good that flows from these self-interests, or the public harm that flows from their regulation. I also note that the few public servants with their hands in the till don’t salt away as much in a lifetime as a corporate raider may in an afternoon. In short, a balanced-budget amendment might make some kind of sense if offered in tandem with a maximum-income-and wealth amendment.
The reason why Professor Buchanan favors the former and would be horrified at the latter is the doctrine that competition forces prices down. It stands to reason that it does, say traditional economists, because the best way to take business from your competitors is to underprice them. For the moment , let’s put to one side what every business man knows, namely that a more effective way to take business is to out-advertise and out-merchandise the competition: Don’t sell the steak, sell the sizzle. Politicians, too, know that this is the way to do it.)
Thus taking leave of the actual let’s explore the world of traditional doctrine, where competition forces prices down and down, until they hit cost and can go no lower this side of bankruptcy. Of course, when prices hit costs, there’s no room left for profit, and the profit system turns out to be profitless. Let’s put this paradox to one side, too and look more closely at costs.
One man’s cost is another man’s price. A firm’s labor costs are its workers’ prices (wages).A cost-conscious firm must try to get these costs down. It will also do what it can to buy its supplies – raw materials, partially finished goods, parts, whatever-at the lowest possible rates. To do this, it will stimulate competition among its suppliers, making them as cost-conscious as it is. Each cost-conscious supplier will then act as did the original firm. It will squeeze its own labor force, and it will hope to find its own suppliers competing among themselves. And so on. We have an infinite regress.
Adam Smith seemed to halt this regress by making the value of labor equal to the goods workers must buy in order to keep themselves going: the simplest food, the cheapest clothing, the minimum shelter-the bare necessities of life. The cost of labor cannot fall beyond the cost of these necessities, for the labor could not sustain itself; therefore their cost is the irreducible cost upon which the price system is based.
Yet these goods are produced, too, and produced exactly as other goods are. A firm producing them can reduce its prices by controlling its costs in the same ways other firms do. There is thus no minimum or final or “natural” price for the goods laborers must buy; consequently no determinate system of costs or prices or values. The regress continues.
But if the regress truly continued all prices under competitive conditions would approach zero, and so would all costs and all incomes. Somehow this bizarre situation never develops; somehow the regress stops. How does it stop? In the only way a regress can stop: It never actually gets started.
THE SYSTEM does not follow the pattern traditional economics says it does. Prices are not forced down to costs, because firms, even when competing on the basis of price, do not set their prices in auction. As the late Sidney Weintraub showed, prices are set with a certain markup in mind; and
as the late Arthur Okun showed, firms also have a certain sales volume in mind. If the sales don’t develop, production is cut. A distress sale may be held, but seldom is an effort made to continue production by cutting price. On the other hand, in the happy case where sales are greater than expected, production is increased and profits pocketed, but price is not ordinarily altered.
Manufacturing firms act in this fashion because they are ongoing organizations. Their capital investment is such that a flow of income is more important to them than a sporadic killing, and steady customers more valuable than casual bargain hunters. They set their prices in the hope of maintaining that flow into the future, and they strive to build a reliable clientele on the basis of their own reliability in observing the industry’s customs-what Okun called the invisible handshake.
The most crucial point is that modern industrialists set their prices. Farmers set their production level and take whatever the market will pay them. Manufacturers are price setters and quantity takers: They set their prices and take whatever sales they can wrest from the market. Setting a price is an act of will. It is a free act. It is determining, not determined. Like all acts, it is limited. It is an event in an actual, articulated world with a past and a future, not an imaginary world without time. You cannot effectively price your wares at a tenth of the going price or at 10 times the going price. Whatever price you set has consequences.
Price determination is not the only willful act in business. The decision to be a haberdasher instead of a bookseller is similarly willful. Determining the prices of shirts and ties is secondary and subordinate to deciding to be a haberdasher, and also to deciding what clientele one intends to attract, what kind of haberdasher one intends to be.
With willful acts we arrest the infinite regress. When we say, “This is what I offer,” “This is what I’ll sell at that price,” “This is what I’ll buy at that price,” we launch ourselves into the future: we progress, not regress. Accepting-seeking, rather-the consequences of our action, we declare our membership in, and responsibility to, the real world.
In conclusion, let me reward your perseverance in reading this far by allowing you to be among the first to hear of Brockway’s Paradox. Professor Buchanan (to get back to him) thinks that perfectly selfish competitors drive prices down to cost. But Brockway’s Paradox calls your attention to the fact that perfectly altruistic producers would also set their prices at cost. In physics, you’ d suspect an error in your observing or your reasoning if both freezing and heating caused water to boil. The solution to the Paradox? Economics isn’t about either selfishness or altruism; it is about right and wrong.
The New Leader