In Memory of James M. Buchanan (1919-2013)
by Fred E. Foldvary, Senior Editor, 14 January 2013The great economist James Buchanan died on January 9, 2013. Buchanan was the leading contributor to the branch of economics called “public choice,” and won the Nobel memorial prize in economics in 1986. The science of economics was once commonly called “political economy,” and now that term has become a synonym for public choice analysis. Buchanan also founded the field of economics called “constitutional economics” and was a major contributor to the theory of clubs.
A “private” choice affects only oneself, while a “public” choice also affects others. When you vote in an election, you are choosing for a group, so it is a public choice. Government officials make public choices when they enact laws. So public choice theory studies the decisions of voters, governmental representatives, bureaucrats, and dictators. Economists have always examined government, but Buchanan, inspired by the writings of the Swedish economist Knut Wicksell, established public choice as an explicit field of economics.
Public choice applies economic theory to study political processes. The economic field called “law and economics” applies public choice, along with other economic theory, to the unintended consequences of laws and policies. Together with Gordon Tullock, Buchanan wrote the landmark book on public choice, The Calculus of Consent. Buchanan and Tullock founded the Public Choice Society in 1962, and its journal, Public Choice. An important policy statement in Calculus of Consent (p. 114) is that "where possible, collective activity should be organized in small rather than large political units."
The field of public choice is divided into several schools of thought, such as the Chicago, Virginia, Georgist, and Austrian schools. Buchanan founded the branch called the Virginia School of Political Economy. The Chicago school tends to believe that the choices of elected representatives reflects the desires of the average voters, but the Virginia school emphasizes the influence of the special interests that are often contrary to the public interest, hence resulting in “government failure.”
Buchanan founded a public choice center at the University of Virginia, which then moved to “Virginia Tech” at Blacksburg, and finally settled at George Mason University in Virginia. I did my graduate studies in economics at George Mason University, and enjoyed a seminar on economic philosophy taught by James Buchanan and Viktor Vanberg.
“Constitutional economics” is about the highest level of choice. One makes a constitutional choice when one joins a group or enters into a contract. The operational decisions afterwards are bound by that higher-level choice. For example, if you join a club, there are club rules you will have to follow, and club payments you will need to make. You may not like all the rules, and you may not agree with the decision of the club chiefs, but you have made a voluntary choice in becoming a member, as your constitutional decision. Examples of constitutional choices are: getting married, becoming employed, entering into a contact to buy a house, and the adoption of a constitution or charter for a country, province, or city. Buchanan referred to constitutional economics as involving a choice of constrains rather than a choice within constraints.
Another major contribution of James Buchanan was the theory of clubs. Economics applies the ordinary concept of a club to examine an organization that supplies collective goods to its members. Buchanan’s model of a club involves two variables: the amount of the good, and the number of club members. With a club good subject to crowding, such as a swimming pool, a larger membership reduces the benefit for each member. Buchanan analyzed the optimal combination of the size of the good and the membership, in which the extra cost of the public good and of congestion are set equal to the extra benefit of a greater amount of the good and more members to share the cost.
Economists use the term “rent seeking” for the subsidies and privileges sought by special interests. The classical economists recognized that land rent is obtained by land owners in exchange for nothing, since they did not produce the land, nor do they in that role produce the goods. Economists generalized the term to “economic rent,” meaning gains beyond what is needed to put a factor of production to its best use. Public choice theorists adopted the term “rents” to refer to the subsidies that go to the “rent seeking” special interests.
Buchanan also was aware of the economics of land rent. As stated by James Buchanan and co-author Charles Goetz in a 1972 article “Efficiency Limits of Fiscal Mobility,” competitive landed clubs are most efficient when the payments by the members are "related to the size of the locational rent component in individual income receipts” (p. 35).
The economies of the United States, western Europe, Japan, and other developed economies are now suffering from slow growth, high unemployment, environmental destruction, and unsustainable budget deficits, all due to the market hampering taxes, subsidies, and restrictions by democratically elected governments. Public choice theory is the dismal science that explains why governments, which ought to facilitate prosperity, instead plunge economies into depressions, fiscal cliffs, and capital flight. Public choice theory also helps to explain why fundamental constitutional reforms are so difficult to implement.
Nevertheless, there is such as thing as human progress. It took thousands of years to end legalized chattel slavery, provide equal rights to women, and establish basic freedoms of speech and religion, but it happened. Movements to establish equal civil rights and reduce pollution have had some success. Public choice theory does acknowledge that political change is possible. James Buchanan himself hoped that his contributions would result in political reform. There is hope, if dissatisfaction can be harnessed into enlightened mass political movements.
-- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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