ABSTRACT
On individualist views institutions seem an unpleasant accoutrement of rational action. All coordination of actions should simply arise out of the unfettered action of individuals. Yet institutions obviously interfere in the course of events. The socalled old institutionalism of Thorsten Veblen, J.R. Commons and others was designed to explain their role. But, rightly or wrongly, these theorists were pushed aside as offering mere collections of observations of institutions without any serious theory of them. But individualism also has had no good theory of them: in an ideal (‘rational’) world they were conceded as necessary for the function of a free-market, but were to be limited as much as possible. More recently a concerted effort has been made to account for institutions within the framework of an individualist view. There are two central ways of approaching this problem. One is to explain all institutions as a mere product of individual rational action. The other is to explain institutions such as firms as rational actors. In this chapter I will discuss Tullock and Buchanan, Buchanan, and Vanberg as examples of the former and argue that their theories are empty. I will also discuss North who tried to apply the theories of Tullock and Buchanan to explain the history of institutions and was led right back to the problems of rationality these theories were constructed to avoid. Finally I will discuss the theories of Coase and Williamson as examples of the second way of treating institutions. Buchanan and Tullock: Can rational choice theory explain institutions? Due to the rediscovery that the study of the role of institutions in economic processes has to be an important part of economic theory, inquiries such as Downs’ An Economic Theory of Democracy or Buchanan and Tulloch’s The Calculus of Consent have become an important part of the new institutionalist literature in economics. Such studies try to both extend economics to cover new areas, in this case that of government, and to give better explanations of economic phenomena by explaining the role of institutions in economic affairs. These authors apply the dominant rational choice research program to explain how democratic governments work. Their success would be a victory for economists seeking to extend the domain of their research. But the method and approach they use cannot attain the goal they seek, that is, a theory of how good institutions may be chosen democratically. Due to their radical individualism, with few exceptions-I discuss
North below-they do not even ask how existing institutions which are not the result of such democratic procedures steer events. If economic theory is to have higher explanatory power, it must take the impact of institutions on economic transactions into account. One can do this by studying those institutions which happen to be at hand for historical or cultural reasons and explain their impact on events, as, for example, Schumpeter did for imperialism or as North and Gellner-see below-did for the comparison of economic development in north and south Europe. But this approach requires that economics be integrated in some social theory which includes the results of other social sciences whose reputation for being scientific is weaker than the reputation of economics. A strictly economic theory of (governmental) institutions could overcome this difficulty. Taking only economic motives and explanations into account, such a theory could explain and appraise existing governmental institutions. It could also show how a well-functioning system of governmental institutions could be attained. The field of economics could be widened by absorbing the study of institutions into economic theory. Buchanan and Tullock are of interest here, then, because they seek to extend rational choice theory to the study of political institutions; they emphasize the importance of political institutions as a basis for economic and social success. They discuss a relatively narrow theme: How do (good) institutions arise, under perfect or near perfect democratic conditions, that is, direct decisions by equal vote of all citizens or direct equal vote by all citizens through representatives. But they hope to use their thought experiments to draw far-reaching conclusions about economic processes and the nature of the best society. They propose that the only public good is institutions which enable individuals to pursue their ends. They hope to find a way to build explanations of institutions into economic theory without changing the kind of explanation economists use. The same assumptions about rationality, in particular about economic man, which are used in the explanation of market phenomena, should also be used in explaining political institutions. They hope to show that just as the explanation of events as products of a market may be explained when a market really exists, that is, when individuals are free to exchange goods as they please, institutions may be explained when individuals are free to determine them under certain conditions of voting and of buying or selling of votes. Buchanan and Tullock seek to demonstrate at least four theses which they take to be a part of a model of institutional innovation. First, institutional change is desirable when the costs it imposes on individuals are less than the advantages it offers. Second, institutional changes which increase the satisfaction of individual utilities will be chosen when individuals have equal voting rights. Third, when individuals pursue their own aims, that is, when they seek to maximize their utilities, the results will be good from the point of view of a minimum utilitarian ethic accepted by economists and the individualist tradition. Fourth, if individuals pursue their own interests and have equal voting rights, the social system that results will be better for all its members than alternatives would be. The first thesis is emphasized by Buchanan and Tullock, because they found it necessary to point out that the calculus of consent, that is, the calculation of which
laws are to one’s advantage and which are not, requires a calculation not merely of the benefits to be achieved once new institutions are at hand, but also of the individual costs of common action to bring about these institutions. But the attempt to use the calculations of individuals of the benefits and disadvantages of specific institutions to explain how and why institutions are created and/or maintained has two crucial defects. The first is that institutions do not normally arise due to such calculations, even though benefits and costs of institutional reform are often considered. The second is a mere repetition of a point made by Popper: one cannot make such calculations in any reliable way. In addition to erroneous and/or incomplete information there are always misconceptions and unanticipated results. The use of a market theory of institutions fails to take account of problems posed by the limits of rationality, of how to find good solutions to often difficult problems. But simply to note that individuals cannot normally make the calculations Buchanan and Tullock presume they should and that individuals quite sensibly do not even try, as Simon has pointed out, will not phase Buchanan and Tullock. They make minimal demands on individual rationality. They say that the effects of the maximization of utilities by individuals which they are investigating will occur even if only a part of the population behaves in this way. They take it as obvious that individuals prefer more to less. Individuals behave, therefore, so close to the ideal of maximizing utilities that a model which assumes that they do this perfectly will adequately explain what happens. Is the nature and extent of deviations by individuals from this model of individual rationality sufficient to block it from attaining some desired degree of explanatory power? In order to answer this question we have to look at the authors’ methodological comments about the purpose and appraisal of models in the social sciences. This is so, because they limit the claims they make for this model severely. They say at the beginning that their model has the virtue of not being refuted, but at the end they note that there are refuting cases. They claim, however, that these counter-examples merely ‘weaken’ their model without showing it to be false. Their model should merely be ‘operational’, that is, have empirical consequences and be confirmed. But how much confirming evidence is enough to show that this model is correct? Some of the evidence offered is little more than anecdotal and all of it taken together is not much.1 The model which Buchanan and Tullock construct is narrow and its application vague. The model is narrow, because it requires equal voting rights and rights to trade votes. This situation approximately exists in some places some of the time, the authors claim, but only approximately and only under certain conditions. The situations in which it applies are vaguely specified. In any given case the approximation might not be close enough and declared irrelevant or any putative refutation may not be deemed a demonstration of falsity, but merely a ‘weakening’ of the model. This use of such a model is defended on the grounds that this use is
1 Critics such as Green and Shapiro (1994; Friedman 1995) have pointed out with
varying examples how poorly this program produces refutable claims.
