Public Choice and the Entrepreneur View
of Public Goods
July 19, 2000
Public choice is the use of economics and political economy to study two processes: (1) making collective decisions and (2) causing the decisions to be implemented. The subject began with a study of the first process and then expanded to include the study of the second. Little attention has been given to the issue of exactly what kinds of decisions a collective would want to make. This is not due to a failure to identify the issue. In the book that launched the field, The Calculus of Consent (1962), James M. Buchanan and Gordon Tullock wrote that the analysis of collective decision making by means of government begins where the private goods, minimum government market economy ends. Whereas economics is concerned with the demand and supply of private goods, the economic theory of collective decision making (later to become Public Choice) is concerned with the demand and supply of "public goods."(Buchanan and Tullock 1962: 34-35)
Unfortunately, this is practically all that Buchanan and Tullock wrote. In their book, they moved immediately to the problem of establishing rules for making collective decisions. Employing the standard assumption of economics that individuals are maximizers, they explored the likely consequences of adopting different kinds of collective decision making rules.
Buchanan and Tullock were not concerned with the second process discussed above. For example, they did not discuss the bureaucracy problem or the tasks that a bureaucracy might be asked to perform. During the forty-year period that followed, however, a great deal of attention was devoted to supply, including William Niskanen's model of bureaucracy, the theory of pressure groups by Mancur Olson and Gary Becker, and various theories of legislative logrolling.(1) However, it appears that no one has attempted to more completely identify the kinds of decisions a collective would want to make regarding public goods.
The aim of this paper is to address this issue. The paper begins in part 1 by separating the services related to public goods supply from other services like national defense and the provision of law and order. It goes on in part 2 to discuss the public goods problem from a special point of view, "the entrepreneur view." This is a view, following Frank Knight, in which we regard the entrepreneur in a free enterprise system as an agent for consumers. We then identify the public goods problem as a situation for which the technical characteristics of public goods interfere with the incentives that entrepreneurs have to act as the consumers' agents. Thus, we conceive of the market failure problem due to public goods as a failure of the private property rights system to provide entrepreneurs with incentives to cause public goods to be produced. The implication is that members of a collective may want to hire agents to either provide the missing incentives or produce the goods themselves. Part 3 discusses the implications of this conception of market failure for our understanding of market failure in the supply of public goods. Part four speculates on the significance of the entrepreneur approach to public goods on Public Choice. It shows how this view of the problem implies a demand by a collective for a range of services that derive from the problem of agency in collectively employing others to either providing these incentives or to provide the goods themselves.
What Kinds of Services Would a Collective Demand?
National Defense and Provision of Law and Order
There are a wide range of services that a collective of individuals might want to have supplied collectively. Perhaps the most crucial are national defense and law and order. It is not clear, however, that these services are public goods in a technical sense. They certainly do not have the characteristic of non-exclusion; and the extent to which they are non-rival is also questionable. Moreover, without national defense, members of a collective would hardly be in a position to make decisions about anything else. Similarly, without order, there could be no market economy. One way to avoid the theoretical problems associated with calling national defense and the provision of law and order public goods is to simply disregard them by assuming that public choice is concerned with collective decision making under the conditions where a monopoly over force already exists and is not threatened either by foreign or domestic enemies. Having already established control over the monopoly over force, the collective faces only the question of how to use it. Alternatively, we could simply stipulate that these are public goods in order to incorporate them under the umbrella definition. In this paper, we follow Buchanan and Tullock by disregarding them.
Maintenance of the Private Property System
Another service that we might include is that of maintaining the private property system. At a minimum, maintenance of the private property system requires the establishment of new legal rights in light of "dynamic" changes in tastes and technology. Beyond this, one might consider redistributing legal rights in light of unanticipated changes in the costs of making transactions.(2) The institution that comes to mind is a judicial system that makes rulings according to the principles of private property and exchange that have come to be articulated in common law. While there are some grounds for including the maintenance of the private property system among the set of public goods decisions that a collective would want to make, omitting it should cause few problems. It seems possible for a relatively small, unregulated, and unlegislated group of judges to provide this service. Thus, we shall disregard it here.
Redistribution of Wealth
Yet another service that a collective might want provided by a government is the redistribution of wealth. Public choice theorists have avoided considering this service for several reasons. First, it may be sensible to conceive of wealth redistribution as a public good, in which case it falls under the general class of public goods. To include it as a separate item would be redundant. Second, the members of a collective may have grounds for ruling out the redistribution of wealth at an imaginary constitutional level of decision making. Third, to include it as a public good (or to exclude it, for that matter) raises ethical or normative questions that are best dealt with outside the frame of a "positive science." Fourth, given that some members of the collective will be in the position of recipients of the redistribution, how are we to determine their true preferences for redistribution? They would seemingly always have an incentive to exaggerate their benefits. For these reasons, we shall not discuss redistribution in this paper.
Correction of Market Failure and the Public Goods Problem
The next candidate consists of various other forms of market failure. The two most obvious ones are monopoly and externality. To the extent that these failures cannot be handled by a judicial system as part of the maintenance of the private property system, it would seem possible to regard them as examples of public goods. Members of the collective could demand the service of controlling any future monopoly that forms, so long as the benefits of control are less than the costs. Similarly, members of the collective could demand the service of intervening by means of regulation in cases where there are externalities and where transactions costs are high. Indeed, since the presence of high transactions costs is correlated with the number of transactors, most externality problems that members of a collective might regard as relevant are really services with public goods characteristics anyway. In light of these considerations, we define the public goods problem as that of deciding whether intervention is an appropriate response to cases of monopoly and externality. We assume that the relevant cases are characterized by the now traditional properties of public goods - jointness and non-exclusion. We discuss these in part 3 below.
The Entrepreneur View of the Public Goods Problem
In this paper, we explore the "public goods problem" by arming ourselves with the powerful tool of the entrepreneur view of the market economy. Most of the work in mainstream economics on public goods has been along the Marshall-Pigou lines of partial equilibrium analysis,(3) where market failure is defined as a technical problem. In more recent years, property rights theorists have set about transforming the technical problem into a problem of the determining the optimal allocation of legal rights in light of the presence of transactions costs.(4) In this paper, we adopt a view of private goods supply that to our knowledge has never been applied to public goods. This is the view that the market failure due to public goods characteristics is a failure of entrepreneurship to provide goods or services even though individuals acting in the entrepreneur role regard the marginal benefits of doing so as greater than the marginal costs.
The Entrepreneur as an Agent
The entrepreneur view, which is partly due to the work of Knight, sees the producing entrepreneurs as agents for consumers. Knight's image of the market economy was one in which individuals sort themselves into roles based on their personal beliefs about their specialties and about other variables in the profit equation.(Gunning 1993) Some of these individuals come to act as producing entrepreneurs and capitalist financiers. They become the leaders, the employers of others, who risk their wealth in production and sales ventures and thereby become, as a group, the most important cause of the satisfaction of consumer wants.
Knight conceived of entrepreneurs as agents of the consumers. Each agent bets that his knowledge of others' preferences, abilities, and knowledge is more correct than that of other individuals who might employ a factor of production. Each bets that he can earn money by producing what ordinary people regard as wealth. To prepare for the bet, he acquires what he believes is the necessary knowledge. Today, agency ordinarily implies either an explicit or implicit contract. The agent is hired by the principal. Since the entrepreneur function does not require a contract with consumers, Knight used a broader definition of "agent."
Knight stated the conclusion we can draw from this approach. He said that the only legitimate basis for supporting the market economy is our intuitive belief that the self-sorting and voluntary "risk-bearing" will cause what consumers regard as wealth to be produced.
Knight knew that his image of the market economy did not include many important phenomena of the real economies in which people live. Besides politics and culture, it disregarded externalities and certain goods that yield general public benefits or harms. But his aim was to describe the competitive price system, not these cases of market failure.
We can show how the market economy provides an incentive to act entrepreneurially with an example. Consider a prospective producer who suspects that he can earn a profit by producing an item and then selling it. He believes that the item is superior to some existing good in satisfying consumers' wants. He believes that it will have either a lower price or superior want-satisfying capacity in the eyes of paying consumers than its alternatives. At first, he lacks both the funds to finance production and the knowledge needed to convince financiers (partners, stockholders, lenders) that enough consumers will pay a high enough price to cover his costs plus a reasonable financial return on their investments. He judges that the best way to acquire the knowledge he lacks is to personally finance the production of a few units so that consumers can sample them. If he confirms his suspicions, he can then present his findings to the prospective financiers.(5)
He must also give the financiers an estimate of production costs. To do this, he may have to conduct a survey of the current prices of various factors. To be convincing, he may have to secure the testimony of a trustworthy business consultant. He may also need to discuss his business with an insurance agent and obtain an estimate of premiums and terms of coverage.(6) His aim is to provide the financiers with information to make their own separate, individual, subjective estimates of the prospect for making a profit or loss. He knows that the financiers will not agree to finance until they feel that their appraisals are adequate.
Consider the producer's actions more closely. He begins with a preliminary appraisal of factors -- a vague notion. This notion is enough to convince him that it is profitable to invest in more information to make more accurate appraisals. At some point he decides that it is profitable to invest in trying to convince financiers to help him carry out the project.
For the production-consumption sequence to occur, the producer, financiers, factor-suppliers, and consumers must reach a point where they are willing to bear all of the uncertainty connected with the production project. Each of them must make sufficiently high projections of their respective gains and/or find someone else to bear the uncertainty, typically at the expense of lower gains to themselves.
Importance of the Private Property System and Free Enterprise
The height of each one's projected gain depends on the existence of rights to obtain rewards for his actions. The producer must be able to obtain the right to the residual that results from his employing factors and selling the goods. Financiers must be able to acquire the right to future repayment of loans or possession of any guaranty pledged by the producer or other guarantors. The consumers must be able to acquire the right to consume a promised or actual good. And factor suppliers must be able to acquire the right to be paid. Thus the private property system and free enterprise enables the otherwise unrealizable and, indeed, unknown gains to occur.
So far, we have discussed a single production-consumption sequence. The market economy contains uncountable sequences of this type. Knight and his predecessors simplified this complex interaction by creating the personage of the pure entrepreneur and the image of the pure entrepreneur economy.(7) The imaginary pure entrepreneur does all the appraising,(8) makes all the production decisions, and bears all uncertainty. In this image, the financiers are merely savers, who receive uncertainty-free interest, the consumers receive consumption benefits for which they pay money, and the factor-suppliers supply factors for which they receive rents. The non-entrepreneurs are like robots who behave according to algorithms. This image of entrepreneurship helps us isolate the incentive to participate in production-consumption sequences by placing all of the distinctly human decision making in the mind of a distinct personage. Thus, the modern theory of entrepreneurship attributes the production of material wealth to the incentive to act entrepreneurially.(9)
In this image, the entrepreneur must anticipate sinking some of his own wealth into the project. For one thing, he must assure himself that his initial suspicion is correct by acquiring more information. For another thing, he must provide guaranty to the savers and possibly to the factor-suppliers and consumers.(10)
The Entrepreneur Economy
Imagine many pure entrepreneurs in various lines of business bidding for loan funds, factors, and consumer spending. Competing entrepreneurs base their bids on their respective beliefs about the worth of the factors. In this "pure entrepreneur economy," the prices of the factors and interest rates reflect the highest bids of competing entrepreneurs.
No single entrepreneur will anticipate a profit unless factor prices and interest rates are low enough. He will not take ultimate control over a factor unless he believes that he has a more profitable use for it than the other entrepreneurs believe they have. The others, by deciding not to bid still higher for the factors, show their beliefs that consumers of their products will not pay a high enough price.
This isolation of the role of the entrepreneur enables us to see clearly three aspects of entrepreneurship that give us great confidence that individuals in the market economy will produce what individuals acting in the consumer role regard as wealth. The first is the profit incentive. Individuals have an incentive to learn about opportunities to profit from satisfying others' demands for goods. The second is cooperation. An individual shares his knowledge to the extent that is necessary in order to induce the cooperation of others in joint production projects. Thus individuals inform each other, within limits, about the potential gains from production and exchange. In addition, they offer others opportunities to benefit from their knowledge. The others may be suppliers of factors, savers, investors or consumers; who are able to gain, respectively, from their opportunities for employment, savings or investments, and opportunities for consumption. Third, it helps us understand competition. Each pure entrepreneur must bid against other entrepreneurs for loan money, for factors, and for consumer spending.
A private property system and a regime of free trade give individuals an incentive to discover opportunities and to bet that their appraisals of factors are more correct than those of other individuals. In addition, except for the market failures of monopoly and externalities, the bet of any single appraiser is a bet that the consumers to whom he plans to sell indirectly value the resources more than the consumers of other products value them. If we add the reasonable assumption that the bettors are likely to be right more than wrong, then we have shown that the system of private property rights gives individuals the incentive to discover and use opportunities to produce what the consumers of their products regard as "wealth."(11) We can now consider the case of public goods.
Incentives to Supply Public Goods
The predominate approach of professional economics to the public goods problem has been to associate it with market failure. Market success is defined in terms of economic efficiency which, in turn, is defined in terms of equilibrium models of the market. Equilibrium models including only private goods are compared with equilibrium models including both private and public goods. Typically, this approach amounts to nothing more than comparing mechanical models of the Marshallian and Walrasian type, in which the individuals are assumed to be robots. In the more revealing analyses done by "property rights theorists" and "new institutionalists," the individuals may be endowed with innovative and creative abilities that an economist is unable to specify. Although these analyses are superior to the comparisons of mechanical models, they do not take advantage of the increase in explanatory power achievable by using the entrepreneur view. To extend this approach to the study of public goods, we must define the public goods problem as entrepreneurship's failure to discover and produce public goods for consumers. The first step is to tell why and how public goods characteristics interfere with the incentive of entrepreneurship to discover and produce public goods. We turn now to that task.
The Appraisal and Production of Public Goods in the Market Economy
Economists ordinarily define public goods as having two characteristics that distinguish them from private goods: (1) jointness (non-rivalry) and (2) nonexclusion (non-payers cannot be excluded). Jointness means that many individuals can enjoy the good simultaneously; there is no extra cost of adding a consumer. Non-exclusion means that consumers can avail themselves of a produced good without having to obtain permission. A producer-entrepreneur who produces a good cannot exclude non-payers from partaking in the consumption. The hypothetical pure public good has these characteristics in the extreme: (1) it yields simultaneous benefits to all consumers and (2) no consumer can be excluded from its benefits.
In everyday life, there are no goods that resemble the pure public goods of economic theory. Accordingly, the public goods problem in everyday life is mainly concerned with situations in which public goods characteristics seem to be important. Since our main concern lies with identifying the theoretical problem, we shall merely follow the standard theoretical practice of dealing with the pure public good.
The "public goods problem" mainly concerns goods that have not yet been produced. For such goods, a prospective producer can always exclude all consumers by simply deciding not to produce. He can demand payments of various amounts from different consumers before he begins to produce.(12) The problem arises because we assume that self-interest leads at least some prospective consumers to conceal their preferences from each other, to drive hard bargains with other consumers, or to reject offers to contribute because they anticipate that the benefits of free riding exceed the benefits of contributing to supply.(13) Because of the prospect for concealment, hard bargaining, and free riding among consumers; entrepreneurs have insufficient incentives to produce pure public goods even in cases where they believe that the sum of the consumers' gains is greater than the marginal cost. This implies, in turn, that entrepreneurship would have insufficient incentive to appraise the items that could become factors in the production of the pure public goods. Items that would otherwise be resources are not identified as such and the appraisement of entrepreneurs result in resource prices that do not reflect their value in satisfying consumers wants for the public goods. Some items may be regarded as resources that would otherwise not be.
The prospect for concealment and hard bargaining also reduces the incentive to produce private goods. The difference is that in the case of a private good, a producer faces consumers whose benefits are separate, as opposed to being joint. As a result, the producer has an incentive to search for ways to reduce concealment and hard bargaining -- for example, by offering nondiscriminatory take-it-or-leave-it prices. The prospective producer of a public good also has an incentive to promote organization among consumers in order to help them find a solution to their concealment, hard bargaining and free rider problems. However, the consumers themselves must still solve the problems of trading among themselves multilaterally. The producer's means of helping are limited. The requirement of a multilateral solution to inter-consumer bargaining is what differentiates the two cases.
Public Goods and Public Choice
If we combine the entrepreneur view of the public goods problem with the problem of collective decision making as originally conceived by Buchanan and Tullock, we can say that Public Choice begins by assuming that members of a collective believe that some public goods and factors will not be discovered and some produceable public goods will not be produced in the collectively desired quantities unless appraisers and producers are provided with special incentives.(14)Practitioners of such a Public Choice would want to explore the actions that members of the collective could take to provide the special incentives. If such actions are not feasible, they would want to explore alternatives, such as hiring agents to supply them directly. We now ask: (1) What kinds of incentives would members of a collective want to supply and how could they go about supplying them and (2) what alternatives might they consider? Our concern is not with the collective decision making problems they might face but only with the nature of the service they are likely to demand of government agents.
Two kinds of Incentives
In describing how members of the collective might view the incentive problem, it is useful to distinguish between two extreme, or ideal, classes of not-yet-produced public goods. The first class consists of goods that everyone knows to be public goods. The second consists of goods that no one currently knows are public goods. Distinguishing these types will enable us to focus on the problem faced by a collective in producing and utilizing knowledge. Consider each in turn.
Known But Not-Yet-Produced Public Goods
If members already know that an item is a public good, the costs of producing it, and the efficient amount to producer, their goal would be to provide an incentive for entrepreneurship to produce the efficient quantity. They can accomplish this by simply offering a payment plan that is sufficient to cover the total cost and equal at the margin to the marginal cost.
Unknown Public Goods
Now consider items that are not known to be public goods. Assume that members of the collective believe that the benefits they can collectively derive from some as yet unknown public goods would be greater than the opportunity costs. One way for the members to provide an incentive to discover and produce such goods is to promise to pay compensation to a discoverer after the discovery is made.
An example might be helpful. We can imagine a future in which the technology will exist to alter the path and change the intensity of hurricanes and typhoons. Many individuals would benefit from the discovery of such a technology. In a free enterprise system, if the perceived demand was sufficiently higher than the estimated costs, a single individual may achieve a position where he finds it worthwhile to invest the time and money needed to appraise the investment in such research. Sooner than that, a consortium may form to raise funds needed to carry out the project. But in both cases, the entrepreneurship would have to also identify a way to exclude the beneficiaries. To the extent that members of the collective did not wish to wait for this to occur, they may feel that they cannot rely on private initiative. They may want to provide an incentive for the would be discoverer to carry out the actions that are likely to lead to the discovery. To do this, they can promise to reward the discoverer if she is successful.
The Agency Problem
In all but the simplest cases, there is a serious agency problem. Even if members already know that an item is a public good, the costs of producing it, and the efficient quantity; they would face a problem. It may seem at first that they can simply hold a meeting, agree to a tax plan, and set aside the money needed to pay the producer. However, they face many types of uncertainty. First, members would be uncertain about each others' preferences for the public good. Second, they would face uncertainty about the will of each individual to hold out for a better deal than that offered in a particular proposed collective agreement. Third, members would be uncertain about the costs of production. They may not know whether one or another production method is cheaper to use. Assuming that they plan to pay a contractor to supply the public good, they would be uncertain about the collective benefits of negotiating with the contractor for a lower price. Fourth, if the collective agrees to pay money to finance the public good, each member would face uncertainty about whether other members would keep his promise to pay his specified share of the price. Finally, all would face uncertainty about whether the supplier will actually supply the public good according to the agreed terms.
The uncertainty problem in public goods demand is itself a public goods problem, since it means that members would benefit jointly and could not, under the circumstances assumed, be excluded from the benefits of information that would reduce the uncertainty.
Such a promise is unlikely to be convincing, since a prospective public good entrepreneur would have to rely on the good faith not of a single person but of the government agents who are designated to represent the collective. Another solution is to hire an agent to determine the reward, but this introduces additional uncertainty.
So they may want to make a collective decision to hire agents to decide when such public goods projects are worth carrying out and then to hire another set of agents to carry them out.
Members can deal with some of these uncertainty problems at one level but only by introducing uncertainty at a different level. For example, to solve the problem of a lack of information about costs, the collective could employ an agent to solicit bids from prospective contractors. They would be uncertain, however, whether the agent was doing his job according to the directions given him and whether the bidders had bribed him. For another example, the collective could employ an agent to collect the money from the members at the time of the meeting and then hold it in escrow until the public good is produced. They would be uncertain, however, whether the agent would take due care to protect the money and earn the highest market interest.
Implications for Public Choice
We can imagine that for some projects, the members of a collective would anticipate that the benefits of individually making appraisals of public goods projects would be high enough to warrant their doing so. They would all participate in the appraisal-making, make a collective decision, and cause a public goods to be produced either by authorizing a contract to be made with suppliers or by hiring government agents to supply the good. Even in this case, members of a collective may wish to employ agents and create institutions (1) to collect information about members' preferences, (2) to reduce the hard bargaining among members, (3) to discover the costs of production in order to determine the cheapest price, (4) to negotiate for the cheapest supply, (5) to monitor supply, and (6) to impose sanctions on suppliers who violate their contracts.
Consider, however, the projects for which the sum of the costs to members of making appraisals are too high. The only way to for members of a collective to generate appraisals of these projects is to appoint an agent, or group of agents. The agents would then report the appraisals. If a project is appraised positively, members of the collective would also want the approved projects to be acted upon. This would require the imposition of taxes and the allocation of funds to the project.
Either the same agents could administer the finances or a separate set of finance administrators could be hired. In any case, an agent or agents must be given the power (1) to determine which projects will be carried out, (2) to tax, and (3) to determine who will supply the factors necessary to cause the public goods to be produced. The agents must also be paid out of tax monies. Since, under our assumptions, hiring agents and choosing the appropriate pay are also projects that yields collective benefits, the collective may also delegate this power to some agents.
Finally, there is a problem of monitoring the performance not only of the hired agents but of the supply of the public goods themselves. Because the benefits of monitoring are collective, there is a problem of providing an incentive to monitor the performance of agents hired, public goods contracts, and so on. This suggests a further task for agents to monitor other agents.
The Problem of Agency in Public Choice
This discussion seems to suggest the primacy of the problem of agency in the decisions relating to public goods that are made by members of a collective. The problem is how a collective can hire agents who are trustworthy and knowledgeable. In Public Choice, this problem has only been dealt with indirectly in the now extensive rent seeking literature, to which Buchanan and Tullock have made major contributions.(15) The now extensive literature on rent seeking is based squarely on the theory of agency. It did not start this way. Tullock's initial paper on the subject (Tullock 1967) was an application of orthodox microeconomics. Agency theory became the focus when rent seeking theorists began to explore the interaction between the individuals and firms that seek monopoly privilege and the government officials who are hired by the collective and who have the power to allocate those privileges.
This indirect approach has led to interesting insights about the inner workings of modern democracies. However, there has been hardly any work on the general idea that the members of a collective will recognize this agency problem at the constitutional stage where they are making rules for collective decision making.
It is possible to couch the entire problem of market failure in terms of agency problems. Frank Knight seems to have been the first to regard the free enterprise system, or market process, as a huge agency system. He conceived of the entrepreneurs in such a system as the agents of the consumers. If we follow this lead, we can conceive of market failure as the failure of this agency system. Members of the collective, in this view, are consumers who want a set of government agents to substitute for the entrepreneurs who, under different circumstances, would contribute to the satisfaction of their wants. The tasks they ask their agents to perform are to identify instances of market failure and to institute the set of legal rights that are necessary to eliminate the failure or to mitigate their effects.
If the public goods problem is regtarded by members of the collective as big enough, they will attempt to create institutions and rules in order to help solve the various collective agency problems.(16) We can conceive of parts of the constitution as the results of efforts to solve these problems. From this point of view, government failure is a failure of the agency system of a democratic government. An explanation of how such an approach might shift the focus of public choice (and constitutional economics) is beyond the scope of this paper.
1. See Niskanen 1971; Olson 1965; Becker 1983 and 1985; Tullock 1970 and Thomas Stratman 1997. To learn about the development of the field of public choice, see Charles Rowley's three-volume collection in 1993 and Dennis Mueller's summary (1989) and handbook (1997).
2. 2This way of viewing the private property system is due to the pathbreaking work on external costs by Ronald Coase (1960). To see the relevance of this work to maintaining the property system, see Gunning (2000).
3. An example of this is William Oakland 1987.
4. See, for example, Demsetz (1970 and 1993) and Randall (1983).
5. The particular procedure he uses to reduce his own and his financiers' uncertainty about demand is immaterial. It is only important to assume that he finances the procedure himself, since the ultimate idea we want to convey is that he must make a bet that his appraisal of some factor (in this case the factor used to produce the samples) is superior to that of others.
6. Again the particular method he uses is immaterial.
7. The major predecessors were J. B. Clark (1899), who identified the entrepreneur with the dynamic elements of the market economy and Herbert Davenport (1914), who clarified the entrepreneur view of the competitive price system.(Gunning 1998)
8. Appraising in the most general sense refers to identifying means of satisfying wants and attaching a monetary value to them. The "means" may be factors of production, a method of combining factors, or a final good (before it is consumed).
9. This more abstract view of entrepreneurship is mainly due to Ludwig von Mises, 1966. For a more complete discussion of the economist's procedure, see Gunning 1994 and 1997.
10. Guaranty to factor-suppliers can be in the form payments for their services in advance of the product's sale. Guaranty to consumers can be in the form of rental contracts that guarantee consumer satisfaction with a promise to pay compensation in the event the consumer is not satisfied.
11. It is worth pointing out the predominant difference between this analysis and one that neglects entrepreneurship. In the latter, we assume that the factors and methods of production are already known. The incentive problem refers to the incentive to employ the factors and methods efficiently. It is an allocation, or rationing, incentive. In a proper entrepreneur analysis, the incentive problem includes identifying and appraising factors, which of course includes identifying preferences. Another difference is the assumption of intersubjective uncertainty.
12. See Alexander Tabarrok 1998.
13. The hard bargaining need not be direct. It is sufficient that a consumer chooses not to pay a higher price because she believes that if she does not agree, other consumers will pay more. The consumers need not meet face-to-face. They may simply respond to a producer's tentative offers.
14. This statement does not imply that members of a prospective collective could easily determine what kind of situations fit into this class or that, if a situation fits into this class today, it will also fit tomorrow. It is a statement in pure theory. The term "collectively desired" refers to the aggregated independent desires of the separate members of the collective.
15. See Buchanan, Robert Tollison, and Tullock (1980); Charles Rowley, Tollison and Tullock (1988), and Tullock (1989).
16. The author discusses provisions that members of a collective would want a constitution to contain in Gunning, forthcoming, Chapters Four and Five.
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