Lecture 7: The Public Choice Theory: James Buchanan

Freedom and Society: Classical Liberalism in the Twentieth Century

A Course with Professor Thomas Patrick Burke
Spring 2007


As I have pointed out in previous lectures, since the beginning of the twentieth century the main arguments for the free society with free markets have been made by economists. A particular example of this is the theory of public choice. This theory was developed largely by the economist James Buchanan during the 1960s. He was awarded the Nobel Prize in Economics for it in 1984. Buchanan himself personally, though he always describes himself as a “classical liberal,” is not exactly an extreme defender of market freedom — the “liberal” is more important to him than the “classical.” He has explicitly rejected laissez-faire. But the theory he developed has, as it were, a life of its own and provides powerful support for markets as opposed to government.

Buchanan was born in Tennessee in 1919 and obtained his doctorate in economics from the University of Chicago in 1948. He is currently professor emeritus at George Mason University in Virginia, where he is also head of the Center for the Study of Public Choice, which was created for him.

His main books for our purposes are:

The Calculus of Consent (co-authored with Gordon Tullock, 1962)

The Limits of Liberty (1975)

Why I, Too, Am Not A Conservative (2005)

The Theory of Public Choice

Mainstream economics as developed by Adam Smith and his successors has focused on the study of markets, the arena in which people buy and sell, and which is governed by the profit motive. It analyzes these transactions by means of distinctive concepts such as demand and supply, price and value, incentive, the division of labor, and productivity. While the relationship between the market and government was always an integral part of this analysis, since government can greatly influence markets through such measures as taxes and regulations, government in itself was always conceived of in contrast to the market, as a realm where, not the profit motive, but concern for the public good was the defining incentive. The conviction of the moral superiority of governmental incentive over private incentive has been a large part of the overall moral superiority that socialism has attributed to itself.

The achievement of Buchanan and his collaborators has been to show that the standard tools of economic analysis can be applied to the operations of government in itself. One consequence of this has been to demonstrate that motives of self-interest play as large a role in the actions of individuals engaged in government as in those of the market, though in its own form. Human nature does not undergo “a sea-change into something rich and strange” in moving from market to government. The ground-breaking work was the book co-authored by Buchanan and Tullock, The Calculus of Consent. It bears the subtitle: Logical Foundations of Constitutional Democracy.

Their starting point was the work of the Swedish economist Knut Wicksell, who in his dissertation published in 1896 had pointed out that the principle of “majority rule” in collective decisions has serious deficiencies both in regard to justice and efficiency, imposing excessive costs on those in the minority and consequently inevitably diminishing their confidence in democracy. Wicksell’s argument led to the conclusion that only the rule of unanimity could be properly just and efficient, though in many contexts it would be unworkable. This was implicitly an argument against all collective decisions, i.e. all government.

Since all decisions are made by individuals, Buchanan and Tullock begin by establishing a principle of “methodical individualism,” analyzing decisions from the perspective of the costs and benefits of the decisions to the individual decision-maker. They then compare this on three different levels of activity: a) purely individualistic action, b) voluntary cooperation between individuals, and c) collective or governmental action. They conclude these can be ordered in six different ways depending on how the costs compare. For example, if the cost to the individual making the decision is less in (b) than (a), there will be an incentive to cooperate voluntarily rather than to act alone; and if the costs are less in (c) than in (b), there will be an incentive to collectivize the action, i.e. have it performed by government. But if not, then not. If the cost to the individual is less in (b) than in (c), and less in (a) than (b), the rational procedure will be to leave it to the actions of individuals rather than government. The mere fact of conducting this analysis raises the possibility that some important actions will be done better if left to individual initiative or to voluntary cooperation (e.g. the firm) than if subjected to collectivization.

Unanimity cannot be a realistic rule for a large number of people, but it can be for a small number. If collective decision-making is divided into two levels, a lower one where the actual decision is made and a higher one where the rules for the lower one are set, it may be possible to have unanimity or something approaching that on the higher or constitutional level, and in that case divergence on the lower level will be acceptable. On this basis Buchanan and Tullock proceed to study the constitutional level from an economic point of view, i.e. in terms of the costs and benefits to the individual constitutional decision-maker. One of the best known parts of this analysis is their study of vote-trading or “logrolling.” This occurs as an inevitable result of the difference in the intensity with which collective decision-makers espouse their opinions. For example, a Congressman, Smith, may wish to support two different pieces of legislation, but his support for the first, A, may be far weaker than his support for the second, B. Another Congressman, Jones, may be opposed to both bills, but his opposition to A may be far stronger than his opposition to B. In this case it will be rational for Smith to offer to vote against the first bill, on condition that Jones will undertake to vote for the second bill. This occurs especially in “pork-barrel” spending, when legislators agree to support one another’s government spending projects in their own constituencies, even though the projects are neither desired by nor useful to their constituents, because the legislators themselves will gain the reputation of “bringing home the bacon.” Such votes cost the legislators little if anything, but may be very beneficial to them. From the moral viewpoint this “logrolling” or back-scratching is scarcely desirable, but Buchanan and Tullock show that it is an inescapable part of collective decision-making.

The discipline known as “welfare economics” routinely assumed that there was such a thing as “market failure,” and that this could be remedied by substituting government or collective action for private action. Buchanan and Tullock, however, show that there can be such a thing as “government failure.” This occurs in general when government does something, the costs of which are greater than they would be if the private sector did it. Besides the vote-trading and pork-barrel spending just mentioned, other examples studied in the public choice literature are rational ignorance and rent-seeking. Ignorance can be rational when the cost of obtaining information is greater than the benefit received. A legislator, for example, in order to vote correctly on a bill, might need to do a good deal of costly research, yet might derive little benefit from the resulting legislation. This can also apply to voters in an election. Rent-seeking occurs when government is used to increase benefits without any corresponding production, as in gerrymandering, or when a regulated entity is successful in having barriers created to entry. A consequence of all such practices can be that measures get passed into law that no individual actually wants. No individual, for example, wants all the pork-barrel spending that may be contained in a bill, but it will be voted through and signed by the president anyway. For similar reasons the ultimate effect of a measure can be the reverse of what was intended by those who initially sponsored it (nationalization in order to increase productivity, for example).

A notable offshoot of the public choice research program has been the work of Gary Becker, another member of the Chicago School and another Nobel prize-winner. Becker has applied economic analysis in productive ways to areas of human life other than government that were previously thought inappropriate for it, such as the family, crime and punishment, human capital, the allocation of time, drug addiction and discrimination. He is usually described as a conservative economist rather than a classical liberal, but this may be mainly because his research is not concerned with governmental topics. He is certainly very close to the classical liberal position.

In his book The Limits of Liberty, published in 1975, Buchanan makes another kind of economic analysis of government. This was a time when in the view of many American society was falling apart into two (or more) hostile camps. The dissoluteness of the 60s, the epidemic of narcotics use, the struggle over civil rights, the student revolt, the war in Vietnam, the experience of Watergate and the subsequent loss of confidence in the presidency, the feminist revolution, the visible decline of the inner cities, the Cold War: all these and more led many to a sense of profound crisis. In this context Buchanan declared that both socialism and the laissez-faire system of classical liberalism were no longer acceptable as organizing principles of society. Instead he proposed an insight from economics. From the perspective of the market, the outcome of an exchange is just if it is consensual, whatever that outcome might be. It is the mutual consent of the parties that makes the outcome acceptable, apart from any preconceived pattern. Buchanan argues that similarly in society at large, we should abandon any attempt to prescribe beforehand what pattern of organization would constitute the public or common good (he does not much speak of justice). Instead, we should accept as the common good whatever pattern we can agree on as a nation. Agreement rather than moral insight should be the foundation of society. He argues, in other words, for a certain kind of contractarian conception of society.

To the surprise of some, he found support for this in the work of the Harvard philosopher John Rawls, who is otherwise universally considered the philosopher par excellence of “left-liberalism.” In his classic work A Theory of Justice (1971) Rawls employs a thought-experiment in which a number of people come together to decide on the basic principles of society (the “original position”). Each person is to count for one and only one. In order to establish complete equality, Rawls provides that they all operate behind a “veil of ignorance” in which no one knows many features of his own situation that would otherwise be considered of decisive importance, such as how wealthy he is, how much education he has, what skills he has, etc. Rawls states that whatever people in such a situation would decide on would be the just principles of society. However, Rawls then goes on to specify what those principles would be (in his opinion, though he does not say that) that they would agree on, and they are rather revolutionary principles of “social justice” or societal equality. For most readers and reviewers, it was these principles of “social justice” that were the focus of interest, and that produced loud reactions, either in agreement or disagreement. The story of the “original position” and the “veil of ignorance” seemed to be merely a device to set the stage to make the principles of social justice more persuasive. Buchanan, however, rejects Rawls’s insistence on social justice; in fact, surprisingly, he seems to think it was not that important for Rawls himself. For Buchanan the valuable thing about Rawls’s account is the contractarian idea that whatever the group agree on should be recognized as the public good.

Why I, Too, Am Not a Conservative (2005) is a collection of papers written over several years, in which Buchanan explains his own personal understanding of classical liberalism and the features that distinguish it from conservatism. Here I will highlight some of what I regard as the book’s main ideas.

Thoughout these essays Buchanan emphasizes the differences between two worldviews, one that he attributes to Plato and labels conservative, and the other that he assigns to Adam Smith and identifies as classical liberal. Plato’s worldview, as he describes it, believes in transcendent values, namely values that have an objective existence apart from human consciousness. For Adam Smith, by contrast, there are no such values: the only values are those that arise subjectively within human consciousness, like market value, which is entirely the result of agreement between two persons carrying out an exchange and has no objective reality outside of that agreement. This is important, Buchanan argues, because a person who believes in transcendent values thereby has an incentive to impose those values coercively on others, while a follower of Adam Smith has no conceptual foundation for attempting such coercion. Buchanan goes so far as to say that a person cannot really be a classical liberal if he believes in transcendent values.

For Adam Smith, human beings are equal by nature, a fact that is reflected in the market, in the natural equality of partners to an exchange, and therefore all human beings should enjoy natural liberty. For Plato, on the other hand, there exists a hierarchy in human nature, some persons being naturally free men and others naturally slaves. Classical liberalism presupposes that men value autonomy and independence; which however does not prevent them from recognizing also their interdependence on one another in a variety of ways.

For the Christian view (a variety of the Platonic one, Buchanan believes) the dominant virtue is benevolence or compassion, altruism, in which one gives up one’s own interest in order to provide for the interest of another. At bottom this implies one considers oneself superior, which may be appropriate for a situation of conflict. But if people are living in peace with one another and are therefore engaging in mutual exchanges with one another in the market, as in the Smithian view, one does not give up one’s own interest but recognizes the other’s equality by treating him with fairness. Buchanan does not see a difference between fairness and justice, but identifies the two, which leads him to a basically positive view of the work of John Rawls, though he feels Rawls went somewhat too far.

Classical liberalism has a vision of an ideal world, and should be able to communicate that vision to others in such a way as to arouse their enthusiasm.

For me personally the most valuable idea in this book is one that Buchanan mentions almost in passing: the classical liberal is one who does not wish to exert power over others. This is both true and inspiring. I believe it could be a key to communicating the classical liberal vision to the unconverted world.

Classical Liberalism, Contractarianism and Natural Law

As mentioned above, Buchanan believes that classical liberalism is incompatible with a belief in objective or transcendent values. The only sound conceptual basis for the free society, in his view, is contractarianism, the view (in his version of it) that what is good is what is agreed upon as being good. This is surprising, to say the least, because some notable classical liberals have held to the doctrine of natural law, which is precisely the doctrine that moral values are objective or transcendent. John Locke, the founding father of classical liberalism, accepted both the idea of a natural moral law, implanted in us by God in the act of creation, and a form of contractarianism: the view that the authority of the state rests upon a form of agreement or contract among the people themselves and between the people and the ruler. He did not believe there was any conflict between his belief in natural law and his contractarianism, or between these and his liberalism. Immanuel Kant is considered by many the outstanding philosopher of classical liberalism, yet he also designated his moral theory a theory of natural law. Murray Rothbard, as we have seen, was undoubtedly a classical liberal, even an extreme one, yet he also supported strongly the concept of natural law, though perhaps not a version of it with a religious basis like Locke’s. He also saw no conflict between natural law and classical liberalism. Buchanan’s thesis is not supported by the history of classical liberalism or of contractarianism.

Nor, in my view, is it supported by the logic of the case. The fact that a person believes that (at least the main) moral values are real and objective, and so can be known by the right use of reason, far from being in conflict with the idea of liberty, is a positive support for it. It is to believe that a rational case can be made for liberty. By contrast, if Buchanan is right, liberty would seem to be good only because people agree that liberty is good, which leaves it open whether they will agree or not. Similarly, a belief that moral values are real and objective and can be known by reason is a positive support for the view that they can be known through a process of discussion and argument, because it gives an assurance that there is something to be, not merely agreed upon pragmatically as a subjective opinion, but discovered and known. The mere fact that one believes moral values are objective does not by any means impel one to impose those values coercively on others. On the contrary, one of the values it is possible to consider objective is the value of not imposing one’s values, however true, on others. This was in fact the view of Immanuel Kant.

The Diverse Reality of Values

Many people assume that all values have the same kind of reality. Traditional societies tend to believe that all values are objective. Postmodernists, that none are. Economists, that all values, including moral values, have the same kind of reality as economic or exchange values. As we saw, Locke and Marx thought that was objective, but Mises and Hayek that it is subjective. In truth, however, each kind of value has its own, different kind of reality. For a “value” is just something we regard as “good” or “bad,” and we apply these labels to fundamentally different kinds of things. The taste of an ice cream on a hot summer’s day, the ability to buy a house at a low price, the ideas in a book, the fitting punishment of a criminal, an act of kindness done to someone suffering, the discovery of America: to all of these we can apply the word “good.” But its meaning is not exactly the same. The taste of the ice cream is subjective, for it depends entirely on the belief of the eater: if no one thought ice cream tasted good, ice cream would not taste good. The value of a house is also subjective, but intersubjective, because it depends on agreement between two parties. The fitting punishment of a criminal and the act of kindness are both objectively good (in my opinion). Immanuel Kant said there is only one thing that is absolutely or unconditionally good, and that is a good will; for everything else can be twisted to serve a bad purpose.

The scholastic philosophers of the middle ages, following Aristotle, employed three useful terms to distinguish the meanings of words. A word is “univocal” when it is used in only one meaning, “equivocal” when it has two or more completely different meanings, and “analogical” when it is used in meanings that are partly the same and partly different. Aquinas taught that “good” was an analogical term, and that seems to me to be right.