A Contractarian Paradigm for Applying Economic Theory

TLDR: This paper pointed out that there is no single person, no single chooser, who maximizes for the economy, for the polity, and that the ultimate object of economics is not itself a choosing, maximizing entity.

Abstract: The object for economists' research is "the economy," which is, by definition, a social organization, an interaction among separate choosing entities. I return deliberately to this element in our primer, because I think that it has been too often overlooked. By direct implication, the ultimate object of our study is not itself a choosing, maximizing entity. "The economy" does not maximize, and we may substitute "the polity" here without change in my emphasis. No one could quarrel with these simplistic statements. The inference must be, however, that there exists no one person, no single chooser, who maximizes for the economy, for the polity. To impose a maximizing construction on the models that are designed to be helpful in policy is to insure sterility in results. Where did economics, as a discipline, take the wrong turn? My own suggestion is that Lionel Robbins marks a turning point. His book defined "the economic problem" as the location of maxima and minima. Almost simultaneously with this, the Edward H. Chamberlin and Joan Robinson books marked a turning inward, so to speak, a shift toward the maximizing problem of a specific decision-making entity. The economics of the firm was born, to be followed by the Hicksian elaboration of the economics of consumer choice. Paul Samuelson put this all together in his Foundations of Economic Analysis. Importantly, he extended the maximizing construction to welfare economics, extolling the virtues of A. Bergson's social welfare function as the tool through which such extension was made possible. For a quarter of a century, we have witnessed many variations on this theme, with economists hither and yon maximizing objective functions subject to specific constraints. I should not imply that the maximizing models have held monolithic dominance. The institutional economists, and their successors, have continued their sometimes inarticulate critique of economic theory. Frank Knight, and some of his students, continued to lay stress on the social-organization aspects of the discipline. Game theory, in its solution rather than its strategy search, offered partial redirection of emphasis. More importantly for my purposes, public choice theory emerged as the positive theory of politics, a theory that necessarily treats individual decision takers as participants in a complex interaction that generates political outcomes. But let me return to mainstream efforts of economists in the years since World * University Professor and General Director, Center for Study of Public Choice, Virginia Polytechnic Institute and State University. The author is indebted to Amoz Kats and Gordon Tullock for helpful comments.