Public Choice (2012) 152:365370

DOI 10.1007/s11127-012-9983-3
The market as a cooperative endeavour
Robert Sugden
Springer Science+Business Media, LLC 2012
In my work as a normative economist, I have been deeply inuenced by an idea I learned
from James Buchanan in the late 1970s, and which is a central theme of his and Gordon
Tullocks Calculus of Consent. In that book, the idea is presented as a dening characteristic
of an economic approach to politics. I prefer to see it in a wider perspective, as a way of
thinking about the terms on which human beings can and should engage with one another
in society. For the purposes of their book, Buchanan and Tullock take it that this way of
thinking is fundamental to the economic approach to economics. But my sense is that their
understanding of market exchange is not quite the same as that of most economists today, or
even of most economists at the time they were writing. In this essay, I try to formulate the
idea and to say something about its implications for an understanding of markets.
In The Calculus of Consent, Buchanan and Tullock repeatedly argue that collective
choice should be understood as the many-person political equivalent of market exchange.
To adopt the economic approach to politics is to treat politics as a kind of market. Here are
two typical passages:
The market and the State are both devices through which co-operation is organised
and made possible. Men cooperate through exchange of goods and services in or-
ganised markets, and such co-operation implies mutual gain. . . . At base, political or
collective action under the individualistic view of the State is much the same. Two or
more individuals nd it mutually advantageous to join forces to accomplish certain
common purposes. (Buchanan and Tullock 1962: 18)
We view collective decision-making. . . as a form of human activity through which
mutual gains are made possible. Thus, in our conception, collective activity, like mar-
ket activity, is a genuinely co-operative endeavour in which all parties, conceptually,
stand to gain. (Buchanan and Tullock 1962: 266)
R. Sugden ()
School of Economics, University of East Anglia, Norwich NR4 7TJ, UK
e-mail: [email protected]
366 Public Choice (2012) 152:365370
Buchanan (1975: 3552) takes a similar approach in The Limits of Liberty, treating the
exchange of private goods as the template for his analysis of post-constitutional contract
with respect to the supply of public goods. As in the Calculus of Consent, the economic
analysis of exchange is taken as uncontroversial. The fundamental idea in both books is that
the market is, and politics ought to be, a domain in which individuals engage in mutually
advantageous cooperation. Or, to put this more generally, social life should be viewed as a
cooperative endeavour. This contractarian perspective on society is very different from that
taken in most welfare economics. Welfare economics normally is addressed to an imagined
planner or policy-maker, construed as an impartially benevolent despot whose aim is to
maximise the overall welfare of society.
There is a parallel between Buchanan and Tullocks approach and John Rawlss (1971:
7374) thought that society should be understood as a cooperative venture for mutual ad-
vantage. Of course, Buchanan and Tullocks conception of a cooperative endeavour is less
egalitarian than Rawlss: there is no presumption in favour of equality in the distribution of
the proceeds of social cooperation, and no suggestion that inequalities in individuals tal-
ents or property endowments call for compensation or redistribution. Still, it is important
for Buchanan and Tullock that a cooperative endeavour is a relationship between equals.
Describing the conditions under which individuals agree on political rules, they say:
The individual participants must approach the constitution-making process as equals
in a special sense of this term. The requisite equality can be insured only if the exist-
ing differences in external characteristics are accepted without rancor and if there are
not clearly predictable bases among these differences for the formation of permanent
coalitions. (Buchanan and Tullock 1962: 80)
The idea, I take it, is that every individual should acknowledge every other as a potential
partner in the pursuit of mutual advantage, rather than as an opponent in a zero-sum game
of conict. If individuals are to do this in good faith, they must set aside any resentments
about existing inequalities of endowments and look ahead to the benets they can expect to
gain from cooperation. This picture of economic life as mutually benecial cooperation has
been a continuing inspiration for me.
In applying this account of the market to politics, however, Buchanan and Tullock take a
further and less secure step. They maintain that the market operates as if with a voting rule
of unanimity. For example, countering the common thought that unanimity in politics is an
impossible ideal, they say:
This line of reasoning seems quite plausible until one confronts ordinary economic
exchange. Note that in such an exchange the interests of the two contracting parties
clearly conict. Yet unanimity is reached. Contracts are made; bargains are struck
without the introduction of explicit or implicit coercion. . . . Our continued repetition
of this simple analogy stems from our conviction that, at base, it is the failure to
grasp fully the signicance of this point that has retarded progress in political theory.
(Buchanan and Tullock 1962: 250)
Following Knut Wicksell ([1896] 1958), Buchanan and Tullock argue that, at least in
principle, political decision-making could be structured by a rule of unanimity in the same
way that (according to their account) the market is. Unanimous approval is not just a suf-
cient condition for deeming a change to be in the public interest:
[W]e go further and state that, for any change in the public interest, unanimous support
can be achieved. . . . If the political process is conceived as one means through which
individuals co-operate to attain mutual advantage, it is clear that, conceptually, all
Public Choice (2012) 152:365370 367
persons can be made better off by any change that does, in fact, produce sufcient
improvement for mutual advantage to be possible. (Buchanan and Tullock 1962:
284)
This idea plays a fundamental role in Buchanan and Tullocks analysis of voting rules.
In that analysis, the unanimity rule is presented as a normative benchmark. Less-than-
unanimity rules are presented as variants from the unanimity rule that may be justied
as means of economising on decision-making costs; but the unanimity rule is the ideal that
would be appropriate in a counterfactual world in which decision-making costs were zero
(Buchanan and Tullock 1962: 96).
My primary interest is not in the justications that can be offered for different voting
rules; it is in the justications that can be offered for different economic institutions, and in
particular for the market. So I have to ask whether Buchanan and Tullocks argument can
be run in reverse. Is it possible to justify the market on the grounds that it operates like an
idealised political process with a unanimity rule?
I think the answer has to be No. Consider a typical market transaction between a seller
A and a buyer B. As far as A and B are concerned, the transaction is voluntary. One might
say that it has been unanimously approved within the group of individuals who are parties
to it. And if, as Buchanan and Tullock (1962: 248, 251) do, one treats voluntary consent
as the test of individual benet, the transaction can be said to be mutually benecial for
A and B. But is it true to say that no one other than A and B is harmed, and hence that
the transaction is (weakly) mutually benecial for the whole society of market participants?
That depends on how one denes harm. When A sells some good to B, no other persons
holdings of goods are affected. And every market participant retains the freedom he had
before to enter into voluntary transactions with any willing partners. In these senses, no one
is harmed. But the transaction between A and B may still affect other peoples prospects of
achieving gains from trade. For example, suppose that A and C are would-be sellers of two
similar used cars, and B is a potential buyer of one of these. Then if A sells her car to B,
Cs expectations are worsened: he has lost a potential buyer of his car. So if the transaction
between A and B could take place only with the unanimous approval of the whole society,
it might be rational for C to veto it. On a larger scale, this is exactly the rationale of policies
that protect established rms or industries from competition. (Think of C as a high-cost
incumbent rm in some industry, A as a potential low-cost competitor, and B as the set of
customers.) Competitive markets do not operate on an implicit unanimity rule.
This conclusion is supported by a further consideration. Suppose, for the sake of the argu-
ment, that no one would be harmed by the transaction between A and B. Unless both parties
are exactly indifferent between trading and not trading, there are gains from trade. In a mar-
ket economy, these gains are appropriated by A and B. But if market transactions could take
place only if approved by unanimous vote, every voter would be in a position to demand a
share of the gains from trade generated by every transaction. Cooperative game theory tells
us that, if decision making costs were zero and all agents were perfectly rational, these de-
mands would be made and would be met: everyone would insist on an approximately equal
share in the gains created by other peoples transactions. This would disable the incentive
mechanisms on which markets depend.
The decision-making principle of the market is not unanimity, but consent among legiti-
mately interested parties. In the case of private goods (that is, goods that are privately owned,
rival in consumption and excludable), a person has a legitimate interest in a transaction if
and only if it transfers or materially affects his property rights. (The word materially is
intended to signify that being exposed to the effects of changes in the market value of ones
368 Public Choice (2012) 152:365370
property rights does not give one a legitimate interest in other peoples transactions.) I sug-
gest that Wicksells ([1896] 1958: 121) principle of voluntary consent and unanimity for
the supply and nancing of public goods is best interpreted in a similar way. For example,
consider a proposal to build a public library, to be nanced by taxation. In its ideal form,
Wicksells principle would require the necessary additional taxes to be divided among the
beneciaries of the library in such a way that each person who paid those taxes consented
to the package of tax and benet. But should an individual who is not called on to pay any
contribution be allowed to exercise a veto, either as a way of trying to appropriate a share
of the social value of the project, or to protect a business interest? (Consider the owner of a
bookshop whose sales would fall if a public library were opened.) I think not.
To say that the market does not operate under a unanimity rule is not to reject the idea that
it is a genuinely cooperative endeavour. To the contrary, the principle that decision-making
rights are reserved to legitimately interested parties is an expression of that idea. If society
is truly to be based on voluntary cooperation, each individual must respect other peoples
freedom to set the terms on which they cooperate with one another. In terms of the story
of the car, C must respect Bs decision to trade with A rather than with him. C might have
hoped that B would have found it in her interest to trade with him; but if the market is to be
viewed as a domain of cooperation, that hope is a not a legitimate interest that C is entitled
to protect.
However, this kind of argument does not answer the fundamental question: Why should
anyone accept the rules of the market? The contractarian logic of Buchanan and Tullocks
approach requires that, if these rules are to be justied, they must be justied to each individ-
ual separately as means of furthering his or her long-term interests. As Buchanan (Buchanan
and Tullock 1962: 311) puts it in a single-authored appendix to Calculus of Consent, the
question that a constitutional political economist tries to answer is: What set of rules should
the fully rational individual, motivated primarily by his own self-interest, seek to achieve if
he recognises that the approval of such rules must embody mutual agreement among his
fellows? (Notice the implication that Buchanan and Tullocks normative economics is not
addressed to an imagined benevolent despot, but to individual citizens as potential parties
to an agreement.) This question is as relevant for the rules of the market as it is for voting
rules.
The rst fundamental theorem of welfare economics tells us that every competitive equi-
librium is Pareto efcient. One way of interpreting this theorem is to say that in an equilib-
riumstate of a competitive market, all opportunities for mutually benecial transactions have
been realised. A closely related result can be proved without using any assumptions about
the coherence of individuals preferences. Roughly speaking, if the competitive process is
represented as one of arbitrage conducted by prot-seeking traders, competitive equilibrium
is a state in which all opportunities for voluntary transactions in private goods are made
available to individuals (Sugden 2004). This conclusion rms up the intuitive idea that the
market is a domain of cooperation for mutual advantage. But it still leaves open the question
of whether the existence of such a domain is in each individuals interests.
It is of course obvious that if all goods are private and if individuals act on stable and well-
articulated preferences, the outcome of any series of voluntary exchanges must be weakly
Pareto-preferred to a regime in which there are no transfers of goods between individuals,
everyone simply consuming his initial endowments. Or, expressing this idea in the language
of opportunity: in a regime in which all transactions are voluntary, every individual has the
option of consuming his initial endowments, and so the market unambiguously expands
individuals opportunities. In this limited sense, market exchange is in everyones interests.
But no economy in recorded history has operated without any transfers of goods. To say that
the market is better for each of us than total autarky is not much of a recommendation.
Public Choice (2012) 152:365370 369
Here is a very rough sketch of what I suggest is a more useful way of constructing a
benchmark from which to evaluate the market. For a given economy at a given point in
time, consider the existing allocation of resources, arrived at by actual political and eco-
nomic processes. In principle (at least within a suitably simplied economic model), one
can imagine this allocation continuing unchangedI shall say frozenfrom then on: each
individual continues to consume exactly the same goods and to supply exactly the same
labour services as at the moment at which the economy was frozen. Suppose there is just
one alternative economic policy under consideration: to unfreeze the economy and allow a
market to operate. We can then ask whether the adoption of the market regime would be in
every individuals interests.
Clearly, this would be the case if, in addition to the trading opportunities that would be
open to him in the market regime, each individual retained the option to choose the bundle
of consumption and leisure that he would have received in the frozen economy. But that
is an option that cannot be provided. The advantage of the market regime is that it allows
individuals to seek out new opportunities for mutually benecial exchanges, adapting to new
knowledge and to changing tastes. If this freedom is to be available, everyone cannot also
have the right to demand the repetition of trades that he still nds benecial, but that his
former trading partners no longer wish to make.
The essential problem is this: Each individuals own opportunities to enter into volun-
tary transactions with others (and, reciprocally, other peoples opportunities to enter into
voluntary transactions with him) are unambiguously advantageous to him. But, because the
market does not operate under a rule of unanimity, there can be no guarantee that individ-
uals do not incur losses as a result of other peoples use of their opportunities to enter into
voluntary transactions with one another.
A contractarian justication of the rules of a market regime has to give each individual
good reasons for expecting a favourable balance of benets and costs. One way in which
this might be done is by showing that there is a general tendency for individuals to benet
from one anothers prosperity, and hence for each individual to share in the gains from other
peoples market transactions. Arguments of this kind have often been used by economists in
the liberal tradition, including Adam Smith and John Stuart Mill (both of whom used them
to oppose mercantilism):
The wealth of a neighbouring nation, however, though dangerous in war and politics,
is certainly advantageous in trade. . . . As a rich man is likely to be a better customer to
the industrious people in his neighbourhood, than a poor, so is likewise a rich nation.
A rich man, indeed, who is himself a manufacturer, is a very dangerous neighbour to
all those who deal in the same way. All the rest of the neighbourhood, however, by far
the greatest number, prot by the good market which his expense affords them. They
even prot by his under-selling the poorer workmen who deal in the same way with
him (Smith [1776] 1976: 494).
[C]ommerce rst taught nations to see with good will the wealth and prosperity of
one another. Before, the patriot. . . wished all countries weak, poor, and ill-governed,
but his own: now he sees in their wealth and progress a direct source of wealth and
progress to his own country (Mill [1848] 1909: 582).
Smith and Mill see the transmission mechanism working through the market. The essen-
tial idea is that other peoples wealth is good for you if they demand what you can supply,
or if they can supply what you demand. Buchanan and Tullocks economic approach to
the politics of public goods suggests a further transmission mechanism. If the same public
goods are valued by all income groups, other peoples wealth tends to increase the supply
370 Public Choice (2012) 152:365370
of public goods from which you benet, without imposing a corresponding increase in your
own contributions.
Still, liberal economists (among whom I like to include myself) must recognise that it is
not a necessary truth that everyone tends to benet from other peoples market transactions.
Recent trends of increasing inequality in many developed economies surely give pause for
thought. Ultimately, I think, one has to decide how far one is committed to the (for me)
deeply attractive idea that underlies Calculus of Consentthe idea that the market is a co-
operative endeavour among individuals who accept differences in their endowments without
rancor and who look forward to mutual gains from transacting with one another. I cannot
see how that idea can be sustained unless it really is the case that, on the whole and in the
long run, everyone does tend to benet from the continued operation of the market. That
need not imply the kind of egalitarianism espoused by Rawls, but it may require a collective
commitment to some degree of redistributive taxation of the surplus generated by market
transactions. Such taxation may be an essential component of a society in which (to adapt
Mills words) people can see one anothers wealth and prosperity with good will.
References
Buchanan, J. M. (1975). The limits of liberty: between anarchy and Leviathan. Chicago: University of
Chicago Press.
Buchanan, J. M., & Tullock, G. (1962). The calculus of consent. Ann Arbor: University of Michigan Press.
Mill, J. S. ([1848] 1909). Principles of political economy. London: Longmans.
Rawls, J. (1971). A theory of justice. Cambridge: Harvard University Press.
Smith, A. ([1776] 1976). An inquiry into the nature and causes of the wealth of nations. Oxford: Clarendon
Press.
Sugden, R. (2004). The opportunity criterion: consumer sovereignty without the assumption of coherent
preferences. American Economic Review, 94, 10141033.
Wicksell, K. ([1896] 1958). A new principle of just taxation. In R. A. Musgrave & A. T. Peacock (Eds.),
Classics in the theory of public nance. London: Macmillan.
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