James McGill Buchanan, Jr. was born on October 3, 1919 and died recently on January 9, 2013. He is this week’s In Memoriam scholar due to his revered work on public choice theory.
Like many top-scholars in our In Memoriam series, Buchanan received his doctorate from the University of Chicago in 1948. He was influenced by the great Frank Knight and Swedish economist Knut Wicksell who studied how government spent money relative to taxpayer wishes. Buchanan founded the Center for Study of Public Choice at the University of Virginia, where he was a long-time professor, before moving to George Mason University. Additionally, he won a Nobel laureate for economics in 1986 and published many books on liberty, democracy, public goods and public debt.
He is most known as the co-founder of public choice theory, alongside Gordon Tullock. Their co-authored book, The Calculus of Consent: Logical Foundations of Constitutional Democracy, explains individual decision-making in the context of the public sector. Some excerpts from Buchanan and Tullock’s book can best explain this constitutional calculus that an individual endures when considering public action:
“The collectivization of an activity will be supported by the utility-maximizing individual when he expects the interdependence costs of this collectively organized activity (interdependence benefits), as he perceives them, to lie below (to lie above) those involved in the private voluntary organization of the activity. Collective organization may, in certain cases, lower expected costs because it removes externalities; in other cases, collective organization may introduce externalities. The costs of interdependence include both external costs and decision-making costs, and it is the sum of these two elements that is decisive in the individual constitutional calculus.” (pg. 50)
The two costs that are explained in the book are:
- “Costs that you will endure as a result of the actions of others” (pg. 51)
“An external cost may be said to be imposed on an individual when his net worth is reduced by the behavior of another individual or group and when this reduction in net worth is not specifically recognized by the existing legal structure to be an expropriation of a defensible human or property right. The damaged individual has no recourse; he can neither prevent the action from occurring nor can he claim compensation after it has occurred.”
- Decision-making costs which are “the number of individuals who are required to agree before a final political decision is taken for the group” (pg. 51)
“If two or more persons are required to agree on a single decision, time and effort of another sort is introduced—that which is required to secure agreement. Moreover, these costs will increase as the size of the group required to agree increases.”
“The rational individual, at the stage of constitutional choice, confronts a calculus not unlike that which he must face in making his everyday economic choices. By agreeing to more inclusive rules, he is accepting the additional burden of decision-making in exchange for additional protection against adverse decisions. In moving in the opposing direction toward a less inclusive decision-making rule, the individual is trading some of his protection against external costs for a lowered cost of decision-making. “(pg. 57)
Buchanan and Tullock show that individuals face a trade-off when deciding upon collective action. Their book which is written in great detail further explains that not all collective activity should be organized the same way and expands on earlier discussion to include rules of when collective action should be taken. Lastly, half the book discusses welfare economics, voting and taxes in a context that incorporates individual rationality. This was unique at the time, because individual decision-making and individual actions were not explained as fundamental to the collective action problem. Buchanan and Tullock popularized this and essentially, became the “fathers” of public choice theory. Much of Buchanan’s work and Tullock’s work go hand-in-hand and Buchanan’s contributions to public choice and political theory are hard to discuss without mentioning his common co-author Tullock.
In this short video, Friedrich Hayek, a past In Memoriam scholar, and James Buchanan both discuss how economic patterns cannot distinctively be explained by mathematics. At 1:40, Buchanan explains that mathematics can fall short of explaining the entire economic problem and individuals neglect emergent choice. Hayek states we should accept “the impossible”—economists cannot make predictions about everything.