| Volume 8, Number 2, 2003
Federal Reserve Bank of Dallas
James M. Buchanan—The Creation of Public Choice Theory
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James Buchanan
stands as one of the giants of American 20th
century political economy.
This Nobel Prize-winning economist’s
prolific work has generated interest in, and
new respect for, constitutional rules versus
discretionary, centralized power.
Buchanan—along with Gordon Tullock and
Anthony Downs—created the public choice
movement. During that process, they forced
their colleagues to reexamine the most fundamental
assumptions regarding the nature of government
and the public policies that emerge from any
political process. Economists now have the
powerful public choice analytical framework
to use in examining the phenomenon that public
choicers call government failure.
Few economists have been as influential or
as productive as James Buchanan, and it is
our pleasure to add his story and ideas to
our Economic Insights series.
| — |
Bob McTeer
President
Federal Reserve Bank of Dallas |
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James M. Buchanan—The Creation
of Public Choice Theory
James M. Buchanan was born in
Murfreesboro, Tenn., in 1919. The son of a poor, politically
populist farmer, he managed
to enter Middle Tennessee State College, where he received
a bachelor’s degree in 1940. He obtained a master’s
degree the following year from the University of Tennessee
and a doctorate from the University of Chicago in 1948.
While he was at Chicago, two
important events changed Buchanan’s
life: He met Frank Knight,[1] and he found and translated
an essay by the great Swedish economist Knut Wicksell. [2]
From Knight, Buchanan says he learned “the message
that there exists no god whose pronouncements deserve elevation
to the sacrosanct, whether god within or without the scientific
academy. Everything, everyone, anywhere, anytime—all
is open to challenge and criticism.”[3]
From Wicksell, Buchanan concluded that governments are not
efficient, purely altruistic entities that effortlessly correct
market imperfections. Instead, governments are aggregates
of individuals pursuing private rather than the public interest
through regulations and tax laws. These private interests
create wasteful lobbying efforts known as rent seeking.
Buchanan’s view of public
finance, and hence, the appropriate size of the state,
is derived from a model in
which the state supplies its constituents with public goods
or services, which are paid for with tax revenues. The only
appropriate rule under such conditions, he has argued, would
be unanimity among citizens. This is not possible in practice,
but a constitutional order that defends the rights of minorities
is acceptable to Buchanan and other public choice theorists.
Public choice economists support strong legal rules that
constrain rent-seeking special interests from undermining
an appropriate public-goods process.
After graduating from Chicago, Buchanan held a number of
teaching positions, beginning as an associate professor at
the University of Tennessee in 1948, making full professor
there in 1950, then moving to Florida State University. He
made an important move in 1956 to the University of Virginia
in Charlottesville, where he taught and chaired the economics
department through 1961. During this period, he resided for
a year in Italy, studying their tradition of public finance
and political theory, an experience that further influenced
his theoretical directions.
Returning from Europe, Buchanan established the Thomas Jefferson
Center for Political Economy at the University of Virginia
and began attracting like-minded thinkers and students to
Charlottesville. Working closely with Gordon Tullock, G.
Warren Nutter and Kenneth Elzinga, he oversaw the formative
years of the new economic paradigm called public choice theory.
Buchanan never cared for this name, but it caught on at a
1967 meeting held in Chicago under the cumbersome title of
the Committee for the Study of Non-Market Decision Making.
The renamed Public Choice Society was born at that meeting.[4]
After spending a year at the University of California at
Los Angeles in 1968, Buchanan moved his public choice center
from Charlottesville to Virginia Polytechnic Institute in
Blacksburg, where he served as a university distinguished
professor from 1969 to 1983. But the final move came in 1983
when Buchanan took a position at George Mason University
in Fairfax, Va., just outside Washington, D.C., and brought
the Center for Study of Public Choice with him. He remains
today its advisory general director.
During his prolific career, Buchanan
has authored or co-authored more than 35 books, translated
two others, contributed chapters
to about 300 others, and authored or co-authored hundreds
of articles—an amazing publication record even if there
were 10 of him. His curriculum vita is over 80 pages long
and can be downloaded from www. gmu.edu. In 1986, he was
awarded the Nobel Memorial Prize in Economic Sciences.
Throughout his career, Buchanan
has dismissed two issues that typically dominate economists’ thinking: He has
never cared about public opinion of his work, and he does
not care whether his work makes the world a better place.[5]
Buchanan’s attitudes clearly reflect Knight’s
skepticism regarding human attempts to better society as
a whole. Buchanan’s opinion on why he has always been
an outsider in the economics profession turns on three propositions:
| First, I have been influenced
by Frank Knight and F. A. Hayek in their insistence
that the problem of social
order is not scientific in the standard sense. Second,
I was greatly influenced by Knut Wicksell’s admonition
that economists cease acting as if government were a
benevolent despot. Third, I rejected, very early in my
thinking, the orthodox economist’s elevation of
allocative efficiency as an independent standard of evaluation.[6] |
At first glance, public choice theory seems to be nothing
more than common sense: Governments are collections of individuals
whose interaction is determined by the same self-interest
that motivates people in the private sector. The simple view
that government is a collective decision-making process that
altruistically solves social problems has a long and, according
to Buchanan, romantic tradition both in political theory
and in economics. Because of his thorough, individualistic
approach to government and his adherence to subjective- cost
doctrine,[7] his public finance models lie outside the neoclassical
mainstream belief in the collective problem-solving model
and in measurable, explicit opportunity costs. A pure subjective-cost
approach denies that the actual costs of any action can ever
be known, even by the decisionmaker(s), because the act of
choice is itself cost, subjectively perceived. A
theorist adhering to this doctrine would not carry out any
benefit–cost analysis, as costs are inherently not
observable and, therefore, not measurable.
Although the economics profession
has resisted Buchanan’s
arguments, public choice theory has, nonetheless, found its
way into public finance discussions and has had a strong
influence on government policies. As many economists came
to doubt the efficacy of large, state-funded programs, they
saw public choice theory as a way to examine what has come
to be known as government failure. For decades following
Arthur Cecil Pigou’s famous book The Economics
of Welfare, economists saw government as a disinterested
agency that could correct for market failures. Buchanan and
other public choice theorists altered the debate by proposing
that government may not really correct problems in the marketplace
because of the wealth trading, or rent seeking, that occurs
during the legislative process.
Extending his view that public
policy emerges from the interaction of self-interested
individuals led Buchanan to a systematic
study of the institutions and, in the case of the United
States, the constitutional parameters within which public
policy decisions are made. Buchanan’s analyses are
always done within the framework of political economy
rather than pure economics. Political economy deals with
the understanding of collective decisionmaking and its wealth
and income distribution effects on society. While some economists—notably
David Ricardo and his followers—have always been concerned
with income distribution, they have not approached the problem
from a public choice perspective, preferring to concentrate
on the distributive outcomes of market processes.
Although public choice theory
seems to favor outcomes supported by society’s more
conservative members, Buchanan considers himself completely
apolitical:
| I resist, and resist strongly,
any and all efforts to pull me toward positions of
advising on this or that
policy or cause. I sign no petitions, join no political
organizations, advise no party, serve no lobbying effort.
Yet the public’s image of me, and especially as
developed through the media after the Nobel Prize in
1986, is that of a right-wing libertarian zealot who
is antidemocratic, anti-egalitarian, and antiscientific.
I am, of course, none of these and am, indeed, the opposites.
Properly understood, my position is both democratic and
egalitarian, and I am as much a scientist as any of my
peers in economics. But I am passionately individualistic,
and my emphasis on individual liberty does set me apart
from many of my academic colleagues whose mind-sets are
mildly elitist and, hence, collectivist.[8] |
Another thing that sets Buchanan
apart is his view of the relationship between individuals
and civilization. Influenced
by what he considered the government’s overreaching
in the 1960s, Buchanan believes the closer a person can come
to self-sufficiency, the better off he is. That might seem
a strange position for an economist, but Buchanan defies
easy classification, even in how he lives his life:
| I like space around me.
I bought this century-old log cabin and started fixing
it up and added to it and so
forth. I kept buying more land, more land, more land.
I found out something about my utility function as I
did that, because I found out that every step I took
toward genuine self-subsistence really gives me a big
charge. If I can build a fire in my wood stove and don’t
have to depend on electric heat if we have a power outage,
then I’m that much happier. Or if I can go across
the street to the spring and get a bucket of water as
opposed to having an electric pump to the well, that
gives me a charge. Or if I grow my own vegetables or
pick my own berries, which I’m doing now. This
year there is a good blackberry crop. I became more and
more interested in having at least a backup, so selfsubsistent
existence really did give me a lot of utility.[9] |
As this quote shows, Buchanan’s
theories are exemplified in his own lifestyle.
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Robert L. Formaini
Senior Economist |
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Notes
- See Formaini (vol. 7).
- Wicksell (1967).
- Breit and Spencer (1997), 165.
- “Interview with James Buchanan,” Federal
Reserve Bank of Minneapolis The Region,
September 1995, minneapolisfed.org/pubs/
region/95-09/int959.cfm.
- Buchanan (1992).
- Buchanan (1992), 103. Also see Formaini
(vol. 4).
- For an explanation of subjective-cost doctrine,
see Buchanan (1999).
- Buchanan (1992), 105–6.
- “Interview with James Buchanan.”
Sources and Suggested Reading
Breit, William, and Roger W. Spencer, eds.
(1997), Lives of the Laureates, 3rd
ed. (Cambridge, Mass.: MIT Press).
Buchanan, James
(1968), “Frank H. Knight,” International
Encyclopedia of the Social Sciences (New
York: MacMillan), 424–28.
——— (1992), “From
the Inside Looking Out,” in Eminent
Economists: Their Life Philosophies, ed.
Michael Szenberg (Cambridge, UK: Cambridge
University Press), 98–106.
——— (1999), Cost and
Choice: An Inquiry in Economic Theory (Indianapolis,
Ind.: Liberty Fund), orig. pub. 1969.
——— (2001), The Collected
Works of James M. Buchanan (Indianapolis,
Ind.: Liberty Fund).
Buchanan, James, and Gordon Tullock (1999), The
Calculus of Consent: Logical Foundations
of Constitutional Democracy (Indianapolis,
Ind.: Liberty Fund), orig. pub. 1962.
Formaini, Robert
L. (vol. 4), “Hayek:
Social Theorist of the Century,” Federal
Reserve Bank of Dallas Economic Insights,
No. 1.
——— (vol. 7), “Frank
H. Knight: Origins of the Chicago School of
Economics,” Federal Reserve Bank of Dallas Economic
Insights, No. 3.
Rowley, Charles K., Robert D. Tollison and
Gordon Tullock, eds. (1988), The Political
Economy of Rent Seeking (Boston: Kluwer
Academic Publishers).
Wicksell, Knut (1967), Finanztheoretische
Untersuchungen (Jena, 1896), trans.
by James M. Buchanan as “A New Principle
of Just Taxation,” in Classics in the
Theory of Public Finance, ed. Richard A.
Musgrave and Alan T. Peacock (New York: St.
Martin’s Press), 72–118, orig.
pub 1958. |
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Remembering
His Favorite Professor and His Influence
One of Knight’s many crusades has been
against the view, which he associates with
John Dewey, that science in some instrumental
sense can be used to solve social problems
in a community of free men. Knight believes
that science applied instrumentally implies
control, whereas the social problem is one
of attaining consensus, of securing mutual
agreement. The “social engineer,” so
prevalent in the background of modern economic
models, has no place in Knight’s approach
to social problems.
Modern man’s central problem, according
to Knight, is a moral one. Historical liberalism
has destroyed conventional religion and has
provided no effective substitute for it; as
a consequence, men have turned all too quickly
to nihilism or to the deification of the state.
What men need, therefore, is a common morality
founded on truth, honesty, mutual respect,
and “good sportsmanship,” the ethics
that liberalism should have produced but somehow
failed to.…
Surveying the history
of Western civilization since the Enlightenment,
Knight sees no clear
indication that man can rise to the challenge
presented by the liberation of his own mind.
But in his later writings especially, one senses
his increased willingness to leave this question
open….
In his critical
attitude and outlook, in his abhorrence of
nonsense even in its most sophisticated
forms, Frank Knight has much in common with
David Hume, although Hume does not appear to
have directly influenced Knight’s thought.
These two critics share a determination to
cut through the metaphysical-linguistic fuzziness
that enshrouds the human mind….
Knight has no “disciples” as
such, and those who have been most influenced
by
his work are as likely to criticize him as
others are. This is because as a teacher he
has been almost uniquely willing to look for
merit in all questions and because he has refused
to accept any final answers.
—“Frank H.
Knight,” in Collected
Works, vol. 19, 92–3. |
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How Can
Government Debt Be Controlled?
Because of this
difference in the specification and identification
of liability in private
and public debt, we should predict that persons
will be somewhat less prudent in issuing the
latter than the former. That is to say, the
pressures brought to bear on governmental decision
makers to constrain irresponsible borrowing
may not be comparable to those that the analogous
private borrower would incorporate within his
own behavioral calculus. The relative absence
of such public or voter constraints might lead
elected politicians, those who explicitly make
spending, taxing, and borrowing decisions for
governments, to borrow even when the conditions
for responsible debt issues are not present.
It is in recognition of such proclivities that
classical principles of public fiscal responsibility
incorporate explicit limits on resort to borrowing
as a financing alternative, and which also
dictate that sinking funds or other comparable
provisions be made for amortization of loans
at the time of any initial spending– borrowing
commitment. Without some such constraints,
the classical theory embodies the prediction
of a political scenario with cumulatively increasing
public debt….
—“The Old-Time Fiscal Religion,” in Collected
Works, vol. 8, 19–20 |
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What Is Cost?
The essential element
in this concept [of cost] is the direct relationship
between cost
and the act of choice, a relationship that
does not exist in the neoclassical predictive
theory. In the London–Austrian conception,
by contrast, cost becomes the negative side
of any decision, the obstacle that must be
got over before one alternative is selected.
Cost is that which the decisiontaker sacrifices
or gives up when he makes a choice. It consists
in his own evaluation of the enjoyment or utility
that he anticipates having to forgo as a result
of selection among alternative courses of action.
The following specific implications emerge
from this choice-bound conception of cost:
- Most importantly, cost must be borne
exclusively by the decision-maker; it is
not possible
for cost to be shifted to or imposed on
others.
- Cost is subjective; it exists in the
mind of the decision-maker and nowhere else.
- Cost is based on anticipations; it is
necessarily a forward-looking or ex ante
concept.
- Cost can never be realized because of
the fact of choice itself; that which is
given
up cannot be enjoyed.
- Cost cannot be measured by someone other
than the decision-maker because there is
no way that subjective experience can be
directly
observed.
- Finally, cost can be dated at the moment
of decision or choice. In a theory of choice,
cost must be reckoned in a utility dimension.
In the orthodox predictive theory, however,
cost is reckoned in a commodity dimension.…
Cost, then, is purely subjective in any theory
of choice, whereas cost is objective in any
theory that involves genuine prediction.
—“Cost and Choice,” in Collected
Works, vol. 6, 41–2. |
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Why We Cannot Implement Simple Keynesian Policies
The political process
within which the Keynesian norms are to be
applied bears little or no
resemblance to that which was implicit in Keynes’ basic
analysis. The economy is not controlled by
the sages of Harvey Road, but by politicians
engaged in a continuing competition for office.
The political decision structure is entirely
different from that which was envisaged by
Keynes himself, and it is out of this starkly
different political setting that the Keynesian
norms have been applied with destructive results.
Political decisions in the United States are
made by elected politicians, who respond to
the desires of voters and the ensconced bureaucracy.
There is no center of power where an enlightened
few can effectively isolate themselves from
constituency pressures. Furthermore, since
World War II, the national economy has never
been appropriately described as being in depression
of the sort idealized in the elementary Keynesian
models. Throughout the three decades of postwar
experience, increases in aggregate demand have
always been accompanied by increases in price
levels, by inflation….
There are also obvious and important differences
between market and political competition. Market
competition is continuous; at each instance
of purchase, a buyer is able to select among
alternative, competing sellers. Political competition
is intermittent; a decision is binding for
a fixed period, usually two, four, or six years.
Market competition allows several competitors
to survive simultaneously; the capture by one
seller of a majority of the market does not
deny the ability of the minority to choose
its preferred supplier. By contrast, political
competition has an all-or-none feature; the
capture of a majority of the market gives the
entire market to a single supplier. In market
competition, the buyer can be reasonably certain
as to just what it is he will receive from
his act of purchase. This is not true with
political competition, for there the buyer
is, in a sense, purchasing the services of
an agent, but it is an agent whom he cannot
bind in matters of specific compliance, and
to whom he is forced to grant wide latitude
in the use of discretionary judgment. Politicians
are simply not held liable for their promises
and pledges in the same manner that private
sellers are.
—“Keynesian Economics in Democratic
Politics,” in Collected Works,
vol. 8, 98–9. |
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| About Economic
Insights
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