•y Notes and Communications•z

Adam Smith, James Buchanan, and Classical Liberalism: An Interview with James M. Buchanan*

James M. Buchanan Masazumi Wakatabe Yong J. Yoon

is the authors' interpretation and extension of Introduction the Smithian proposition that the division of The idea of interviewing James Bu- labor is limited by the extent of the market. chanan, 1986 Nobel laureate in economic But Buchanan's involvement with Adam science, began with a casual conversation Smith does not stop at economics. Having between the two of us, Yong J. Yoon and developed a deep admiration for the tenets of Masazumi Wakatabe. Yoon, whose field is the classical liberal tradition, Buchanan economic theory, has been a close collabora- became its foremost torchbearer in the post- tor of James Buchanan, and together they World War II era. His major contributions to have produced a book and several papers, economics, public choice theory and constitu- including their coedited volume, The Return tional political economy, are regarded as to Increasing Returns (Ann Arbor, MI : Uni- representing the rehabilitation of that tradi- versity of Michigan Press, 1994). Wakatabe tion. is a historian of economic thought. The con- As that conversation drew to a close, versation took place while Wakatabe, during both Wakatabe and Yoon were sharply con- a sabbatical year, was a visiting scholar at scious of the many questions that remained the James Buchanan Center for Political regarding how the philosophy, politics, and Economy at George Mason University, where economics of Adam Smith and the classical Yoon is a senior research scholar at the liberal thinkers merge into Buchanan's Center for Study for Public Choice at George thought. The next step seemed natural : if we Mason University. have questions, why don't we ask him in Their point of departure was Yoon's person? Yoon suggested the idea to Jim Bu- new book project with Jim Buchanan, tenta- chanan, who agreed to give us the opportu- tively entitled The Extent of the Market, and nity. Wishing to make the outcome available Buchanan's relationship with Adam Smith to the public, Wakatabe contacted the editor and classical liberalism. As the working title of the History of Economic Thought, who of the book clearly suggests, the monograph agreed to publish the interview. That is how

* We are extremely grateful for the Center for Study of Public Choice , George Mason University, and Mrs. Jo Ann Burgess for providing us with much needed help including transcribing the interview. Wakatabe would like to thank the Japanese Society for the Promotion of Science (No. (C) 18530150) for financial assistance.

-124- Notes and Communications a casual conversation ultimately was extended to become an important interview The Interview project with James Buchanan. Yong J. Yoon (hereafter abbreviated as Y): On Saturday, 30 July 2005, we visited Considering the correspondence between Allyn Young and Frank Knight, I wonder Jim Buchanan and discussed some of the if Frank Knight accepts Adam Smith's main ideas concerning Adam Smith, James proposition at all. Smith's proposition Buchanan, and classical liberalism. One ques- has been later interpreted as increasing tion area turns naturally to Buchanan and returns ; and Frank Knight did not Moon's prospective book, The Extent of the accept the idea of increasing returns. So, Market. The second topic focuses on ques- what is the crux of the misunderstanding tions regarding Buchanan's interpretation of between Frank Knight and Allyn Young? Smith as a contractarian, as it was expres- James M. Buchanan (hereafter abbreviated as B) : Well, that's a good question. sed, for example, in his paper "Adam Smith Frank Knight told me that the only econ- as Inspiration" delivered in Seoul, South omist he had ever learned anything from Korea in 1996 [reprinted in The Collected was Allyn Young. (Laughter.) He had Works of James M. Buchanan, Indianapolis : been Allyn Young's student at Cornell. Liberty Fund, 1999-2003, vol.19, pp. 289-3031. He had a great admiration for Allyn The last topic addresses the emergence, cur- Young. And I always said - as a side rent state, and future of classical liberalism. issue - that Edward Chamberlain's whole The Theory of Monopolistic Com- James McGill Buchanan was born in petition was simply notes taken from Murf reesboro, Tennessee, in 1919. After Allyn Young's course. graduating from Middle Tennessee State Masazumi Wakatabe (hereafter abbreviated College and receiving his M.A. from the as W) : That's right. University of Tennessee, he served in World B : But, it is true that Knight and Young did War II. After the war he entered the graduate not agree at all on increasing returns. school of economics at the University of Knight was not interested in increasing Chicago, receiving his Ph.D. in 1948. He returns ; Knight was interested in the taught at the University of Virginia, UCLA, allocative processes. And he didn't Virginia Polytechnic Institute and State Uni- believe it (increasing returns). He made a big point of the failure of some of the versity, and finally, since 1983, at George neoclassicals, not notably Marshall, to Mason University. He has written numerous separate statics and dynamics. He books and articles, most of which are includ- wanted to get the statics right, that's ed in The Collected Works of James M. what the whole Risk, Uncertainty, and Buchanan, 20 vols. (Indianapolis : Liberty Profit, was about - to spell out the pure Fund, 1999-2003). In 1986, he received the statics of competitive equilibrium, at Nobel Memorial Prize in Economic Science that time. Which he did ; he was the first "for his development of the contractual and to do that. And he wanted to freeze the economy in terms of wants, resources, constitutional bases for the theory of eco- technology, and then see how it would nomic and political decision-making." He play out - what would be efficient ; what now lives in Dry Run, Blacksburg, Virginia, wouldn't be efficient. He didn't really where the interview took place.1) jump beyond that and talk at all much

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about how you might change the outside responsible free men rather than depen- parameters, so to speak. Which is what dent free men. Can we invoke the entre- dominated - at least in that one famous preneurial element of ordinary people to article - Allyn Young's thought. become responsible free men? So, in a sense there was no meeting B : Well, you're mixing up a great deal, in of the mind on that. As far as I know, those comments. (Laughter.) I think that except in this correspondence, they didn't the Adam Smith's general understanding really get into that very much. Knight of market order from what you and I rejected increasing returns on the stan- have called "generalized increasing dard Sraffa grounds ; namely in that you'd returns," is not necessary in order to have monopoly in different industries understand that. You don't need all that and obviously that was not observable. complication in order to understand that. And so empirically he objected to it. But, It seems to me (we've used this terminol- he enjoyed working within the constraint ogy before), that given the parameters of of the constant returns postulate. Work- the economy, there is a set of goods that ing it out, and fully working it out. are viable ; a set of procedures that are At the same time, however, Knight viable ; ways of producing that are was really an admirer of Adam Smith, viable, but if you can extend that fron- but not on this particular context. He tier, those parameters make the market didn't, as far as I know and as I remem- bigger, there would be a whole set of ber, he did not discuss at all the division other technologies and other goods that of labor principle that is the extent of the would make people better off. market notion. He was with the belief And so, if you expand that frontier, that we had to just go over and over and then that sea (of goods and technologies) over again till we fully understood Smith's is out there, and you just have to have deer and beaver example in which you somebody to pick it up. I don't think have relative prices and costs, under everybody needs to be the entrepreneur what conditions, and so forth and so on. here. I think, although you start out from He had a huge admiration for Adam a Smithian postulate, that we are all Smith and his general outlook and per- capable equally of doing it. It is true that, spective on things, but as far as this once an opportunity for rents, in this case particular increasing returns point, I and context, opens up, somebody is going think Knight was just not interested in to pick it out, but there is no way you can that aspect of the matter. predict who it might be. It could be Y : I think the ultimate source of increasing anybody. So in that sense, everybody's a returns is the element of entrepreneur- potential, equally a potential entrepre- ship that we all have. Ludwig von Mises neur, but I don't think you need to bring and Israel Kirzner also mentioned the in the entrepreneurial element quite as importance of entrepreneurship. In sev- much up front as you indicated in your eral places you say that the current fiscal comment. I don't think you need to bring crisis is a symptom of our forgetting the in the Kirzner's approach so much early spirit of classical liberalism. People are on. You can bring that in later, but that's willing to vote for spending money more, not essential, to my view, for the Smith- while they are not willing to assume the ian proposition to carry through. It just responsibility of the taxation. And you means that somebody is going to take advocate people assuming the attitude of advantage of any opportunity that

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emerges, and as the economy gets bigger, the thinking classes - the philosophers there's going to be opportunities for and the economists and so forth - have more specialization. Like in our exam- not paid enough attention to this. So ple, somebody's going to decide to bring those things all come in. "How to get out hot lunches to the beaver hunters and the of it?" is another question. deer hunters. But that necessarily is that Y : The extent of the market can be affected it could be anybody. But somebody picks by regulations and trade. As public that out and runs with it, so to speak. So, choice economists convincingly argue, in that sense, I think the entrepreneur regulations are very difficult to die. On ship is there, but it's not an early on the other hand, expanding the trade element as such. nexus is more widely accepted recently. I In terms of the second part of your wonder if the free trade idea will restrict question, that is, the responsibility the rent seeking activities. While regula- notion, I think that is a very, very diffi- tions raise the prices above the market- cult question to answer. I think it is competitive level, opening the market something that not only in economics but externally will force a monopoly to face other classical liberals and political phi- the lower world price. If this interaction losophers have all tended to neglect, is fully understood, there will be less namely the fact that responsibility goes rent-seeking activity in the domestic along with liberty. We, especially those economy. of us who have libertarian inclinations, B : Well, first of all, I think even throughout tend to overlook that responsibility part. my career and earlier, economists, gener- This is where I think some of the conser- ally, have neglected what we could call vative critique of classical liberalism has the incidence of economic policy. That is, some relevance. They have more respect they have neglected to pay attention to for, you know, the basic necessity that how differing policy instruments that people have civic virtue, and they would interfere with markets have their inci- include individualized responsibility. dence, either concentrated or diffused, Now, of course, if you move down the and they should have followed up that way that we have in our history, toward line. Instead, they have gone down the a welfare state and create the depen- road of, somehow, spending much more dency of the welfare state, you're going time worrying about this particular regu- to have people being encouraged to lose lation is going to have this benefit for any sense of civic virtue to the extent this group, and that group, and then that people in fact are required by the comes along public choice and starts nature of their setting to be independent, explaining a good deal of this, in terms of that they will be responsible. You don't pressure groups, interest groups, special expect a person who is on his frontiers, interests, and so forth. And then, I think a sort of idealized frontier, he must be the fundamental point where you started responsible because he'll starve other- to comment, and we've talked about, wise. Whereas if all he has to do is go to namely the possible differentiation here, pick up the welfare check, there is no or difference, between tariff protection pressure on him to be responsible. So, in as a means of restricting the market and part, it's the development of history - internal regulation. I think that's some- it's the institutional development - we've thing that needs more development. got ourselves into, and, in part, that even Whether or not you can say categorically

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that it would be easier, other things course, that comes back to this incidence equal, for politically public choice, of policy. Now we know that, in fact, whether it would be easier to get a tariff benefits tend to be concentrated from reduction in the extent of the market tariff protection and the benefits of hav- than it would to get an elimination of a ing the tariff are concentrated, and the regulation, I don't think. I don't think costs are spread out, so that it makes it that is necessarily clear, but it depends very difficult to eliminate a tariff pat- on how the structure of this instance and tern. But doing it in this reciprocal way, working of these benefits and these costs. you seem to balance off better, and On the other hand, I do think that we acceptable. But let's go back to the fun- must attribute a lot of what's happened damental question, namely, regulation in this century in terms of the fact that versus restriction through international over the course last century rather... but means. I do think that's something that over the course of the century, from the needs more analysis. We need to work 1930s on, we did get a generalized freeing out the models on that one. up of international trade. There were Y : As Leibniz said, language is a mirror of less restrictions. And that was in part the human mind ; language is also a due to the invention of Cordell Hull, who mirror of what people are doing. Per- was Secretary of State, who was a native haps, globalization and extended trade is Tennessean as a matter of fact, in possible because, as Noam Chomsky introducing this idea of reciprocal trade says, we human beings have the same agreements. Now reciprocal trade agree- innate general grammar structure. How ments make no sense from an economic relevant is language in the extent of the point of view. market? Obviously, as Ricardo and others B : If you will look on the floor, right over recognized long ago, that you can extend there, you'll see a green journal ; it's the your market, make your market more current issue of the Southern Economic efficient and just unilaterally open it. But Journal. And it has the lead article by a by bringing in the bilateral aspect - man named William [K.] Hutchinson, bilateral agreement aspect - you made and it's called "Linguistic Distance as a the politicians and the public buy into a Determinant of Bilateral Trade." 2) It is freeing of markets that you couldn't have ... directly on the point that you're gotten them to do otherwise. The argu- making. The implication here is that, to ment, even today as you notice, is always the extent that you have commonality in on, "Well, if we open our markets, they language, it's much easier to trade. It will open their markets" etc. facilitates trade, in other words. It can Y : That is true. change. Obviously, linguistic barriers are B : And, in a sense it seems to strike a transactions costs barriers. So if you political nerve, this idea of a balancing have to trade, as you move toward Eng- act here between opening their markets lish being the lingua franca of the world, and they therefore will open theirs if you would expect to have opening up of we open ours, and so forth. You get the markets in certain sense, because, in false argument basically, but it had a Xiaokai Yang's terminology,3~ transac- huge political impact because of this tions costs are very substantially apparent attitude, public attitude, reduced. toward the incidence of tariffs, and, of So I do think that language is very

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important in facilitating the extensions they ever exchange anything? of markets, and, no doubt, that part of B : No. No, not at all. (Laughter.) the post-mid-century expansion in general Y : Now, Prof. Wakatabe asks questions international trade - globalization - that go beyond Smith's The Wealth of has been due to the fact that more and Nations - Lectures on Jurisprudence and more people in different cultures accept Theory of Moral Sentiments. and understand the basic language, the W : First, I'd like to ask you very simple English. I don't think that's necessarily questions. Were you a student of Frank related to the Chomsky view that we all Knight at the graduate school of eco- have this innate structure. We may or nomics at the University of Chicago? may not, but I don't think that is directly B : Oh, yes ; oh, yes. related. I do think that you might make an argument to the extent that Adam W : When was the first time you read Adam Smith felt that one of the distinguishing Smith? Did you read it when you were at features of the human animal from other the University of Chicago? animals, namely, is the ability to talk. B : Right... right. David Levy, as you know, made a lot of W : So, what was your first impression of this point. And, I think there is something Adam Smith, and how did this impres- in that. People truck, barter, and sion change over time? exchange, of course, but they also talk ; B : Well, as I told you, Frank Knight, was a whereas none of the experiments with great admirer of Adam Smith. He had nonhuman animals have really succeeded his heroes, and he had his villains in the in showing that they would trading. history of thought. He did not like Mar- Adam Smith said, "No dog will exchange shall ; didn't think much of Marshall ; a bone with another dog," you know. didn't think anything of Ricardo, etc. Now, some people deny that ; a lot of But he was a great admirer of Adam people deny that, but I think, fundamen- Smith. And we did get exposed to Adam tally, that's correct. That you cannot get Smith really for the first time. There was off the dime correct, so to speak, in a course that he taught in the history of trade unless you can somehow communi- economic thought, in addition to his price cate, and also - well this get's into theory course. But in both those courses, another point - you've got to communi- we got exposed to Adam Smith, but a cate, but you also have to make commit- limited Adam Smith. He didn't bother to ments, and keep commitments ; those assign portions of The Wealth of Nations kind of things are not there available for or the other books ; he was interested in the animals, nonhuman animals. And, so, that basic core material - that funda- in that sense, I think language is mental, initial of books where you ex- extremely important - I just don't know plained relative prices, and so forth and but it seems to me the whole Chomsky so on. And you learned that backwards bit about there being common grammar and forwards, and I sort of became close is highly speculative, but I'm not an to Knight. Knight became my role model expert at all in that area. so to speak, and the fact that he admired I think it's interesting that your Smith so much made me necessarily question fits right in with that lead piece. favorable toward Adam Smith. But then Y : I am wondering, how did Sister and when I studied Adam Smith more and Junior [Buchanan's dogs] get along. Did more, I began to understand it more and

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more and began to think that going Hobbes, Locke, or even Hume, and through Adam Smith's basic, price the- Smith specifically said that he didn't buy ory, so to speak, and relative value the- into the contractarian argument. On the ory was a very good way to understand other hand, in your paper - "The Justice fundamental economics. And, when I of Natural Liberty" [reprinted in The used it in my own teaching, I used Adam Collected Works of James M. Buchanan, Smith. One year, I remember, at a gradu- Indianapolis : Liberty Fund, Vol. l , pp. ate price theory class, we did nothing but 292-310] -, you said that if one takes a just go over the deer and the beaver look at the Adam Smith's Theory of and... (Laughter.) Some of the students Moral Sentiments, his argument of the still talk about that - still talk about impartial spectator could be interpreted that class. as a contractarian argument. W : That's very interesting. Professor Yoon It is quite true that we could or may has already mentioned your 1996 paper, construct a contractarian element in "Adam Smith as Inspiration ." This is a Smith, but the problem about this inter- nice summary of what you got from pretation is that Smith himself did not Adam Smith, in which you made several use this kind of natural justice or natural fascinating points. For example, you said jurisprudence idea to explain what the that we "must accord Adam Smith full laws and institutions - or govern- credit for elevating confused economic ments - have been and are in the real discourse to genuinely scientific under- world. Actually Smith struggled with standing." You also referred to Smith's this problem, because clearly some insti- argument that wealth would be created tutions are not according to natural jus- under a system of natural liberty, while tice. The system of natural liberty does not come naturally. So I think his under- you also said that Smith did not naively expect society to evolve naturally to standing of the laws and institutions is a some ideal order, such as the system of bit different from your interpretation. So natural liberty. I think here your empha- how do you think about your difference sis on public choice and constitutional with Smith? political economy comes quite nicely. B : Well, I don't deny that. In looking at You also emphasized that institutional Smith's in the textual sense, exegetic framework was something that Adam sense, there's a great deal of tension Smith really cared about, and the laws between what I interpret Smith as say- and institutions and the complementary ing, or having implied, and what he actu- moral constitution are the necessary part ally put down as saying. So you can of the market economy. interpret Smith in many ways, and my I would like to turn to your reading own view is that you have to try to back of Smith as a constitutional political off and see how the whole schema fits economist, because this is indeed a very together. interesting and very fascinating example W : Right. of communication between Smith and B : And I agree that you can't find anything you. As you also recognized, there is a in Smith that would label him as, even as tension in your interpretation of Smith as an implicit contractarian. But he talks a a constitutional political economist and lot about the laws and institutions that Smith as he was, because Smith was are required in order for the system of never a contractarian in the sense of natural liberty to work, including moral

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institutions, as well as formal institu- force working ; that is the political sys- tions, some of which may have evolved, tem. A political system could work although he certainly didn't think you against this natural system of liberty. were ever moving toward more and more After all, that's the whole point of Smith acceptable institutions over time. He to write for the reforms at that time. was, perhaps, going along with his col- What I see is that you now have the leagues in saying a lot of these institu- extent of the market part quite right, so tions have emerged without design. But perhaps there is a way to incorporate we need to understand how they, in fact, Smith's theory of institutions to your do constrain us in some ways. And I extent of the market project. Take, for interpret the part of the spectator as example, globalization. Whether politics Smith (and of course, I'm putting my works for, or against globalization, is a spin on it ; I don't deny that at all putting major issue. This is more important and my spin on it), namely, you interpret that interesting in your extent of the market as Smith's way of getting at the problem project rather than in standard inter- that Jack Rawls was getting at, namely, national economics, since your project how do you, in fact, derive a legitimacy entails increasing returns. If that is the for the system of natural liberty from case, then I think there is a possibility individual people that are just "out that, through the extent of the market there." We know there is no impartial argument, you could get to Smith's the- spectator. On the other hand, how can ory of laws and institutions in a more you imagine a setting in which you could direct manner. say, well, this would be a desirable B : Well, there are several things to say on aspect, this system of natural liberty. that. First of all, as we know, as George And the impartial spectator gives you a Stigler kept pointing out, Smith really handle on it, just like Rawls's veil of did not pay much attention to the work- ignorance gives you a handle on it. So, in ings of politics. And he thought, at one that sense, I put him in the camp of the level he thought he would not have much contractarians, so to speak. influence on politics if he did try. On the W : One of the reasons why I ask this ques- other hand, the whole book, as you say tion is that precisely because you've been was written as a diatribe against the working on the extent of the market mercantilist follies. And very success- project right now. As far as I understand, fully so, but he never dreamed it would Smith did not elaborate on theory of the be successful, really. But then I think he laws and institutions. But as far as I got was trying to articulate as best he could from reading his work, there are two the fact that this system of natural lib- forces in shaping the laws and institu- erty would only work within a set of tions. One force is the extent of the laws and institutions that somehow or market kind of force, which is the natu- another would have to be laid on or put ral proclivity of any man to conduct a there, changed, or modified, or evolved, truck, trade, and barter. And this is con- or something ; he didn't really get into sidered as a progressive force. that. I don't quite see how we might B : And to improve his own position. develop that further. W : That's right - "bettering one's own posi- W : Right. tion." And that's the basis of the system B : There's a very interesting review, in the of natural liberty. But, there is another current (it's right there) review of New

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York Review of Books. Thomas L. Fried- tion of Adam Smith is precisely like John man, this writer for the New York Gray's point, because I think that Adam Times, has written a book called The Smith considered politics as a process of Flat World. conflict and struggle, and Smith did not W : That's right, The World Is Flat [New think the realization of the system of York : Farrar, Straus and Giroux, 2005]. natural liberty as either automatic or B : The World Is Flat. And he's arguing natural. essentially the point you make, in a way, B : Oh, I agree ; I agree with that. that as more and more we trade, and W : That's your point actually. globalization, we are all becoming more B : Yeah, yeah. like each other, so the world becomes W : So, with the help of now the tools you essentially the same. It has a lot of reso- have - public choice - aren't we shap- nance from what you are saying. John ing Adam Smith's thought better? And Gray, on the other hand, is a friend of now you have the extent of the market mine ; he's a British philosopher who has part, combined with the public choice switched his views so many times. perspective. (Laughter.) B : No, I think there's some potential there. It has a very critical but very incisive I agree with that ; I agree with that. review of - and a long review of - that book by Thomas L. Friedman, arguing W : Now let's go back to the origin of the that Friedman neglects, fundamentally, Thomas Jefferson Center for Political the traditions and the politics and the Economy at the University of Virginia. It history of the nationalisms and that there is quite famous that you had a conversa- are these resistances to this globaliza- tion with G. Warren Nutter, and the tion, this market extension. You can whole progress of this center is to "save interpret globalization as a sort of an the books." Is that right? evolving extension of the marketplace, B : No, that's not quite right. so to speak. And, but there are these W : Okay. forces holding it back and more or less B : It's not correct, no, no. It's long before successfully, as Gray talks about it. So "save the books ." There were graduate we economists generally, and Friedman, students who had this conversation. We Thomas Friedman, in particular have were concerned about the way economics neglected that aspect. So the world may was developing long before the Cold War not be moving in the way that it would be had got hot. (Laughter.) nice to think it would be moving - nice So it wasn't "save the books" prob- for some of us to think that it would be lem. This was 1948, when we had this moving. But I think it's worth thinking conversation. And we said, there needs to about a little bit, and, of course, you can be a center set up somewhere that would trace all of, as Gray does in that review, be devoted to kind of research on return- trace a lot of the current problems that ing to classical economics, and Adam we are having with the Islamic world to Smith in particular. We needed more something like this. I mean people are emphasis on the classical writings, and reacting very negatively to being incor- we needed more emphasis on Adam porated in this "flat world," so to speak. Smith. People were losing their under- W : Maybe I gave you a wrong impression standing of this by going down this road about Adam Smith, but my interpreta- toward mathematization, post-Samuelson

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world. So, Nutter and I had that conver- made (and, in part, successfully) to sation. It had nothing to do with "saving revive and keep alive the history of eco- the books" or anything else. Then, by the nomic thought as a fundamental part of time we got to the University of Virginia, our discipline. I think David Levy's Sum- in 1956, we had the opportunity to set up mer Institute [for the Preservation of this center in political economy which we the History of Economics] is very useful did, very successfully so, set up that here ; and I think the journals are very center. And then it was during the 1960s, useful. There are two very good journals early 1960s, in late 1950s, by that in this country, you have a journal, other time, you see, by the late [19] 50s, early people have journals, and you get an [19] 60s, and I mean especially the way association, you have meetings. I think Warren Nutter was treated with his to keep alive as institutional structure - Russian studies. The Cold War had got the people who are interested in the very hot, not only the Cold War in the history of thought - is very, very useful, global sense got hot, but also in and I'm very sympathetic to that. On academia. There were huge amounts of the other hand, I think that there is a intensity in the academic circles, and the tendency, always has been a tendency, socialists were attempting to dominate for those who specialize in the history of departments, and we were trying to hold thought, perhaps, to become too exegeti- out as a non-socialist department, more cal, that is, they become too much tex- or less teaching the verities of Adam tual, line and verse, what did the man Smith. And we were pilloried by for say, what did he say. That is not the key, that ; and it looked very gloomy there for it seems to me. The key is to try to learn a while. It was about that time that from, as Frank Knight used to say - Warren Nutter made this statement, now this I learned from Frank Knight - "Well , we may go down, but at least he used to say, we study them to learn we'll have tried to save the books." That from their mistakes. We don't study was his statement. It came out of the them to learn from what they can tell us Cold War context, not the earlier con- so much, but learn from the way they got text. confused and how they worked them- W : The reason why I asked the question is selves out of it and so forth and so on. In that, throughout your entire career, the a way it became, the history of thought history of thought or the classics have became a bastion of those who sort of been the integral part of your research held out for systematic philosophical project, so I just want to know your view understanding of economics, as opposed on the use, or the role of the history of to pure technical economics - formal thought in the economics program. modeling, formal proofs, all that stuff - Nowadays many universities are not just took over in economics, and history even pretending to teach the history of of thought in a way accidentally sort of thought. Especially during this visit I became the one holdout against that. And noticed this trend in North American so, in that sense, it was useful, very economics academia. So, what is the use useful, but not so much in terms of what of the history of thought, and how could people particularly said or that sort of we maintain that usefulness? thing. I don't think you're going to get B : Well, first of all, I'm very sympathetic to modern people very interested in simply these various efforts that have been text about what was said two or three

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centuries ago. But you can, in fact, get therefore it solved this problem of people interested in these, sort of, how chaos - they didn't want to trust the ideas emerged ; how they got confused ; market, so to speak, to spontaneously how they developed ; and so forth and so coordinate the allocation of resources. on. And so, only after the collapse of social- Y : Now, I have two questions regarding ism and the fundamental ideas in the last classical liberalism. The most remark- thirty years that you got a more general able insight of classical liberalism, by understanding, or a general rejection, of Smith and Hume, is that there's no con- this idea of command-control of the econ- flict between individual liberty and eco- omy as being more efficient than the nomic progress. People tend to forget other. And then, surprise, surprise! this main insight and vision. Is this (Laughter.) because we are not facing the same ten- You eliminate the superstructure of sion? At the time of Smith, there was control, and the market just doesn't serious tension between mercantilism emerge like people thought it would in and individual liberty. Socialism has col- these places. You didn't have the funda- lapsed, so people may think they are mental underlying structure of Rawlsian protected from socialism. Yet small institutions in place, and, in part, even socialism, social democracy and pater- in the developed countries of the West, nalism, persists today. Another possibil- you didn't have the resurgence of market ity is that, after Ricardo and the emer- principles like [Francis] Fukuyama had gence of neoclassical economics, we just hoped that it would emerge. Instead, lost the vision of classical economists. you've got rejection of that, in part, Economists have been aspiring to that's what I was trying to address in that become like natural science and develop paper on dependence, because people theories a la Descartes. simply want; it's a bottoms-up demand. B : Well, I think you raise a whole set of It's not the economists or the dirigistes interesting questions. You see, I think I've trying to impose their own views on the said many times that the most important world so much. It's people who want to single principle in economics is the idea be dependent on the state. This goes back of the spontaneous coordination that the to Nietzsche's `God is dead' thing ; it market achieves - Hayek emphasizes was that people are searching for some- this a great deal. But, it's also what I thing in lieu of religion, and the state learned from Frank Knight, and certain- served that function. It was there ; moved ly Smith and Hume understood this. in during the Socialist period ; pulled out Mercantilists didn't understand it at all ; after the Socialist period, but it's still to them it was chaos, and unless you had there. People want to depend on the regulation or control. And that under- state ; so they demand that the state standing, fundamental understanding of provide them help ; demand that the state the spontaneous coordinatioe properties provide a pension. Even though, on the of the marketplace, it was missing other hand, they're not willing to tax throughout most of economics. Most themselves to fund it. So we're facing a economists didn't understand it. And real crisis in the next half century in all that's the reason the wave of socialist these welfare democracies. And that's dirigisme was so popular ; it seemed to quite apart from terror threats, you see. be, you know, to control things, and Y : My second question is about the

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contractarian principle in The Calculus those rules. And we have, unfortunately, of Consent. I have no problem with the lost most of the constitutional under- analytical logic, a two-level structure in standing that we did have in this country collective decision-making. As a political to some degree, more than in other coun- ideology, is constitutionalism a universal tries, but now we seem to have lost that. value or parochial ideology? Should gov- People don't understand what a constitu- ernment be restricted by higher princi- tional structure is, even ideally, meant to ples of justice rather than the interests of be. I think that's a tragedy. the individuals? W : Now it's my turn again. I have been B : I'm not sure I understand exactly what working on the Great Depression era you're getting at there, but, I've always since that was a kind of the turning point argued, as you know, that, if you rely on in history all over the world. And, what simple utility maximization (self-interest fascinates me is that institutions matter. in a normal way), you're never going to You have a paper entitled "Economic get things off the ground, because it Constitution and the New Deal," in 1979 requires a certain moral underpinning, a [reprinted in The Collected Works of certain willingness, or reciprocal James M. Buchanan, Indianapolis : Lib- ethics - ethics of reciprocity has to be erty Fund, Vol. 16, pp. 339-55], and in there. You couldn't have much of a game that paper you argued that, during this if you knew everybody was going to New Deal period, the American Constitu- cheat, in other words. And, but then you tion was drastically changed. And what have a game because you know people interests me about your paper is that are going to follow the rules, and you some people like the Chicago people or have a good game analogy Frank Knight Irving Fisher proposed setting monetary used to teach that all the time. And, so policy right. So my question is ; where I've argued with Gordon Tullock and Joe did you get this understanding of the Stigler for years on this point. No matter Great Depression era? From Frank how perfect your laws might be, unless Knight or someone else, or did you come people are willing to behave in terms of to this understanding through your read- this reciprocal ethic, to at least some ing of whom? extent - a considerable number of B : Both. Not necessarily Frank Knight's you - you're never going to have a market order to work. And then, of nor my understanding. That was just course, the whole contractarian-constitu- part and parcel of the whole Chicago tionalist exercise depends on people, academic environment. It was Frank Knight, Henry Simons, among others, (and I'll use the game analogy all the time, which I got, in part, from Rutledge Lloyd Mints, a whole bunch of them. Vining who, himself, was a student of That was the whole culture of Chicago Frank Knight), namely, that you agree economics, which was based on that on the rules, and you play by the rules interpretation of the Great Depression - upon which you agree. The idea you don't how we could have done a lot better, how play by the rules would make no sense if we the Chicago group met and proposed you knew you were going to violate these things - nothing happened - that them. So the whole idea of rules emerge was all part and parcel. from constitutional structure, constitu- W : So, were you taught that way in courses tional agreement, and people live by and lectures you took at Chicago?

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B : Oh, it was just implicit, yeah, in a sense. because it couldn't wipe out the old insti- Simons talked about it ; Mints talked tutional structures. And so you got about it ; Knight talked about it. It was nations that'll really move fast if you can just part of the whole atmosphere. wipe out the institutional structure. But, W : That's quite interesting. The second as these structures get older and older, question is related to this understanding and maybe in Japan's case by early 1990s of the Great Depression. The Japanese these institutions had sort of ossified. economy has been stagnating during the And what you needed was something 1990s. My interpretation of this event has that maybe was beyond the power of much to do with government failures government. Maybe what you needed (including central bank). But in Japan, was simply to sort of wipe out the sys- many people argue that Japan has some tem. (Laughter.) structural problems, and so on and so And start over, you know, one way forth. Personally, I don't believe this kind or the other. There, William Hutt wrote of understanding, because before the 1990s a very interesting book in 1943, in the Japanese economy was not so in bad middle of the war, called Plan for Re- shape. My understanding is that, if there construction [London : K. Paul, Trench, were negative shocks to the economy, Trubner & Co.], about Britain - and one could point out structural problems. Hayek pointed that book out to me one What is your opinion on that? time - and Hutt had it all worked out ; B : I simply don't know. I know the argu- how to get rid of those institutional bar- ments, I see people make that kind of riers in World War II Britain, by simply arguments that you're referring to. huge compensations, paying huge com- I don't think it's quite possible to pensations to the labor unions to buy point to anything quite so specific as the them off and get them to agree to drop central bank failure in the United States all their restrictive practices and so forth in the Great Depression in the 1930s. and so on. Of course, it didn't get any- There's no doubt there was a good deal where ; the book didn't get anywhere at of central bank weakness and failure to all. (Laughter.) follow through, but nothing, nothing On the other hand, that was at least quite so dramatic. Maybe what might an approach to an idea. Something like have happened in the Japanese case was that might have happened in Japan ; it a lot of these so-called institutional re- might have required simply a massive strictions and barriers sort of came to a transfer, buying out, bribing, of the head, and the government needed to entrenched traditionally historic inter- break them down and couldn't do it. It ests that had developed over the twenty might be more an example of the Mancur or thirty years. Before, when Japan was Olson thesis in The Rise and Decline of generally growing very rapidly and it Nations [New Haven, NJ: Yale Univer- could neglect a lot of this part. But I'm sity Press, 1982]. As you remember, he not an expert on Japan. argues that the reason Japan and Ger- W : But there are several serious questions many rose so quickly and fast, after about the Mancur Olson thesis. For World War II, was because they wiped example, Germany did not wipe out their out the institutional structures - the old institutions and the Japanese bureau- war did - and so then you've got new cracy actually remained intact and kept structures, whereas Britain stagnated, intact, because the American forces,

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armed forces used Japanese bureaucrats. could have predicted that. So, the world's B : Then, do you wish the Americans had a lot better off than economist's (chuck- used the Iraqi bureaucrats and the Iraqi ling) would have predicted as of 1975. So, army? (Laughter.) That was a terrible in a sense, you can never tell. mistake, banding or disbanding all that I do think that this terror threat is a structure. real, a very real thing, and I don't know W : That's quite true. how we're going to handle it. I think the British are getting a comeuppance right B: ... terrible mistake. now, and they're going to face it much W : Are you so pessimistic about the current more seriously than we do, because they situation? Perhaps we should not be so have a much bigger Islamic population ; pessimistic, because we have recovered so does Western Europe. And how this some insights from classical liberal tradi- sort of culture clash or culture war is tion, and now economists are talking going to play out I think it's up for grabs more and more about institutions, laws, right now ; I just don't see. I'm not opti- and so forth. On the other hand, it may be mistic about that, and I don't see a way it the case that we find many institutional can be resolved very readily. It might failures in the real world, and, as you well be that we'll capture the leaders, mentioned, that American people do not and then things will turn right. But I really understand the economic insight. guess Japan's pretty well isolated from B : That's a good question. I think there's a that... ? lot of basis for being pessimistic. I think, W : Well, yes. In a sense, yes. within the economics profession, I think B : I understand you're in good stead if you we're a bit more understanding ; and I are. agree with you on that. And, no doubt, W : But, of course, we are part of the inter- that comes down through the policies to national society. Also, for the first time some extent. So in terms of that, we won't in the post-World War II Japanese his- be as foolish as we certainly have been in tory, we actually are sending troops, our certain past epochs in terms of economic troops to Iraq and to some military activ- policies. And, it's easy to be pessimistic if ities in Iraq through the international you look forward - you don't quite see how you're going to get out of this depen- effort. I think there is a problem also in dency state ; how we're going to solve Japan. this fiscal crises and things. On the other B : But... but... is not true or, maybe not hand, looking backwards, I always say true, but... one of the things that's likely I'm a pessimist looking forward, but an to happen in the United States and in optimist looking backward. (Laughter.) Britain, in particular, is a huge restric- Because, displace yourself twenty- tion on individual liberty, in exchange for five years, or thirty years, say to 1975, protection. You may escape more, a lot, no one could have predicted that we'd be or all of that in Japan. as well off now as we are ; in the sense W : Hmm, you see, I think that's a different that no one could have predicted that the kind of thing, but the current government Soviet Union would collapse - that is a conservative government. And con- Communism would collapse, that the servatives like to restrict individual lib- whole idea of communism and socialism erty, so there is always sort of worry and would be moribund or gone. Nobody anxiety among Japanese people. But I

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think you are quite right that it's not James M. Buchanan : George Mason University, happening in Japan as it has been hap- Fairfax, Virginia, USA Masazumi Wakatabe : Waseda University, pening in the United States. Tokyo, Japan Could I just add one thing? You said Yong J. Yoon : George Mason University, Fair- that you are pessimistic forward, but fax, Virginia, USA optimistic backward. I think that's exactly Smith's attitude. (Laughter.) notes B : In a way, I guess you're right. I think 1) For further information on Professor Bu- that's probably right. chanan's works and curriculum vitae, see http:// www.gmu.edu / jbc /faculty bios / buck W : Smith never thought that mercantilism ananvita.html. would go down, neither would slavery. 2) Southern Economic Journal, July 2005, 72(1): He even imagined that under democracy 1-15. slavery would persist rather than perish. 3) See Yang's book Economics : New Classical B : I think that's exactly right, that's a good versus Neoclassical Frameworks (London : analogy actually. Blackwell, 2001).

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