Free exchange
The voice of public choice
James Buchanan, who died on January 9th, illuminated political decision-making
Jan 19th 2013 |From the print edition
A LIST of things that Americans judge more favourably than Congress, according to Public Policy Polling, a survey firm, includes colonoscopies, root canals, lice and France. America seems to have stumbled from economic crisis to political paralysis. That would have come as little surprise to James Buchanan, a Nobel prize-winning economist and the architect of “public-choice theory”, who died on January 9th, aged 93.
Mr Buchanan was an outlier in his field. He eschewed the profession’s embrace of complex models and maths in favour of serious reflection on political philosophy (leading some to dismiss him, wrongly, as a lightweight). A Tennessean by birth, he mistrusted north-eastern elites and spent most of his career at universities in Virginia. He challenged his profession’s casual treatment of variables such as economic cost, which he considered to be a deeply subjective matter. He adopted heterodoxies such as a 100% inheritance tax, on egalitarian grounds. Yet his greatest contribution was in the realm of political economy.
His interest in the workings of the state reflected its growing importance. From having only a minimal role in pre-industrial days, Leviathan came to control swathes of economic activity as the 20th century progressed. National-security demands were partly responsible. Government responses to market failures, from unscrupulous business practices to the trauma of the Depression, also played their part. As demands on the state grew, so too did the need to understand its behaviour.
Mr Buchanan was one of a small group of economists wondering whether the state was up to the task. Untrammelled markets may fail—by producing more pollution than society as a whole would prefer, for example. That creates the potential for welfare-improving government intervention, such as a tax on pollution. Yet there is no guarantee a state will get it right. Whether interventions are justified, Buchanan pointed out, depends on whether government officials are motivated by self-interest as well as a sense of public duty. Weighing up the pros and cons of policy choices requires an unsentimental view of government actions, a position he called “politics without romance”. In exploring this he helped create public-choice theory.
Public-choice economics assumes that government figures are merely human. They should be expected to look out for themselves rather than to act as saintly public stewards. It is a cynical (and, some might say, obvious) approach but a useful one. John Maynard Keynes may have been spot-on in concluding that big government deficits could boost a sagging economy. But Mr Buchanan reckoned such arguments led to a slow erosion of the “old-time fiscal religion” that taxes should be raised to meet government obligations. This made spending less politically costly, because politicians no longer felt under pressure to pair new spending with higher taxes. That, he rightly predicted, would lead to an era of persistent, big fiscal deficits and growing debt.
Public-choice analysis quickly provided the lens through which government action is now viewed. Legislators may “logroll”, for instance, striking deals with colleagues to pass measures that benefit small groups but are of dubious value to the general public. Governments are racked by “rent-seeking”, whereby firms aim to capture financial returns through special government privileges or monopoly rights. A construction company may spend its time lobbying for government contracts rather than courting private business, for example. That absorbs not only the resources of the firm eventually granted the privilege but also those of other firms competing for the same entitlement. As opportunities for rent-seeking expand, they siphon off resources from productive activities in the private sector and towards competition for government largesse. Public-choice theory counsels caution and care in expanding the role of the state.
It also hints at ways to resist political machinations. Take pollution. Robert Stavins of Harvard University argues in favour of a cap-and-trade policy to limit carbon emissions over the simple carbon tax many economists prefer. His reasoning is that legislators will inevitably give sops to industry. Under a cap-and-trade system they do so by freely granting, rather than auctioning off, carbon permits to certain interests. But that does not alter the law’s emissions-reducing power. Granting exemptions on carbon taxes, by contrast, would weaken its environmental benefits.
Even America’s brinkmanship over the “fiscal cliff” and the debt ceiling may be understood as an application of public-choice theory. When rational self-interest leads politicians into endless gridlock, hard choices are more likely to be made when policymakers have no alternative but to confront them. The parade of policy expirations and deadlines is part of the effort in Washington, DC, to channel self-interest into policy action.
Strong constitution
Such episodes do little for politicians’ standing, but they reflect the trade-off that exists in democracies between effective decision-making and the need to govern consensually. In Mr Buchanan’s landmark work, “The Calculus of Consent”, co-written with Gordon Tullock, the authors split political decision-making into two stages: an initial rule-setting, or “constitutional”, stage; and a subsequent politics-as-usual stage. A democratic system can maintain legitimacy despite rancorous politics if broad agreement exists on the fairness of the underlying rules. Mr Buchanan distinguished between American and European attitudes in this regard, noting that “in a constitutional democracy, persons owe loyalty to the constitution rather than to the government.” America’s politics are a mess but its institutions are to be treasured.
Sources
"Public choice: politics without romance", by James Buchanan, Policy, Spring 2003
"The constitution of economic policy", by James Buchanan, Nobel Prize lecture, 1986
"The Calculus of Consent", by James Buchanan and Gordon Tullock, 1965
Economist.com/blogs/freexchange
From the print edition: Finance and economics
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