The Adam Smith lecture: on the structure of an economy: a re-emphasis of some classical foundations

Business Economics, Jan, 1989 by James M. Buchanan

Economic choices are made by many buyers and sellers as they participate in many markets for many goods and services. "The Economy" is best described by the structure (the rules) within which these market choices take place. Efforts to reform the pattern of results observed in an economy should be directed exclusively at this structure; attempts to modify directly the outcomes or results of market process within structures are based on fundamental misunderstanding.

TO THOSE OF US who share the view expressed so well by Adam Smith in my frontispiece citation, there is both "good news" and "bad news" in the global political economy of 1988. The "good news" is reflected in the developing recognition that centrally planned economies everywhere remain glaringly inefficient, a recognition that has been accompanied by efforts to make major changes in internal incentive structures. More extensively, throughout the developed and the developing world of nations, the rhetoric of privatization in the 1980s has, occasionally, been translated into reality.

The "bad news" emerges from the United States, where in a single week in early May 1988 two separate stories in the media caught my attention. The first was a report that the Greenspan Federal Reserve Board had returned full circle to the once-abandoned effort at monetary fine turning. The second was a report that councils well placed in the Democratic Party are increasingly disposed to promote specific and directed governmental intervention into industrial operation. These two stories came on top of the protectionist-mercentilist absurdities abroad in the land, absurdities that seemed excessive, even by presidential election years standards.

These items, along with the formal title of this, The Adam Smith Lecture, prompt me to devote my attention exclusively to a restatement and re-emphasis of what I think was Adam Smith's own normative attitude on the structure of a national economy, and, by inference, on his attitude toward political-governmental directions for economic policy. Let me say at the outset, however, that I am not an exegetist, and that my concern is really not what Adam Smith may have said or failed to say. My concern is, instead, with articulating what I think would be a consistent position, for Adam Smith, in the context of the United States political economy in the late 1980s. And you will not, of course, be surprised that I shall exploit yet another opportunity to present my own perspective on political economy generally.

I propose, therefore, to defend the categorical distinction to be made between the structure of an economy and the operation of that economy within such structure. I shall argue that the appropriate domain for political economy, for politically directed reform as well as for discussion and analysis of that reform, is exclusively limited to structure. Efforts directed toward effectuating modifications of results that emerge only from complex interdependencies within structure are misguided, as are all canons of putative advice advanced by pundits who fail to understand the necessary distinction. y argument may be properly interpreted as a restatement of the positive case for laissez-faire that Adam Smith might have made had he used this term. Above all else, Adam Smith was a man of prudence, who would never have countenanced those fools of right or left whose caricatures through the decades have reduced a potentially meaningful slogan to polemical absurdity.

I shall proceed as follows. In the next section, I shall offer a precautionary tale about the dangers of terms that seem semantically and didactically useful but that may have the effect of making enlightened understanding more difficult to achieve. Functionalism, the familiar scourge of explanatory analysis in the other social sciences, also works its spell among economists. The third section is devoted to a necessarily foreshortened discussion of the order of an economy, as it operates within its own constraining structure. The next section examines elements of structures and analyzes relationships between structure and operations within structure. In the following section, I argue that elements of structure offer the only appropriate targets for reform. In the final section, I demonstrate how confusion in understanding the distinction between structure and operation-within-structure, between rules of the game and play within the rules, between process and end states, produces misdirected, and ultimately self-defeating, ventures in economic policy. The lecture falls clearly within "constitutional political economy," although, by comparison with some of my other papers, discussion here is concentrated on the structure of the economy rather1 than on the structure of the polity. In other words, the analysis examines the impact of politics on the economy, both in its positive and normative variants. The analysis does not, at least directly, introduce constitutional politics.

THE "FUNCTIONS" OF AN ECONOMY