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FEDERAL RESERVE BANK OF DALLAS VOLUME 8, NUMBER 2 James M. Buchanan The Creation of Public Theory

James M. Buchanan was born in Murfreesboro, Tenn., in 1919. The son of a poor, politically populist farmer, he James Buchanan stands as one of the managed to enter Middle Tennessee State College, where he received a bache- giants of American 20th century political lor’s degree in 1940. He obtained a . This Nobel Prize-winning econo- master’s degree the following year from the University of Tennessee and a doc- mist’s prolific work has generated in, torate from the in and new respect for, constitutional rules ver- 1948. While he was at Chicago, two im- sus discretionary, centralized power. portant events changed Buchanan’s 1 Buchanan—along with life: He met , and he found and translated an essay by the and —created the public great Swedish Knut Wick- 2 choice movement. During that process, they sell. From Knight, Buchanan says he learned “the message that there exists forced their colleagues to reexamine the most no god whose pronouncements deserve fundamental assumptions regarding the elevation to the sacrosanct, whether god within or without the scientific acad- nature of and the public emy. Everything, everyone, anywhere, that emerge from any political process. anytime—all is open to challenge and /Evan Cantwell criticism.”3 James M. Buchanan now have the powerful public From Wicksell, Buchanan con- choice analytical framework to use in exam- cluded that are not effi- but a constitutional order that defends cient, purely altruistic entities that ef- the rights of minorities is acceptable to ining the phenomenon that public choicers fortlessly correct imperfections. Buchanan and other the- call . Instead, governments are aggregates of orists. Public choice economists support individuals pursuing private rather than strong legal rules that constrain rent- Few economists have been as influen- the through seeking special from under- tial or as productive as James Buchanan, and and laws. These private interests mining an appropriate public- create wasteful efforts known process. it is our pleasure to add his story and ideas to as rent seeking. After graduating from Chicago, our Economic Insights series. Buchanan’s view of , Buchanan held a number of teaching and hence, the appropriate size of the positions, beginning as an associate state, is derived from a model in which professor at the University of Tennes- — Bob McTeer see in 1948, making full professor there President the state supplies its constituents with Federal Reserve Bank of Dallas public goods or services, which are paid in 1950, then moving to Florida State for with tax revenues. The only appro- University. He made an important priate rule under such conditions, he has move in 1956 to the University of argued, would be unanimity among cit- Virginia in Charlottesville, where he izens. This is not possible in practice, taught and chaired the de- Remembering His Favorite Professor and His Influence How Can Government Debt Be Controlled? 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 commu- Because of this difference in the speci- nity of free men. Knight believes that science applied instrumentally implies control, whereas the fication and identification of liability in private social problem is one of attaining consensus, of securing mutual agreement. The “social engineer,” and public debt, we should predict that per- so prevalent in the background of modern economic models, has no place in Knight’s approach to sons will be somewhat less prudent in issu- social problems. ing the latter than the former. That is to say, Modern man’s central problem, according to Knight, is a moral one. Historical liberalism has the pressures brought to bear on govern- destroyed conventional religion and has provided no effective substitute for it; as a consequence, mental decision makers to constrain irre- men have turned all too quickly to nihilism or to the deification of the state. What men need, there- sponsible borrowing may not be comparable fore, is a common morality founded on truth, honesty, mutual respect, and “good sportsmanship,” to those that the analogous private borrower the ethics that liberalism should have produced but somehow failed to.… would incorporate within his own behavioral Surveying the history of Western civilization since the Enlightenment, Knight sees no clear calculus. The relative absence of such public indication that man can rise to the challenge presented by the liberation of his own mind. But in his or voter constraints might lead elected politi- later writings especially, one senses his increased willingness to leave this question open…. cians, those who explicitly make spending, In his critical attitude and outlook, in his abhorrence of nonsense even in its most sophisti- taxing, and borrowing decisions for govern- cated forms, Frank Knight has much in common with David Hume, although Hume does not appear ments, to borrow even when the conditions to have directly influenced Knight’s thought. These two critics share a determination to cut through for responsible debt issues are not present. the metaphysical-linguistic fuzziness that enshrouds the human mind…. It is in recognition of such proclivities that Knight has no “disciples” as such, and those who have been most influenced by his work are classical principles of public fiscal responsi- as likely to criticize him as others are. This is because as a teacher he has been almost uniquely will- bility incorporate explicit limits on resort to ing to look for merit in all questions and because he has refused to accept any final answers. ■ borrowing as a financing alternative, and which also dictate that sinking funds or other com- —“Frank H. Knight,” in Collected Works, vol. 19, 92–3 parable provisions be made for amortization of loans at the time of any initial spending– borrowing commitment. Without some such constraints, the classical theory embodies partment through 1961. During this guished professor from 1969 to 1983. the prediction of a political scenario with ■ period, he resided for a year in Italy, But the final move came in 1983 when cumulatively increasing public debt…. studying their tradition of public fi- Buchanan took a position at George —“The Old-Time Fiscal Religion,” in nance and political theory, an experi- Mason University in Fairfax, Va., just out- Collected Works, vol. 8, 19–20 ence that further influenced his theoret- side Washington, D.C., and brought the ical directions. Center for Study of Public Choice with Returning from Europe, Buchanan him. He remains today its advisory gen- attempts to better society as a whole. established the Thomas Jefferson Center for eral director. Buchanan’s opinion on why he has al- at the University of During his prolific career, Buchanan ways been an outsider in the economics Virginia and began attracting like-minded has authored or co-authored more than profession turns on three propositions: thinkers and students to Charlottesville. 35 books, translated two others, con- Working closely with Gordon Tullock, tributed chapters to about 300 others, First, I have been influenced by Frank G. Warren Nutter and Kenneth Elzinga, and authored or co-authored hundreds Knight and F. A. Hayek in their insis- he oversaw the formative years of the of articles—an amazing publication tence that the problem of social order new economic paradigm called public record even if there were 10 of him. His is not scientific in the standard sense. choice theory. Buchanan never cared curriculum vita is over 80 pages long Second, I was greatly influenced by for this name, but it caught on at a 1967 and can be downloaded from www. ’s admonition that econo- meeting held in Chicago under the gmu.edu. In 1986, he was awarded the mists cease acting as if government cumbersome title of the Committee for Nobel Memorial Prize in Economic were a benevolent despot. Third, I the Study of Non-Market Decision Mak- Sciences. rejected, very early in my thinking, ing. The renamed Public Choice So- Throughout his career, Buchanan the orthodox economist’s elevation of ciety was born at that meeting.4 has dismissed two issues that typically allocative efficiency as an indepen- After spending a year at the Uni- dominate economists’ thinking: He has dent standard of evaluation.6 versity of California at Los Angeles in never cared about public opinion of his 1968, Buchanan moved his public choice work, and he does not care whether his At first glance, public choice theory center from Charlottesville to Virginia work makes the world a better place.5 seems to be nothing more than common Polytechnic Institute in Blacksburg, Buchanan’s attitudes clearly reflect sense: Governments are collections of where he served as a university distin- Knight’s skepticism regarding human individuals whose interaction is deter- mined by the same self-interest that motivates people in the private sector. What Is Cost? The simple view that government is a The essential element in this concept [of cost] is the direct relationship between cost and the collective decisionmaking process that act of choice, a relationship that does not exist in the neoclassical predictive theory. In the altruistically solves social problems has London–Austrian conception, by contrast, cost becomes the negative side of any decision, the a long and, according to Buchanan, ro- obstacle that must be got over before one alternative is selected. Cost is that which the decision- mantic tradition both in political theory taker sacrifices or gives up when he makes a choice. It consists in his own evaluation of the enjoy- and in economics. Because of his thor- ment or that he anticipates having to forgo as a result of selection among alternative courses ough, individualistic approach to gov- of action. ernment and his adherence to subjec- The following specific implications emerge from this choice-bound conception of cost: tive-cost doctrine,7 his public finance 1. Most importantly, cost must be borne exclusively by the decision-maker; it is not models lie outside the neoclassical possible for cost to be shifted to or imposed on others. 2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else. mainstream belief in the collective 3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept. problem-solving model and in measur- 4. Cost can never be realized because of the fact of choice itself; that which is given up able, explicit opportunity costs. A pure cannot be enjoyed. subjective-cost approach denies that 5. Cost cannot be measured by someone other than the decision-maker because there is no the actual costs of any action can ever way that subjective experience can be directly observed. be known, even by the decision- 6. Finally, cost can be dated at the moment of decision or choice. maker(s), because the act of choice is In a theory of choice, cost must be reckoned in a utility dimension. In the orthodox predictive itself cost, subjectively perceived. A theory, however, cost is reckoned in a commodity dimension.… theorist adhering to this doctrine would Cost, then, is purely subjective in any theory of choice, whereas cost is objective in any the- ory that involves genuine prediction. ■ not carry out any benefit–cost analysis, as costs are inherently not observable —“Cost and Choice,” in Collected Works, vol. 6, 41–2 and, therefore, not measurable. Although the economics profession has resisted Buchanan’s arguments, public choice theory has, nonetheless, within the framework of political econ- wing libertarian zealot who is anti- found its way into public finance dis- omy rather than pure economics. Pol- democratic, anti-egalitarian, and anti- cussions and has had a strong influence itical economy deals with the under- scientific. I am, of course, none of on government policies. As many standing of collective decisionmaking these and am, indeed, the opposites. economists came to doubt the efficacy and its wealth and income distribution Properly understood, my position is of large, state-funded programs, they effects on society. While some econo- both democratic and egalitarian, and saw public choice theory as a way to mists—notably and his I am as much a scientist as any of my examine what has come to be known followers—have always been con- peers in economics. But I am passion- as government failure. For decades fol- cerned with income distribution, they ately individualistic, and my empha- lowing ’s famous have not approached the problem from sis on individual liberty does set me book The Economics of , econ- a public choice perspective, preferring apart from many of my academic col- omists saw government as a disinter- to concentrate on the distributive out- leagues whose mind-sets are mildly ested agency that could correct for comes of market processes. elitist and, hence, collectivist.8 market failures. Buchanan and other Although public choice theory seems public choice theorists altered the to favor outcomes supported by soci- Another thing that sets Buchanan debate by proposing that government ety’s more conservative members, Bu- apart is his view of the relationship be- may not really correct problems in the chanan considers himself completely tween individuals and civilization. In- marketplace because of the wealth apolitical: fluenced by what he considered the trading, or rent seeking, that occurs dur- government’s overreaching in the 1960s, ing the legislative process. I resist, and resist strongly, any and all Buchanan believes the closer a person Extending his view that public pol- efforts to pull me toward positions of can come to self-sufficiency, the better icy emerges from the interaction of self- advising on this or that or off he is. That might seem a strange interested individuals led Buchanan to cause. I sign no petitions, join no position for an economist, but Bu- a systematic study of the and, political organizations, advise no party, chanan defies easy classification, even in the case of the , the serve no lobbying effort. Yet the pub- in how he lives his life: constitutional parameters within which lic’s image of me, and especially as decisions are made. Bu- developed through the media after the I like space around me. I bought this chanan’s analyses are always done Nobel Prize in 1986, is that of a right- century-old log cabin and started fix- ing it up and added to it and so forth. I kept buying more land, more land, Why We Cannot Implement Simple Keynesian Policies more land. I found out something about my utility function as I did that, The political process within which the Keynesian norms are to be applied bears little or no because I found out that every step I 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 for office. The took toward genuine self-subsistence political decision structure is entirely different from that which was envisaged by Keynes himself, really gives me a big charge. If I can and it is out of this starkly different political setting that the Keynesian norms have been applied with build a fire in my wood stove and destructive results. Political decisions in the United States are made by elected politicians, who don’t have to depend on electric heat respond to the desires of voters and the ensconced . There is no center of power where if we have a power outage, then I’m an enlightened few can effectively isolate themselves from constituency pressures. Furthermore, that much happier. Or if I can go since World II, the national economy has never been appropriately described as being in across the street to the spring and get depression of the sort idealized in the elementary Keynesian models. Throughout the three decades a bucket of water as opposed to hav- of postwar experience, increases in have always been accompanied by increases ing an electric pump to the well, that in levels, by …. gives me a charge. Or if I grow my There are also obvious and important differences between market and political competition. own vegetables or pick my own Market competition is continuous; at each instance of purchase, a buyer is able to select among berries, which I’m doing now. This alternative, competing sellers. Political competition is intermittent; a decision is binding for a fixed year there is a good blackberry crop. period, usually two, four, or six years. Market competition allows several competitors to survive I became more and more interested simultaneously; the capture by one seller of a majority of the market does not deny the ability of the in having at least a backup, so self- minority to choose its preferred supplier. By contrast, political competition has an all-or-none fea- subsistent existence really did give ture; the capture of a majority of the market gives the entire market to a single supplier. In market me a lot of utility.9 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, As this quote shows, Buchanan’s theo- and to whom he is forced to grant wide latitude in the use of discretionary judgment. Politicians are ries are exemplified in his own simply not held liable for their promises and pledges in the same manner that private sellers are. ■ lifestyle. ■ —“ in Democratic ,” — Robert L. Formaini in Collected Works, vol. 8, 98–9 Senior Economist

——— (1992), “From the Inside Looking Out,” Rowley, Charles K., Robert D. Tollison and Notes in Eminent Economists: Their Life Philosophies, Gordon Tullock, eds. (1988), The Political 1 See Formaini (vol. 7). ed. Michael Szenberg (Cambridge, UK: Economy of Rent Seeking (Boston: Kluwer 2 Wicksell (1967). Cambridge University Press), 98–106. Academic Publishers). 3 Breit and Spencer (1997), 165. 4 “Interview with James Buchanan,” Federal ——— (1999), Cost and Choice: An Inquiry in Wicksell, Knut (1967), Finanztheoretische Reserve Bank of Minneapolis The Region, Economic Theory (Indianapolis, Ind.: Liberty Untersuchungen (Jena, 1896), trans. by September 1995, minneapolisfed.org/pubs/ Fund), orig. pub. 1969. James M. Buchanan as “A New Principle of region/95-09/int959.cfm. Just Taxation,” in Classics in the Theory of 5 Buchanan (1992). ——— (2001), The Collected Works of James Public Finance, ed. Richard A. Musgrave and 6 Buchanan (1992), 103. Also see Formaini M. Buchanan (Indianapolis, Ind.: Liberty Fund). Alan T. Peacock (New York: St. Martin’s Press), (vol. 4). 72–118, orig. pub 1958. 7 For an explanation of subjective-cost Buchanan, James, and Gordon Tullock (1999), doctrine, see Buchanan (1999). The Calculus of Consent: Logical Foundations 8 Buchanan (1992), 105–6. of Constitutional (Indianapolis, Economic Insights is a publication of the 9 “Interview with James Buchanan.” Ind.: Liberty Fund), orig. pub. 1962. Federal Reserve Bank of Dallas. The views expressed are those of the authors and should Sources and Suggested Reading Formaini, Robert L. (vol. 4), “Hayek: Social not be attributed to the Federal Reserve System. Breit, William, and Roger W. Spencer, eds. Theorist of the Century,” Federal Reserve Please address all correspondence to (1997), Lives of the Laureates, 3rd ed. Bank of Dallas Economic Insights, No. 1. Economic Insights (Cambridge, Mass.: MIT Press). Public Affairs Department ——— (vol. 7), “Frank H. Knight: Origins of the Federal Reserve Bank of Dallas Buchanan, James (1968), “Frank H. Knight,” Chicago School of Economics,” Federal P.O. Box 655906 International Encyclopedia of the Social Reserve Bank of Dallas Economic Insights, No. Dallas, TX 75265-5906 Sciences (New York: MacMillan), 424–28. 3. Visit our web site at www.dallasfed.org.