Economic Insights FEDERAL RESERVE BANK OF DALLAS VOLUME 8, NUMBER 2 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 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 economy. 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 interest in, torate from the University of Chicago 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 Gordon Tullock life: He met Frank Knight, and he found and translated an essay by the and Anthony Downs—created the public great Swedish economist 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 government and the public policies emy. Everything, everyone, anywhere, that emerge from any political process. anytime—all is open to challenge and George Mason University/Evan Cantwell criticism.”3 James M. Buchanan Economists now have the powerful public From Wicksell, Buchanan con- choice analytical framework to use in exam- cluded that governments 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 market imperfections. Buchanan and other public choice the- call government failure. 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 public interest through regulations seeking special interests from under- tial or as productive as James Buchanan, and and tax laws. These private interests mining an appropriate public-goods create wasteful lobbying 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 public finance, 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 economics 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- Political Economy 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. Knut Wicksell’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.