Public Choice and the Entrepreneur
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
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
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
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
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
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
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
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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J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
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