CONVERSABLE ECONOMIST

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Some Economics of James Buchanan Posted: 05 Jun 2021 08:00 AM PDT The Fraser Institute has been publishing a "Essential Scholars" series of short books that provide an overview of the work of prominent thinkers, including John Locke, David Hume, and Adam Smith in the past, and Friedrich Hayek, Joseph Schumpeter, and Robert Nozick from more recent times. The books seek to explain some main themes of these writers in straightforward nontechnical language. In the most recent contribution, Donald J. Boudreaux and Randall G. Holcombe have written  The Essential James Buchanan. The website even include several 2-3 minute cartoon videos, if you need a little help in spotting the main themes. Buchanan won the Nobel prize in 1986 "for his development of the contractual and constitutional bases for the theory of economic and political decision-making." Boudreaux and Holcombe argue for Buchanan, these theme emerge from a perspective in which group decisions--whether by government or clubs or religious organizations--must always be traced back to what form of agreement was reached by members of the group. In describing Buchanan's view, they write:  [B]ecause neither the state nor society is a singular and sentient creature, a great deal of analytical and policy confusion is spawned by treating them as such. Collections of individuals cannot be fused or aggregated together into a super-individual about whom economists and political philosophers can usefully theorize in the same ways that they theorize about actual flesh-and-blood individuals. Two or more people might share a common interest and they might—indeed, often do—join forces to pursue that common interest. But two or more people are never akin to a single sentient individual. A collection of individuals, as such, has no preferences of the sort that are had by an actual individual. A collection of individuals, as such, experiences no gains or pains; it reaps no benefits and incurs no costs. A collection of individuals, as such, makes no choices. ... Buchanan called such aggregative thinking the "organismic" notion of collectives—that is, the collective as organism. From the very start, nearly all of Buchanan's lifetime work was devoted to replacing the organismic approach with the individualistic one—a way of doing economics and political science that insists that choices are made, and costs and benefits are experienced, only by individuals. Buchanan took this distinction so seriously that, as I'll discuss below, he proposed renaming the field of economics to highlight it. When thinking about people coming together to take joint actions, whether they are buying and selling in a market, or starting a company, or operating together through government, Buchanan insisted on viewing the process not as actions taken by "the government," but rather as the outcome of negotiations by groups of individuals.  Boudreaux and Holcombe write:  Buchanan's fiscal-exchange model of government depicts government as an organization through which individuals come together collectively to produce goods and services they cannot easily acquire through market exchange. Just as individuals trade in markets for their mutual benefit, government facilitates the ability of individuals to engage in collective exchange for the benefit of everyone. This fiscal-exchange model is an ideal, of course; Buchanan was well aware of the possibility that those who exercise government power can and often do abuse it for their own benefit at the expense of others. Much of his work was devoted to understanding how government can be constrained in order to keep this abuse to a minimum. When those constraints are effective, collective action through government can further everyone's well-being. The fiscal-exchange model is based on the idea that taxes are the price citizens pay for government goods and services. And just like prices in the marketplace, the value of the goods and services government supplies should exceed the prices citizens pay, in the form of taxes, for these goods and services. ...  "[W]hen analyzing the groups that individuals form when they come together to pursue collective outcomes, Buchanan insisted that close attention be paid to the details of how these individuals constitute themselves as a group—and most especially, to the decision-making procedures they choose for their group." Here are some examples. Buchanan was a big supporter of federalism: that is, the idea that government responsibilities would be divided up into local, state, national, and perhaps other intermediate levels. "Buchanan refers to federalism as     an ideal political order' with several advantages ... Federalism offers citizens more choice, because citizens can choose among jurisdictions," while " governments at the same level in a federal system thus each have stronger incentives to provide a mix and pricing of public goods that is attractive to large numbers of people. ... "In addition, federalism can encourage governments at different levels to police each other." One of Buchanan's main policy concerns was governments were prone to over-borrowing, because the future generations that would need to repay the debts were not well-represented in current discussions about the extent of borrowing. Boudreax and Holcombe write:  This ability of current taxpayers to use debt financing to free-ride on the wealth of future generations led Buchanan to worry that government today will both spend excessively and fund too many projects with debt. citizen-taxpayers, after all, are not today's voters. Thus, the interests of these future generations are under-represented in the political process. To reduce the magnitude of this problem, Buchanan endorsed constitutional rules that oblige governments to annually keep their budgets in balance. His fear that the opportunity for debt financing of government projects and programs would be abused was so acute that it led him to endorse a balanced-budget amendment to the US Constitution. His participation in a political effort to secure such an amendment is one of the very few specific, ground-level policy battles that he actively joined. As one more example, Buchanan wrote an article for the first issue in Summer 1987of the Journal of Economic Perspectives, where I work as Managing Editor, as part of a symposium on the Tax Reform Act of 1986  ("Tax Reform as Political Choice." Journal of Economic Perspectives, 1:1, 29-35). For those unfamiliar with the bill, the general thrust of TRA86 was to broaden the tax base by closing or limiting various tax deductions and exemptions, and then to reduce marginal tax rates in a roughly revenue-neutral manner. This advice to broaden the tax base and reduce marginal tax rates is pretty standard, year in and year out, among mainstream public finance economists. But what made it possible for such legislation to actually be enacted in 1986? Buchanan suggested that there is a cycle to tax policy. Say that you start off in a situation with a broad tax base and few loopholes. Over time, politicians and special interests will carve out a series of tax breaks. But every time they reduce the base of income that is taxed, they will be forced to raise marginal tax rates as well to garner the same amount of revenue. At some point, Buchanan argued, marginal tax rates have become so high that a countermovement forms. Essentially, the countermovement is willing to give up some tax loopholes of its own, as long as many other parties also need to give up their tax loopholes, in exchange for lower tax rates. As soon as this bargain is enacted into law, as in 1986, the political business of carving out loopholes begins all over again.  Thus, Buchanan did not view  public policy as an attempt to reach a higher level of social welfare or a more efficient allocation of resources. These kinds of goals would be what Buchanan disparaging called "organismic." Instead, Boudreaux and Holcombe described Buchanan's view of the political process in this way:  Economic and political outcomes are compromises among people with legitimate differences in their preferences. These outcomes can never be correct or incorrect in the same way that an answer to the question "What is the speed of light?" is correct or incorrect. The correct answer to the question about the speed of light is not a compromise among different answers offered by different physicists—the speed of light is what it is, objectively, regardless of physicists' estimates of it. But the "correct" allocation of resources and "correct" level of protection of free speech are indeed nothing more than the compromises that emerge from the economic and political bargaining of many individuals, each with different preferences. In short, said Buchanan, politics is about finding peaceful agreements among people with different preferences on collective outcomes. Politics, unlike science, is not about making "truth judgments." The challenge is to discover and use the set of rules that best promotes the making of compromises among people with different preferences. Legitimate scientific inquiry and judgment can play a role in assessing how well or poorly some existing or proposed set of rules will serve this goal. Even here, though, Buchanan warned that people's differences in fundamental values means that there is no universal one "best" set of rules, scientifically discoverable, for all peoples and for all times. In the end, the best set of rules is that which wins the unanimous approval of the people who will live under it. Notice here that the unanimous approval will not be for the outcomes of decisions by organizations. People will disagree over outcomes. Instead, Buchanan is suggesting that we might agree to a set of rules, and we might be willing to be coerced under those rules. As Buchanan and Holcombe describe it: In this situation, individuals might agree to be forced to pay toward financing the [public] good if everyone else is also forced to pay. Everyone could hold the same opinion, saying they do not want to pay unless everyone is forced to pay, but they would all agree to a policy that forces everyone to pay. People could agree to be coerced. The idea that people could agree to be coerced lies at the foundation of the social-contract theory of the state. Even though there is no actual contract, people would agree to give the state the authority to coerce those who violate its mandates, if everyone was bound to the same contract provisions. According to social-contract theory, because people would agree to be coerced for their own benefit, the exercise of such coercion violates no individual's rights. Buchanan extended this individual-based contractual view of organizations beyond government, and beyond  market exchange:  The point is that exchange possibilities are not confined to the simple bilateral exchanges on which economists traditionally focus nearly all of their attention. When this truth is recognized, many familiar features of the real world are seen in a more revealing light. Clubs, homeowners' associations, business firms, churches, philanthropic organizations—these and other voluntary associations are arrangements in which individuals choose to interact and exchange with each other in ways more complex than simple, one-off, arm's length, bilateral exchanges. These "complex" exchange relationships are an  important reality for economists to study. But they are more than mere subject matter for research. They are also evidence that human beings who are free to creatively devise and experiment with alternative organizational and contractual arrangements have great capacity to do so. Where the conventional economist sees "market failure," humans on the spot often see opportunities for mutually advantageous exchange. Buchanan felt so strongly about this position that in a 1964 essay, he suggested renaming the field of economics ("What Should Economists Do? Southern Economic Journal, 30:3 pp. 213-222). Boudreaux and Holcombe discuss this essay in their Chapter 10: here, I quote from the 1964 essay. Buchanan argued that the current definition of economics is much too identified with the idea of choice. He wrote in 1964:   In one sense, the theory of choice presents a paradox. If the utility function of the choosing agent is fully defined in advance, choice becomes purely mechanical. No "decision," as such, is required; there is no weighing of alternatives. On the other hand, if the utility function is not wholly defined, choice becomes real, and decisions become unpredictable mental events. If I know what I want, a computer can make all of my choices for me. If I do not know what I want, no possible computer can derive my utility function since it does not really exist. Rather than basing economics on an idea of utility functions that do not actually exist until they are called into being by people's choices, Buchanan suggested instead that economics should instead be focused on the principle of voluntary exchange, and the conditions that people agree to in shaping such exchanges. He wrote:  The theory of choice must be removed from its position of eminence in the economist's thought processes. The theory of choice, of resource allocation, call it what you will, assumes no special role for the economist, as opposed to any other scientist who examines human behavior. Lest you get overly concerned, however, let me hasten to say that most, if not all, of what now passes muster in the theory of choice will remain even in my ideal manual of instructions. I should emphasize that what I am suggesting is not so much a change in the basic content of what we study, but rather a change in the way we approach our material. I want economists to modify their thought processes, to look at the same phenomena through "another window," to use Nietzsche's appropriate metaphor. I want them to concentrate on "exchange" rather than on "choice."  The very word "economics," in and of itself, is partially responsible for some of the intellectual confusion. The "economizing" process leads us to think directly in terms of the theory of choice. I think it was Irving Babbit who said that revolutions begin in dictionaries. Should I have my say, I should propose that we cease, forthwith, to talk about "economics" or "political economy," although the latter is the much superior term. Were it possible to wipe the slate clean, I should recommend that we take up a wholly different term such as "catallactics," or "symbiotics." The second of these would, on balance, be preferred. Symbiotics is defined as the study of the association between dissimilar organisms, and the connotation of the term is that the association is mutually beneficial to all parties. This conveys, more or less precisely, the idea that should be central to our discipline. It draws attention to a unique sort of relationship, that which involves the co- operative association of individuals, one with another, even when individual interests are different. It concentrates on Adam Smith's "invisible hand," which so few non-economists properly understand. I am uncertain as to what the practictioners of catallactics or symbiotics would be called. "Catallacticologists?" "Catalysts?" "Symbioticians?" "Symbiotes?" I'm open to suggestions. If you would like some additional background on Buchanan,  two starting point are this 1988 article looking at Buchanan's contributions just after he won the Nobel prize, and this earlier post from me just after Buchanan died in early 2013.

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