Thursday, January 10, 2013

Remembering James Buchanan

MTSU was the alma mater of Nobel laureate James M. Buchanan, who passed away yesterday at the age of 93. He was a great man--literally a gentleman and a scholar. He came from humble beginnings--a farming family in Rutherford County, Tennessee--and eventually earned the highest honor of the economics profession.

Back when Buchanan attended MTSU it was a small teaching college. He went from there to get his M.S. from the University of Tennessee at Knoxville in 1941, and then served in the Pacific theater in World War II. He went on to get his PhD from the University of Chicago in 1948, and studied public finance in the 1950s. Some of that study was done with economists in Italy.

This formed the basis of one of the two big projects of his life. His work on public finance was a reaffirmation of the views of the classical economists. The Independent Review has a good summary. In particular, he argued against the view that debt does not matter to the extent that we owe it to ourselves. Viewing Americans as one unified person conceals important differences; some people will benefit from the debt, while others will bear the future burden. The debt will affect different people at different times, and these cost differences matter. Buchanan also believed that government borrowing harms private capital formation, and although it might be useful if used for public capital formation, in practice the borrowed money was usually used to finance government consumption.

His biggest contribution to economics came when he began working at universities in Virginia--the University of Virginia, Virginia Tech, and George Mason University. He and a group of other scholars (most notably Gordon Tullock) began a project that became known as Public Choice Economics.

Understanding this contribution requires some explanation. Up to this point, economics was almost entirely about "private choice"--how private individuals (you, me, a business owner, an investor, etc.) make economic decisions as consumers and producers. These people were assumed to be rationally self-interested. Government was treated as a sort of black box; the decisions of people in government were not assumed to be rational (or, for that matter irrational--they were simply not subjected to scrutiny by economists). Government was treated as a sort of costless social guardian--whatever needed to be done, it would do. Economists had argued a great deal about the appropriate role of government in the economy (as they still do). Usually a paper identifying a role for government would go something like this:

1) Ideal competitive markets are usually efficient (where efficient means something like "maximizing the difference between benefits and costs", or "making people as well off as possible").
2) I have identified a market (either real or theoretical) that is not competitive or has some other market failure which prevents it from achieving efficiency.
3) Therefore government must intervene so that efficiency can be achieved.

James Buchanan and the others at the Center for the Study of Public Choice realized that going from 2) to 3) was a big leap. In fact, the identification of market failure does not at all imply government intervention is desirable. That is, whether or not government intervention is desirable depends on how a "public choice" is made. If government officials are rationally self-interested, their choices might lead to inefficient outcomes, just as private choices can lead to inefficient outcomes.

The study of collective decision making leads to all sorts of surprising conclusions. Voting need not reach efficient outcomes. Logrolling and pork-barrel spending can easily result in inefficiency. The only rule that guarantees efficient government decisions is unanimity--and it is an unworkable rule for strategic reasons. You can read all of his landmark book, The Calculus of Consent, at the Library of Economics and Liberty (at zero price!). The book was coauthored with Gordon Tullock--more on him in a moment.

Buchanan also developed "Constitutional Economics", which is the study of how constitutional rules can constrain government behavior.

As a result of this understanding of how government makes choices (although that is sloppy shorthand--his point was that "government" is not a monolithic thing that makes choices; it is made up of many individuals whose choices result in an aggregate outcome), economists should always approach market failures in this fashion:

1) Ideal competitive markets are usually efficient.
2) I have identified a market (either real or theoretical) that is not competitive or has some other market failure which prevents it from achieving efficiency.
3) Government intervention could potentially improve on this outcome, if the incentives of the relevant interest groups align in the right manner.

Unfortunately, as far as I can tell, most economists still do not understand 3, and go straight to "therefore government must intervene".

James Buchanan won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the "Nobel Prize in Economics", in 1986, both for his work in Public Choice and Public Finance. Many economists (including me) believe that the award should have been shared with Gordon Tullock, who was equally important to the Public Choice school of thought (or Tullock should have been given his own separate award--every year many of us hold out hope that this will be Tullock's year). This doesn't take away from Buchanan's accomplishments, however.

Buchanan always emphasized that if he could come from such a humble beginning and accomplish such things, anyone could. This is probably not true; I think few of us have what it takes to become an intellectual giant like James Buchanan.

He will be remembered always by economists. As for MTSU, the Buchanan Fellowship is awarded to 20 incredibly bright incoming students in the Honors College each year. I have been honored to teach the Buchanan Fellowship Econ 2410 class (an intro class). In addition to the usual Supply and Demand material, I have students read from The Calculus of Consent, as well as Buchanan's writings on Constitutional Economics. This is how we can best honor James M. Buchanan: read his works, and remember to be skeptical of simple arguments for government intervention.

UPDATE: Here is a good collection of remembrances from Marginal Revolution. 

1 comment:

  1. It will be interesting to see who steps up to replace great thinkers such as Buchanan and William F. Buckley. Especially in these times, we will miss their lot.