Method and Morals in Constitutional Economics: Essays in Honor of James M. Buchanan
Abstract
This Festschrift was "presented" in electronic form to Buchanan on the occasion of his eightieth birthday on October 3, 1999, after dinner in Fairfax, Virginia. As one might have expected, the response to our call for papers was vo luminous. In looking over the many contributions, we felt that a "published" Festschrift was also possible and fitting for the eightieth birthday of so prodi gious and influential a scholar as Professor Buchanan. To that end we have assembled the following volume. In selecting the papers to be included here we have basically tried to choose those papers which in some way bear on Buchanan's contributions. Perfectly good papers about issues not related to Buchanan's research agenda or not referring directly to Buchanan's work were not included. Space constraints did not allow universal coverage, so choices had to be made. It should be stated clearly that these were our choices based on the criterion that the contribution be relevant to Buchanan's work. Buchanan had nothing whatsoever to do with the selection of papers for this volume. Once choices had been made, we arranged the papers by subject matter ranging from various aspects of Buchanan's work in economics, political science, philosophy, and related areas, to some more personal recollections of Jim as a professor, friend, and colleague. Including the latter material was also our decision, and this probably represents a choice with which Jim would not have agreed. We think, however, that the reader will find these pieces interesting and informative.
Chapters (33)
Ladies and Gentlemen, Dear Fellow Members of the Mont Pelerin Society:
Those of us who attended the meetings in Cannes in 1994 will remember Ronald Coase’s fine speech in honor of Friedrich August von Hayek. They will recall, too, how Ronald Coase mused why it was he who was giving the speech honoring the founder of this society. After all, he “did not call him Fritz”.
It is my pleasure to send greetings to James Buchanan on the occasion of this celebration. He has played so many important roles in my life (gracious friend, inspiring colleague and stimulating mentor) that my debt to him is greater than I could every repay. But I shall at least take this opportunity to engage in a little fun in the knowledge that for over thirty years he and I have been co-conspirators against those who take themselves too seriously. Moreover, he will undoubtedly detect the strong undercurrent of seriousness in what follows. The economist-as-artist is an insight that we share. Jim Buchanan is an artist par excellence. Like other great artists who paint brilliant canvases, he has created a world and persuaded legions of followers that his perception of the world is correct. In accomplishing that feat he has indeed made their world what it is. Therefore to mark this milestone in his life it is fitting that James Buchanan, the preeminent representative of that school of art known as Public Choice-Constitutional Economics, be honored by a retrospective exhibit in the “Imaginary Museum of Modern Economics”. The chronology in the catalogue that accompanies the exhibit follows.
The problem of an adequate social order is one of the main concerns of James Buchanan and his theory of constitutional political economy.2 Ultimately, this problem seems to be one of a normative nature. And the problem of the conditions of adequacy of such an order seems to be a central question of social philosophy. What I want to show in this paper is how it is possible to come to a rational solution of the problem and how social science can make an important contribution to this solution.
As one of our friends once said, James M. Buchanan is a whole university in and of himself, or at least an economics department, a philosophy department, and a political science department combined in one person. Another way of putting this is to recognize that Buchanan has contributed to numerous literatures inside and outside of economics, so that characterizing his work or his methodological approach in general terms can be a little difficult at times. Depending on the time and the particular issue he is pursuing, Buchanan appears here and there in a variety of methodological modes. It is fair to say, however, that in the main Buchanan has worked as a normative economist — he has tried to use economic theory to increase the understanding of complex behavioral interactions, so as to enhance general agreement on mutually beneficial social arrangements. He is not a welfare economist or a utilitarian in the sense that he offers any prospects of ascertaining what is “best” for everyone, distinct from their own evaluations. Rather, he is a contractarian who seeks to find the ways and means by which people might cooperatively better themselves. This, at least, is the aspect of his work that Buchanan emphasizes, and that other scholars have stressed as well.
Thirty years ago, Jim Buchanan elucidated and developed the subjective nature of opportunity cost and its relation to choice. Ten years later, Jack Wiseman and I were hoping to write a textbook embodying a thorough-going subjectivist approach. Jim kindly offered to host our work at the Center for Public Choice, VPI, in Blacksburg in the summer of 1980. This was an invaluable opportunity: Jim’s own understanding of and sympathy for the approach and his openness to discussion, as well as the active intellectual milieu and unfettered working conditions at the Center, made this an ideal environment. No matter how early we arrived in the office there would be a typed note from Jim on our desks, reflecting his even earlier morning thoughts on the discussions of the previous day.
James Buchanan’s constitutional political economy is much closer to what the philosophers of classical antiquity called an “art” than to what the philosophers and practitioners of modem times would call a “science”. Buchanan has sometimes spoken of the scientifically-minded statistical endeavors of modem social science pejoratively as “proving that water flows downhill”. Nevertheless, Buchanan would think of himself as “slipping down the hill” if he ever accepted the anti-empiricism and a priori methods of Ludwig von Mieses and some of the more extreme Austrian economists. There is empirical content in economics but it is more or less as trivial as the empirical content of insights like “water flows downhill”.
Buchanan sees himself as an economist and for that reason a theorist of choice. He is attracted by individual sovereignty, calculative rationality, revealed preference, catallactic process, voluntary contract. He is repelled by top-down authoritarianism, social welfare functions, intolerant ideologists, Hegelian organicists and paternalistic leaders who tell the consumer in the Shop of State which ‘public interest’, which ‘truth’, which ‘good society’ he ought to buy. Buchanan sees himself as an economist and for that reason a student of the future: ‘We can act only now: we cannot act in the past.’ (Brennan and Buchanan 1985, p. 68). It is too late to turn back the clock, bygones are forever bygone — and we start from here.
While visiting the Center for Study of Public Choice in April 1994 I was allowed to attend, as an observer, sessions of a seminar constructed as a meeting of co-authors of James Buchanan. At the end of one session, Jim was asked to reflect on the role of co-authorship. In responding, Jim identified a number of patterns of co-authorship — ranging from long-running collaboration to a one-off paper in one dimension; and from genuine joint-production in which each author contributes to and learns from the partnership, to a more asymmetric senior/junior structure in another dimension. In an essay that is intended for distribution primarily from a web site, it seems appropriate to identify a further form of co-authorship, and label it ‘virtual co-authorship’.
In this extended quotation, Buchanan sets out the central elements of one of the hard-core features of ‘constitutional economics’, as he would identify that enterprise. The element in question is, of course, methodological individualism. My object in this brief paper is to elaborate and, I hope, clarify Buchanan’s observations. I do so because, like him, I see methodological individualism as a core attribute of the economic way of thinking. And further, because it is an attribute that is often misunderstood or misinterpreted — both by critics and (occasionally) practitioners of the ‘economic approach’. It is notable, for example, that while methodological individualism is regarded as de rigueur in economics and in constitutional economics specifically [so much so indeed, that without it, as Buchanan states in the second sentence of the epigraph “there can be no departure from the starting gate”] methodological individualism is equally regarded as total anathema in sociology and much sociologically informed political theory. Without wanting to diminish the significance of the differences in approach that these two broad traditions of analysis exhibit, it seems to me unlikely that disagreements over the propriety of methodological individualism are solely attributable to such differences: terminological confusion seems likely to play an important role. In other words, there may be rather less here in the way of genuine disagreement — and rather more of talking at cross-purposes. For that reason, some attempt at clarification seems called for. Here, I shall use the Buchanan quotation as a framework for this attempt.
In a short article written in 1964 in celebration of the sixtieth birthday of Professor A.P. Lerner, Paul Samuelson criticized the notion of the ‘veil of ignorance’ used in the Economics of Control.2 Lerner (1944) advanced such concept to derive the strong proposition according to which in society
“the ... probable value of total satisfactions is maximized by dividing income evenly.”
For the public sector to function at all, there must be some degree of public trust in its ability to function and achieve the goals for which it was established. As early as the 1700s Benjamin Franklin pointed out that “Much of the strength and efficiency of any government, in procuring & securing happiness to the people, depends on ... the general opinion of the goodness of that government.”1 In 1988 Buchanan and Brennan argued that the basic public choice premise that government action is motivated primarily by private interest, might well serve to undermine public trust in government and reduce its effectiveness. In concluding their argument they posed a key question, “Is public choice immoral?” and responded that (1988, p. 184):
Even if the explanatory power of public choice models of politics is acknowledged, the moral spillovers of such models on the behavior of political actors may be deemed to be so important as to negate any purely “scientific” advance made in our understanding of how politics actually works. The maintenance of the standards of public life, it could be argued, may require a heroic vision of the “statesman” or “public servant,” because only by holding such a vision can the possibility of public-interested behavior on the part of political agents be increased.
Starting from the two-stage model underlying constitutional political economy, this work suggests the introduction of a third stage with the aim of solving the problems, which under certain conditions arise in the public goods market. These problems may be due to: a) a centralized institutional framework, and b) the impossibility to reach an agreement following the majority rule.
In 1959, James M. Buchanan criticized the collectivist misuse of Pareto optimality by the “new welfare economists” and made a first attempt to extend that individualist concept into the political realm.1 Over the following three decades he further developed his political application of Pareto’s insight to buttress an essentially economic analysis of political exchange that would justify the processes of constitutional democracy in the same way Pareto efficiency justifies free markets. In this paper I will explain why Buchanan’s particular formulations will not work and propose a more comprehensive solution that accomplishes Buchanan’s announced purpose. I will argue that a conventionalist understanding of the rule of law provides a precise and appropriate application of the Pareto criterion in the legal and political realm.
Although cloistered away for almost two decades now, out of communication with almost all of my old friends, I find no difficulty in recalling the lively, penetrating, and unique mind of Jim Buchanan. What most distinguished Jim to me was his appreciation for sensible novelty. The Jim I remember was quick to recognize the oppressive power of intellectual tradition and rebelled against it whenever it became clear that the tradition posed a substantial barrier to a rational understanding of the world around us. Along with this basic iconoclasm came an unusual appreciation for seeing old things in a new light. No matter how much an idea grated against his basic instincts, he appreciated an idea if it amounted to a logical and empirically meaningful attack on a traditional belief.
A significant portion of James Buchanan’s academic career has been devoted to the study and design of constraints that limit the power of government.2 Some of the studies deal with political constraints such as constitutional limits to taxation.3 Others deal with market-based constraints in which citizens’ ability to “vote with their feet”, even to secede, limits the ability of government to redistribute wealth. For example in Buchanan and Faith (1987), the government is constrained in its ability to expropriate resources from the citizenry by the possibility of secession. The lower the cost to secessionists of setting up a new government, the larger the size of the seceding group, the smaller the tax base in the original jurisdiction, and the lower the government’s tax rate. The more difficult is secession the higher are tax rates.
This paper deals with transformation issues along the lines of constitutional economics. Transformation is considered to be a mix of top-down and bottom-up developments. Given such a mix, what is preferable, a rapid transformation of a former socialist economy into a free market economy — or a more gradual one? This question is first discussed by use of the social network concept. Elementary desiderata of system transformations are developed. They are illustrated by the West German currency reform of 1948 and German reunification of 1990. The concept of human network capital is introduced and it is argued that the main impediments to rapid or big-bang transformation are the difficulties or impossibility of transforming human network capital. This is the time consuming part of any system transformation
In 1990, shortly after the the Iron Curtain fell, reversing the division of Europe, James Buchanan published an optimistic essay on Europe’s constitutional future. In his estimation “Europe is now presented with a historically unique opportunity to achieve that greatness which has so long remained unrealized” (1990,1). His proposal involves a “federal union within which members of the separate units co-operate for the achievement of widely recognized and commonly shared objectives, those of internal (intra-European) peace and economic prosperity, within political arrangements that ensure individual liberties and, at the same time, allow for the maximal practicable achievement of standards of justice”. The constitutional requirements for peace and prosperity according to Buchanan are constitutional guarantees of free trade inside and outside the union (p. 16), a monetary constitution based on competing national central banks plus equal rights for all European citizens to make transactions in whatever currency they prefer (p. 13) and, finally, a federal structure for the union, in which the member states share sovereignty, yet at the same time they should not fall into the centralization trap as the American states did in the post-Lincoln era (p. 6 and 17).
In 1996 I presented at a Monetary Conference of the Cato Institute in Washington a paper entitled The Implementation and Maintenance of a Monetary Constitution (Bernholz 1986a/1987). I had the good luck to have James Buchanan (Buchanan 1986/1987) as my discussant. Good luck because he turned his attention not to the monetary but to the constitutional problems involved. For I had asked and at least to a certain degree answered the following questions:
1.
Under which conditions can a monetary constitution emerge which is favourable to price stability.
2.
Which conditions must be fulfilled so that such a monetary constitution has a good chance to be maintained for a long time.
One of the key aspects in James Buchanan’s work is the question of how far governmental action should legitimately reach. In this respect his ideas often stand in conflict with those of the orthodox public finance school of thought as, for instance, with Richard Musgrave’s. According to Buchanan’s classification, Musgrave represents the insider-Harvard vision of sociopolitical reality whereas he himself stands for the outsider-Chicago-Virginiapublic choice school of thought (Buchanan 1989, p. 291). Both scholars’ ideas concerning government intervention appear to be mutually exclusive (see also Hansjürgens 1999). Buchanan emphasized that all governmental action should aim at fulfilling the interests of only the individuals concerned. He stressed ‘that in the conceptual derivation of the origins of the state ..., there is no resort to any source of value external to the expressed preferences of individuals who join together in political community.’ Consequently, he states that ‘the state does not exist as an organic entity independent of the individuals in the polity. The state does not act as such, and it cannot seek its own ends or objectives’ (Brennan/Buchanan 1985, p. 22).
The broad and deep themes of the role of the individual relative to the state, and the proper long-term rules for the conduct of society were James Buchanan’s primary areas of interest. He did not write much on the popular events of the day (with the notable exception of Academia in Anarchy); he is not a “policy analyst” although he certainly has provided one of the definitive models for the analysis of collective policy. However, one other area of application which did tempt his interest—with that interest responsible for much of the direction of my own career—was medical care. He was the sole author on two essays on medical care, and co-authored a third (with C.M. Lindsay, The Organization and Financing of Medical Care in the United States.) In this note I want to comment on the ideas expressed in the two singly-authored essays, placing them in the context of the large and growing body of research on medical economics, while at the same time spotlighting some insights so far neglected which could be discovered with profit by medical economists, and perhaps by the economics profession as a while. Along the way I will mention the tension that any economist of a reflective nature, of which James Buchanan was the example par excellence, feels which confronting an applied and politically charged issue.
The premise of this paper is that morality has a significant effect on voting, where morality is defined by the source of its returns: what others think about one’s trustworthiness or its internalization conscience. We will show that morality leads people to advocate more interferences with the market than if simple self-interest dominated their decisions. Many aspects of voting are inconsistent with simple self-interest, where voters are only concerned with the consequences of the policies on which they vote. But self-interest models have been virtually the only fruitful models in the social sciences. Hence, we use an expanded self-interest model where we focus on the returns to trustworthiness in addition to the miniscule returns to policy consequences.
Though written and translated a few years ago, this essay is dedicated to Jim Buchanan on the occasion of his 80th birthday as it tries to cover some of the ground we have in common in our thinking. When forming my views I had the benefit of reading what he wrote, and when we occasionally met, I greatly benefited from stimulating discussions though my memory is not so reliable as to allow me to say specifically and in writing when and where we agreed, or merely agreed to disagree.
Fundamental to the economic approach to human behavior is the notion that people are motivated by self-interest in the sense that, if faced with a choice among alternative courses of action, they do what, in their view, best serves their own interests. Ethics, on the other hand, is based on the idea that there exist rules of moral conduct, and that people are not permitted simply to pursue their own interests, but are obliged to conform to these rules.
Contingency matters. Most determinants of our existence are neither the result of our deliberate choices nor the result of necessary laws of nature but are contingent. The facts of birth like the historical age, the generation, the place, the religion, and the family are contingent as well as are the facts of our fate, talent, health, life expectancy. Most traits of the person and of the economic and social institutions the person lives in are contingent in the sense that they could also easily have turned out to be different. Contingency is a basic attribute of human existence and society. It is, so the thesis of this paper, also the basic argument for the market. The market is seen here as the institution processing contingency and supporting societies to be able to transform contingency into realized chances and to expand the satisfaction possibility frontier of the individuals as much as possible. In terms of Leibnizian philosophy, the market realizes the maximum of compossibility of existence of humans, the maximum of human existence that can exist together at one point in space and time.
At the University of Virginia in the 1960s Public Finance was an upper level course taught by Mr. Buchanan. Everyone was referred to as “Mr.” at the University of Virginia and the daily-required dress for classes was coat and tie. No student would have imagined calling Mr. Buchanan “Jim.” I recall how the class was conducted. His style was to assign either papers or a topic for reading and students were required to produce written documents of no more than a page or two on each assignment. This ritual began the first week.
James McGill Buchanan is a classic “original thinker” type. One of the things that sets original thinker geniuses apart from those of us in the common herd is that their minds often work in quirky, almost spooky intuitive ways.
More than two decades after leaving graduate school, I still feel like a student of Professor Buchanan’s.1 When I see him, I now call him Jim, but at the same time I think of him as Professor Buchanan, the person who, to use modern economic jargon, gave me the human capital to succeed as an academic economist.2 Of course, because so many people have learned so much from his writing, in one sense there are a huge number of Buchanan students. His ideas have changed the way the profession thinks in fundamental ways, and many people whose main contact with Jim has been through reading his written work can legitimately call themselves Buchanan students. But considered more narrowly, only a privileged few (relatively speaking) have been Buchanan’s classroom students, and I am one of them. This essay reminisces about some of the things I learned from Professor Buchanan in addition to economics. I will discuss not what he taught, but how he taught. His ideas can be found in his writing, but Buchanan’s teaching methods have been revealed to a smaller group. I must confess that Professor Buchanan’s teachng methods have had a huge influence on me, and for more than two decades I have taught my graduate students by trying to emulate the type of instrucion I received from Professor Buchanan in the early 1970s
There is a quaint expression that runs something like, “don’t let college interfere with your education.” I can say that, at least in my case, there was much truth to this saying. For the most part, I remember little of my undergraduate education in economics at Virginia Tech, completed in March 1978. Allan Mandelstamm pricked my interest in economics with his microeconomic principles course, taken early in my sophomore year. But my love affair with economics as a science was initiated by my contact with two professors during my senior year: Barney Lentz and Bob Tollison. Barney, who later became my longtime professional collaborator, taught a superb course in labor economics. Bob, who subsequently became my mentor in graduate school and the early part of my academic career, as well as an occasional research partner, introduced me to rent seeking and the Leviathan State in the context of a fascinating course on Mercantilism.
My first acquaintance with Jim Buchanan was through reading Cost and Choice in around 1974. I had seen the book referenced in a paper on the economic calculation debate that I was assigned to discuss at a SEA session that year. Since I knew next to nothing about the debate, I went and read all the works referenced in the article so I would have some ability to judge the paper. I have been forever grateful that I took my assignment so seriously at the time, because my work led me to study an issue that was to influence my entire subsequent career. And one of the most important influences dating from that time, was the work of Jim Buchanan.
As an economics teacher in England, the late 1950s and early 1960s was a relatively uninspiring intellectual period for me. While the discipline of economics was still absorbed with Keynes, microeconomics was usually engrossed in static neoclassical models of efficient allocation in contrast with market failure. Theories of government failure had not yet appeared, and when they did they came from the U.S.
James Buchanan began influencing me before I even met him Prices, Income, and Public Policy: The ABC’s of Economics (McGraw-Hill, 1954) is a concise Principles text written by Clark Lee Allen, James M. Buchanan, and Marshall R. Colberg. I used that excellent book in teaching a one-semester course at the University of Maryland. It helped me face two challenges: of distinguishing between essential ideas and fringe refinements of economics and of putting the essentials across to students in one semester. Although ensuing years offered me fewer and fewer opportunities to teach the Principles course, I never thought that teaching it was a degrading chore. Economists avid to demonstrate technical expertise should remember that the strands of economics of which ignorance does the worst damage are precisely the basics, not technicalities giving rise to the most easily gradable test questions.
On the day we brought Jim Buchanan’s potential appointment before a George Mason University Board of Visitors committee, a member of that board declared, “The question isn’t whether Jim Buchanan is big enough for George Mason but rather whether or not George Mason is big enough for Buchanan!”
How do gifts relate to formal and informal institutions? Giving gifts, especially in the form of anti-poverty aid, opens the givers to a serious social dilemma: the Samaritan's dilemma. We explain how the Church of Jesus Christ of Latter-day Saints uses a mixture of formal and informal governance to provide sustainable social welfare programs that avoid this dilemma. These institutions not only govern aid arrangements, but also provide governance across the entire Church community, encouraging religious adherence and broad-based participation.
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