“The market as a creative process”

That is the title of this excellent essay by Viktor Vanberg and the late James Buchanan, which was recently reprinted in Daniel Hausman, editor, The Philosophy of Economics, Cambridge U Press (2008), pp. 378-398. Here is a picture of the book in which the essay appears:

In brief, Vanberg and Buchanan argue against equilibrium analysis and highlight the role of choice and creativity in markets. Here, for example, is one of our favorites sentences from their paper:

“The market economy, as an aggregation, neither maximizes nor minimizes anything. It simply allows participants to pursue that which they value … within the constraints of general ‘rules of the game’ that allow, and provide incentives for, individuals to try out new ways of doing things. There simply is no ‘external,’ independently defined objective against which the results of market processes can be evaluated.”

In other words, standard econ concepts such as “general equilibrium” and “perfect competition” are not only nonsense — non-existent and imaginary entities like the luminiferous aether in Newtonian physics — such notions also neglect the critical role of creativity and human choice in our lives. In addition, we appreciate Vanberg and Buchanan’s emphasis on the role of the ‘rules of the game’ in their creative conception of markets. Rules are a necessary condition for the process of exchange; simply put, without rules there are no markets. Ideally, then, such rules should be designed to encourage positive-sum exchanges and entrepreneurial risk-taking, while penalizing theft and other forms of banditry.

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