The Impact of Professor James Buchanan's work
on American Public Policy
Edwin J. Feulner
From his earliest days as a farm boy in Murfreesboro, Tennessee throughout his career and still today James Buchanan has set his own rules for leading the examined life and acted within those rules to the great benefit of higher learning and American self-government.
Never too interested in studying the minutia of the marketplace, Buchanan instead has applied his economic training to understanding how individuals interact in the public square to reach collective decisions. As he states in the autobiographical essay "Better than plowing," "My interests in understanding how the economic interaction process works have always been instrumental to the more inclusive purpose of understanding how we can learn to live one with another without engaging in Hobbesian war and without subjecting ourselves to the dictates of the state."1 Indeed, for Buchanan, the political process is an integral part of economics defined as the nexus of interpersonal exchange. Assuming freedom of individual choice, politics becomes merely a subset of economics. "Economics is the study of the whole system of exchange relationships. Politics is the study of the whole system of coercive or potentially coercive relationships…"2
To this basic understanding of the proper scope of economic inquiry, Buchanan adds that the role of the economist goes beyond merely identifying empirical trends or engaging in purely positive analysis. Economists while remaining ethically neutral should locate "possible flaws in the existing social structure and present possible 'improvements.'"3 The test of these "possible improvements" is their acceptance or denial within established collective choice mechanisms. Should a recommendation be denied it is incumbent upon the economist, in Buchanan's paradigm, to alter the proposal in such a way that it meets with collective approval. He went so far as to recommend, "If complexities of the collective decision making process arise to prevent a genuine testing of the hypothesis, the economist may, if he desires…introduce his own ethical evaluations and state openly and frankly that he thinks [some policy] would be 'good' for the whole group."4 Assigning such an active role to the economist, Buchanan has re-introduced the practical employment of the political economist.
At various times this approach has enticed criticism from nearly every school within the economic profession. Economists within the neoclassical, positive tradition--as delineated from Milton Friedman and his Chicago colleagues--may take issue with Buchanan's call for economists to propose economic hypotheses for active consideration in the public policy process. On the other hand, economists in the Keynesian tradition have criticized Buchanan for what they have termed his thinly veiled attempts to promote a classical liberal political agenda under the guise of academic rigor. Through it all though, Buchanan has been true to his own advice and writing. And, upon reflection in this the 80th anniversary of the Nobel Laureate's birth, it is evident that the work of James Buchanan has had a greater impact on American public policy over the past quarter of a century than that of any other economist.
Economists have always had a significant impact on American public policy. But, if one takes a step back it becomes evident that two economists have had a larger impact on American public policy over the past fifty years than any others. The thought of John Maynard Keynes and his students dominated not only the programs of the New Deal era but also the debt-driven policies of the 1960s and 1970s. Keynesians held that the federal government could offset deficit spending used to spur economic activity during recessions with government surpluses during booms. Underlying this belief was the notion of government as a single benevolent (or at least benign) actor. In essence, Keynesians misapplied to the federal government a consumption-smoothing ability that Franco Modigliani5 and Milton Friedman6 correctly identified with the individual economic actor. The government was a black box into which the economist was free to pour any assumptions that allowed specification of his model. Even the great Austrian economists Ludwig von Mises and Friedrich A. Hayek in their sound and important critiques of the planned economy relied on the complexity and tacit knowledge of the market rather than any integrated understanding of political institutions to prove the unworkability of such a scheme.
Compounding this simplifying mistake was the elitist nature of so many American economists starting with John Maynard Keynes. In the words of Buchanan and his co-author Richard Wagner, "[Keynes] was an elitist, and he was operating under…the presuppositions that governmental policy, and economic policy in particular, was made and should be made by a relatively small group of wise and enlightened men, whether in Whitehall or in Washington. Keynes did not think about the application of his policy norms in what we would, in America, call a democratic setting."7 In other words, twentieth century economists through the 1960s had conveniently forgotten that public policy in America was derived from a democratic (and political) process. They had forgotten what the Founding Fathers were all too aware of, that political power is coercive power and a constitutional framework with checks on government power is essential to the working of a market-based economy and society of free individuals.
Buchanan's fundamental insight, then, was to restore a Madisonian understanding of government and open the "black box" of government action to sound economic analysis. In the words of Buchanan and Tullock in their landmark book, The Calculus of Consent, "Our purpose in this book is to derive a preliminary theory of collective choice that is in some respects analogous to the orthodox economic theory of markets …to extend the assumptions of the economist to the behavior of the individual as he participates in the political process."8
The entry into the black box of government is the understanding that individuals do not change as they pass through the door of a government agency or take an oath of office. As Buchanan and Tullock pointed out, "A shift of activity from the market sector cannot in itself change the nature of man, the actor in both processes…This simple point seems to have been almost entirely overlooked in the so-called 'great debate' of the 1960s."9 As the Founding Fathers recognized, men are fallen angels or else there would be no need for government at all.
The application of economic analysis to the political and democratic processes has revolutionized both economics and public policy. Economists can no longer assume that the government is merely a correction for slight imperfections in their models. The economic inter-workings and inefficiencies of government action--the costs as well as benefits--must be taken into account. There has been a general shift in the public policy debate from the simple recommendation of various policies to an analysis of the rules and procedures that guide implementation of those policies and the policy-making procedure itself. In other words, public policy does not stop at the introduction of ideas but extends to every aspect of the implementation process.
A basic insight of public choice theory is that most government spending and tax policy is directed not by politicians acting in the public interest but by pressure groups acting in their own special interests. Not recognizing this has lead to a public ledger as riddled with loopholes and special earmarks as Swiss cheese is of holes.
My own organization was able to apply the lessons of public choice to achieve significant tax reductions and budget restraint in 1995. Previously, reducing the size of government by eliminating special subsidies and unnecessary spending programs had been nearly impossible despite the obvious economic benefit of doing so. The benefits of these programs flow to a relatively small group of individuals who could easily organize in defense of "their entitlement." The cost, however, is spread among the general mass of taxpayers, a population that cannot be mobilized easily within the traditional public policy making process. However, by proposing a $500 per child tax credit, we were able to organize this mass of taxpayers. Immediately, the political dynamic shifted. There existed an identifiable beneficiary to reducing the size of government. There existed a constituency that was willing and able to organize and benefit directly from eliminating certain parts of the government bureaucracy.
More broadly, the general success of the conservative movement, a group of activists and organizations dedicated to fighting for limited government and individual liberty can be indirectly attributed to the theories of James Buchanan. These organizations, working in tandem or individually all represent a "special interest group" for the forgotten American voter. These are the institutions that have finally given the silent majority a voice in the public policy process. By organizing and pooling the relatively disparate resources of the millions of Americans that shoulder the burden of an intrusive and complex government, these institutions have counterbalanced the existing special interests created to support existing government programs and tax loopholes.
Buchanan's insights and impact on American public policy go beyond public choice observations, however. In fact, Professor Buchanan views public choice as we know it today as only a sub-discipline of a larger branch of economics, Constitutional Economics. Constitutional Economics, writ large is the study of collective decision-making. Action in the public sphere is voluntary exchange. So, while recognizing that state action is inherently coercive, Professor Buchanan has maintained that the individual's participation in the state is a voluntary action. "Individuals acquiesce in the coercion of the state, of politics, only if the ultimate constitutional 'exchange' furthers their interests. Without some model of exchange, no coercion of the individual by the state is consistent with the individualistic value norm upon which a liberal social order is grounded."10
What has emerged, then from the entire Buchanan-inspired paradigm is a recognition that human motivation does not change with social settings, that the government is a collection of individuals under the umbrella of a constitution and not a black box, and that collective action if properly framed can function to the good of a free society and most importantly to the individuals that compose that society. What this has meant for American public policy when compared to the alternative, black-box approach of previous, predominantly Keynesian economists is tremendous.
In the Keynesian paradigm, a Swiss cheese tax code may be employed efficiently to not only raise the revenues necessary for essential government activities but also spur "desirable" economic activity and depress "undesirable" activity. According to Keynes and his followers, enlightened thinkers and politicians can design a tax code that results in an optimal level of government revenues and private social action. The result of this activist tax policy has been the current system that is so complex an entire industry of tax accountants and lawyers are necessary just to help ordinary citizens file their annual returns.
The Buchanan paradigm recognizes that financial resources are necessary to accomplish legitimate government functions, functions that have been voluntarily agreed to by individual citizens. However, Buchanan and his students also recognize that just as with any other issue, tax policy, tax loopholes, and excise taxes will be demanded by special interest groups and not politicians or enlightened academics acting in the public interest. The understanding that politics will arrive at something less than an economically efficient tax system has opened the door for discussion (or rather re-invigoration) of fundamental tax reform, a change not in policy but in the rules that guide that policy. Super-majority requirements for raising taxes are being discussed and adopted in several states. National policy organizations and even some bold politicians are calling for repeal of the 16th amendment. All of these developments realize the fundamental Buchanan insight that fundamental change requires action at the constitutional level.
Debt financing and government spending
The very heart of Keynesian economics is the idea that the government can moderate the natural cycles of the market economy by running deficits in economic downturns and surpluses in economic booms. The idea behind this notion is that extra government spending will spur consumption and therefore the economy in slow periods and moderate economic growth in upswings (and concurrently pay down the government's debt) by running surpluses.
However, the Keynesian call for debt driven stimuli ignores the fundamental fact that American public policy is arrived at through a democratic process rather than through the directives of a group of benevolent and omniscient planners. The democratic practice is loath to give up spending at any time. Thus, Professor Buchanan's insights have led the way for calls for a Balanced Budget Amendment that would bind all the actors within the policy process, politicians, special interest groups, and voters.
The primary actor in the Keynesian paradigm is the central government. For a Keynesian, only the central government has the scope and means to smooth out the bumps of the market economy. Only nationally elected officials that have the "mandate" of the nation can act legitimately in the general public interest rather than in response to narrow, regional needs.
The Buchanan paradigm, on the other hand, leads to exactly the opposite conclusion. To see why, recall that a specific public policy is absolutely sanctioned only by the unanimous consent of voters. Unanimity becomes the benchmark of efficiency.11 Unanimity can be most closely approximated only at that level of government that contains voters directly affected by the policy in question. The result of this condition is a re-emphasis on federalism and the devolution of collective choice to the most local level possible.
The unanimity requirement of Buchanan's constitutional construct is reinforced by the public choice analysis of voting. In short, public choice theory has found voting, particularly for national candidates, irrational. The reason is that the likelihood of an individual's vote affecting the outcome of a national election is astronomically high. With such a slim chance of making a difference at the poll, individuals should be spending their time in other more productive activities. However, as political decisions are devolved or returned to a more local level each individual has a greater incentive to vote. Increased democratic participation increases the likelihood of unanimity and therefore more efficient collective choices.
Finally, the Keynesian paradigm, grounded in the public interest theory implies that experienced lawmakers are essential to good policy. The added experience will increase these politicians' ability to recognize the true public interest and make enlightened policy decisions. The result is the intellectual support of career politicians.
Again, the insights of Professor Buchanan lead to exactly the opposite conclusion. Tenured politicians are more responsive to special interest groups rather than voters. Career politicians gain experience not in identifying the public interest but in listening to lobbyists and other entrenched interests. The Buchanan-inspired solution is a change in the rules, strict constitutional term limits placed on political office.
It has taken a farm boy raised near Murfreesboro, Tennessee, to remind us that politicians are politicians and that people are people no matter in what institutional structure they find their employment. It has taken a scholar skeptical of the traditional ivory tower academy to call into question the ability and judgment of any enlightened class. It has taken an individual of the caliber and determination of James Buchanan to establish and follow rules for economic analysis that are leading to a reconstitution of the Founding Fathers' vision of the public policy process in America.
In his personal statement titled "From the Inside Looking Out," Buchanan writes, "Within limits, and despite my stance of relative indifference … my ideas now begin to have consequences. I do not yet know how I shall react when and if specific changes in rules are more or less directly traceable to my influence."12 Well, Jim, may I offer a bit of friendly advice: on this, your four-score birthday, begin to think of how to react. As I have shown here all too briefly, your ideas have had a tremendous impact on the American public policy process. And, I have little doubt that they will continue to influence the peaceful ordering of a society of free individuals for the next eighty years.
1Buchanan, "Better than Plowing," p 17.
2Buchanan, "What Should Economists Do?"
3"Positive Economics, Welfare Economics, and Political Economy," p. 16.
4"Positive Economics, Welfare Economics, and Political Economy," p. 17.
5Modigliani, "Life Cycle, Individual Thrift, and the Wealth of Nations."
6Friedman, A Theory of the Consumption Function.
7Buchanan and Wagner, "The Political Biases of Keynesian Economics," p. 393.
8Buchanan and Tullock, Calculus of Consent, pp. 17 and 298.
9Buchanan and Tullock, The Calculus of Consent p. 306.
10Buchanan, "The Constitution of Economic Policy," p 308.
11Buchanan, "The Constitution of Economic Policy."
12Buchanan, "From the Inside Looking Out," p 154.
Buchanan, James. "Positive Economics, Welfare Economics, and Political Economy," Journal of Law and Economics, October 1959, Vol. 2, pp. 124-138.
--------. "What Should Economists Do?," Southern Economic Journal, January 1964, Vol. 30, pp. 213-222.
--------. "Better than Plowing," reprinted as chapter one in Better than Plowing and Other Personal Essays, Chicago, IL: The University of Chicago Press, 1992, pp. 1-18
-------. "From the Inside Looking Out," reprinted as chapter ten in Better than Plowing and Other Personal Essays, Chicago, IL: The University of Chicago Press, 1992, pp. 147-157.
-------. "The Constitution of Economic Policy," Nobel Lecture, presented in Stockholm on December 8, 1986 and reprinted as chapter 21 in Economics: Between Predictive Science and Moral Philosophy, College Station, TX: Texas A&M University Press, 1987, pp. 303-314.
Buchanan, James and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy, Ann Arbor, MI: University of Michigan Press, 1962.
Buchanan, James and Richard Wagner, "The Political Biases of Keynesian Economics," as reprinted in Economics: Between Predictive Science and Moral Philosophy, College Station, TX: Texas A&M University Press, 1987, pp. 389-408.
Friedman, Milton. A Theory of the Consumption Function, Princeton, NJ: Princeton University Press, 1957.
Modigliani, Franco. "Life Cycle, Individual Thrift, and the Wealth of Nations," Nobel Lecture, presented in Stockholm on December 9, 1985 and reprinted in the American Economic Review, June 1986, Vol. 76, No. 3, pp. 297-313.