Montreal, July 16, 2006 No 184

 

CAPITALISM & COMMERCE

 

Dr. Edward W. Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia.

 
 

JAMES M. BUCHANAN:
CONSTITUTIONAL AND POST-CONSTITUTIONAL POLITICAL ECONOMY

 

by Edward W. Younkins

 

          In 1986, James M. Buchanan was awarded the Nobel Prize for economics for his efforts to study the public sector within the same microeconomic analytical framework that is used to study private economy. Buchanan applies economics to understanding how individuals interact in the public square to formulate collective decisions. His Public Choice research program offers a foundation for understanding and analyzing the behavior of persons in public choosing whether they be voters, politicians, bureaucrats, diplomats, or other public servants. Buchanan's contributions to this field can be found primarily in his The Calculus of Consent (1962) with Gordon Tullock, The Limits of Liberty (1975), and The Reason of Rules (1985) with Geoffrey Brennan.

 

Early Influences

          Buchanan recognizes Chicago economist Frank Knight and Swedish economist Knut Wicksell as the two major influences on his economic thinking. Knight was Buchanan's early intellectual role model. Knight understood and taught that, although economics is a science, it is not a science in the traditional meaning of the physical sciences economics is about individual human choice, exchange, and processes of adjustment. Buchanan's views on methodology and subjectivism were inherited from Knight who also endorsed introspection as a valid and valuable tool of economic analysis. Knight explained human action within a subjectively perceived means-ends framework. In addition, he denounced positivism and maintained that economic prediction is limited to pattern prediction.

          The strongest influence on Buchanan's views about the analysis of the public sector was the writings of Knut Wicksell. Wicksell contended that only taxes and government spending, that are unanimously approved of, could be justified. This is his principle or rule of just taxation. According to Wicksell, politics should be understood as an exchange framework with efficiency in the public sector assured only under a rule of unanimity for collective choice.

          Wicksell was concerned about the injustice and inefficiencies that can result from majority rule. Based on his analysis of the relationship between public expenditures and taxes, Wicksell doubted the efficiency and justness of majority rules and proposed that voting rules be modified in the direction of unanimity. He had perceived that majorities were inclined to pass legislation aimed at benefiting their own members at the expense of others. Wicksell stated that if we wanted reform in economic policy, then we should change the rules under which political agents or their representatives act majority rule should be modified in the direction of unanimity.

          In his writings, Buchanan adopts, modifies, and transfers Wicksell's 1896 principle of unanimity to the constitutional stage of collective choice. Buchanan's "contract theory of the state" shifts Wicksell's analysis of taxation into the sphere of constitutional choice. Throughout his career, Buchanan has aspired to the Madisonian goal of first empowering and then constraining government.

          Like Wicksell, Buchanan understood that institutions emerge through efforts by individuals or groups of individuals to achieve certain goals. He explains that his analysis of collective choice is based on methodological individualism and that the only way to understand the operations of any collective organization is to study the plans, choices, and actions of the individual members of the collective. Buchanan views government as an endogenous segment of the economic institutional arrangements through which individuals attempt to satisfy their individual wants. In turn, institutional arrangements provide opportunities for the imposition of constraints on individuals.
 

Methodology

          Buchanan bases his analysis on methodological individualism, rational choice, individual utility maximization, and politics-as-exchange. All people in both the governmental and market sectors try to do the best they can for themselves, as they personally view their situation, within the set of constraints they face. Individuals thus attempt to pursue their broadly conceived and subjective self-interest. Each individual rational contractor will therefore ask to minimize his costs and to maximize his benefits. Buchanan even suggests substituting the word, catallactics, for the word, economics, in order to stress that the appropriate objects of study are individuals acting to advance their broadly defined interests through mutually beneficial transactions with other persons.

          Economics is concerned with individual actors rather than with collective entities. Buchanan accepts individual economic man within politics as a modeling strategy for the design of a constitution. In his theory of public choice, Buchanan adopted an economist's interest in exchanges. In other words, he extends the assumptions of the economist to the behavior of individuals as they participate in the political process.

          Buchanan employs conjectural history as an analytical tool to determine how a constitutional order could have emerged. He explains that a constitution is a voluntary agreement to which all citizens give their consent. In Buchanan's thought, the concept of agreement or consent serves as at type of an ethical surrogate in place of natural law. As an avowed Hobbesian and a contractarian procedural liberal philosopher, he attempts to demonstrate how men could agree upon a constitutional order which does not allow any one assortment of values to be adopted over all others. Buchanan contends that we must proceed on the presumption that no man's values are better than any other man's values.

          Buchanan appeals to a hypothetical natural state with conditions not unlike Hobbes' state of nature a natural state of anarchy and lawlessness. As a neo-Hobbesian social contractarian, Buchanan explains individuals agreeing to a social contract because of their desire to survive. In his later writings, Buchanan moves a bit away from his Hobbesian position and closer to John Rawls' emphasis on uncertainty and prudence and his veil of ignorance. As a contractualist, Buchanan views individual rights as a set of rights that have been agreed to, not as natural rights that can be justified by referring to human nature. Before the existence of a social contract, Buchanan envisions an anarchist equilibrium of production, predation, and self-protection. After a social contract is made, a government is needed to enforce it.

          People make constitutional decisions under a veil of ignorance or uncertainty regarding their own future positions. There is a veil of uncertainty as to each person's particular interest and to future applications of the constitutional rules. Buchanan states that each individual has an incentive to create a state in order to decrease expenditures on his personal defense and to make the cost of unilateral withdrawal from the contract exorbitantly high. He says that another reason why people will agree to constitutional rules is to impose limits on the potential exercise of political authority.

          According to Buchanan, the manner and limits of government authority are to be determined by asking what people would agree to in advance of entering civil society. He says that people make a constitutional decisions with respect to drawing the boundary between private actions and collective actions. He explains that people will realize that some mutually beneficial exchanges cannot take place if all action is limited to strictly private transactions. It follows that a constitution is agreed to in order to have collectively furnished goods. Buchanan maintains that in collective decisions the correlative to mutual consent in market exchange is unanimity.
 

The State's Hobbesian Origins

          In the beginning, there are no government bureaucracies or political agents there are only the demands of individual persons pursuing each one's broadly conceived self-interest. By framing constitutional choice in the context of a Hobbesian state of nature with all self-interested citizens making decisions under a veil of uncertainty, Buchanan shows that unanimity is both conceivable and likely. He says that a political rule will attain the optimality criterion if it can gain unanimous consent or some kind of modified "workable unanimity."

          According to Buchanan, under Hobbesian anarchy, individuals apportion their time between productive, protective, and predatory activities. He observes that self-interested behavior on the part of each person will lead to a stalemate situation with each individual dividing his time between productive private activities and military-type combat. It follows that rational people will agree to reduce their defensive and predatory actions so that more resources could be employed in the production of private goods. Buchanan explains that an original distribution of property rights must be negotiated and agreed upon along with rules standardizing their legitimate transfer throughout time.

          Constitutional-level law can be seen as an array of restrictions on economic freedom that paradoxically allows individuals to prosper economically. It follows that a coercive agency, the protective state, originates by necessity to enforce this accord its purpose is to define and protect property rights and their legitimate transfer over time.
 

Two Levels of Public Choice

          Buchanan distinguishes between two levels of public choice the initial or first level sets the rules of the game through the choice of a constitution and the second or post-constitutional level involves playing the game within the rules. Different rules have different distributional consequences and the rules chosen are applicable into the future. Constitutional politics thus places boundaries over what ordinary politics is permitted to do. Ordinary political decisions are made often based on majority voting. One of Buchanan's major contributions is bringing attention to the two-level structure of collective decision making.

          Two types of analysis fall under the taxonomy of public choice constitutional economics and operational public choice analysis. The purpose of constitutional economics is to legitimize the existence of a constitutionally circumscribed state and to discuss what type of constitutional rules could reasonably reach unanimous consent at the stage of constitutional choice. Buchanan's primary interest lies in constitutional choice and constitutional reform. Operational public choice analysis deals with political processes within existing constitutional structures. Operational public choice analysis involves the study of a nexus of evolving exchanges, bargains, trades, agreements, contracts, and side payments.
 

"Buchanan states that each person has an ethical obligation to join an ongoing constitutional dialogue but he fails to adequately describe the source of this ethical obligation."


          Buchanan explains that the unanimity principle does not have to apply to the stage of post-constitutional operations of the government established by the constitution. The level of routine government operations takes place under the constitutional process rules that are meant to apply to every individual situation. Buchanan says that rational contractors will unanimously agree to less than unanimity rules which reduce decision making costs with respect to routine collective decisions. Obtaining unanimous consent is too costly so the framers set up a legislative process by which the original distribution of property rights could be changed in order to create otherwise unattainable public goods.

Majority Voting

          According to Buchanan, people have agreed to majority voting because they expect to be more often in a winning coalition than in a losing coalition. Individuals within the political sector base their choices and coalition memberships on their personal evaluation of costs and benefits. He notes that majority coalitions tend to be unstable, temporary, and ever-changing. Majority rule is apt to lead to inefficient outcomes such as the overprovision of collectively supplied goods and services and majority cost-shifting of some of the costs onto the minority. These are the allocative effects of majority rule. Buchanan observes that when redistribution occurs individuals are no longer functioning under a veil of ignorance.

          Majority-voting rules permit a multitude of separate potential coalitions to put forth taxing and spending proposals. At the post-constitutional stage a losing minority cannot legitimately claim that they were forced by the majority. Buchanan explains that government compulsion with respect to the supply of public goods is legitimate if the original contract (i.e., the constitution) is the product of an effective unanimity rule. Decisions regarding the financing of collective projects are regarded as the outcome of voluntary agreements among citizens. Political voting mechanisms thus serve as substitutes for decentralized private decisions where opportunities (for public goods) exist that cannot be easily embodied in private contracts.
 

Post-Constitutional Analysis

          Politics consists mainly of individual and group attempts to obtain the most benefits from government and to pay the least amount of taxes. According to Buchanan, post-constitutional analysis involves the examination of strategies players adopt within defined constitutional rules and principles. During the post-constitutional stage players treat the rules of the game as constraints and devise strategies to deal with them. Today, most government taxation and spending policy is dictated by pressure groups acting in their own perceived special interests and not by politicians acting in the public interest.

          Buchanan distinguishes between the protective state and the productive state which has "evolved" into the redistributive state. He says that what we generally consider to be a "limited" state actually includes more than merely the protective and judicial services associated with the "night watchman" state it also includes the productive state which furnishes public goods such as roads and schools. The protective state enforces agreed-to rights and the productive state produces collective goods. The protective state enforces neutral, unanimously agreed upon law. In turn, the productive state may operate through rules of less than unanimity given that at the constitutional stage those rules find unanimous agreement. Whereas the protective state functions in an objective fashion to determine rule infractions, the actions of the productive state are subject to choice. Buchanan's economic theory of the origins of law is consistent with the state provision of public goods. When the protective state was set up, the consenting persons discerned that public goods in the future may be wanted and that without a productive state many public goods would be unobtainable. The framers realized that there would be difficulties financing projects because anyone can use such services without contributing financially.

          The modern state is transforming into the illiberal and redistributionist state as the productive state does not simply provide public goods but also intervenes in the private economy by promoting the same ends pursued in the private sector. The government has taken over many functions previously left to markets. With no meaningful distinction between public and private interests, people dissatisfied with their results in the private sector will increasingly turn to the public sector. Coalitions of voters seek special advantages from the state to obtain legislation favorable to them. Buchanan explains that looking to the government to remedy things can lead to more harm than good.

          Much of today's politics can be viewed as rent-seeking activity (e.g., pork barrel politics). A rent-seeking society leads to the redistributive state that transfers wealth from one party to another through collective action. If there is value to be gained through the political process, people will invest time and resources in their attempts to capture this value for themselves. The emergence of the welfare state and the growth of government have increased opportunities for, and rewards of, redistributive activities. Interest groups in a rent-seeking society will make efforts to gain their own benefits at the expense of others through the use of government. More and more, individuals are investing in rent-seeking and rent protection.

          The Public Choice application of the logic of microeconomics to politics has revealed the prevalence of rent-seeking and free riding on the part of voters, politicians, bureaucrats, and the recipients of public monies. With costs spread over the taxpayers at large, individuals with concentrated interests in increased government expenditures (as benefits) take a free ride on people with diffuse interests in lower taxes. This reflects the logic of concentrated benefits and dispersed costs. Politics produces a policy mix which affords short term and easily identified benefits at the expense of largely hidden and long term costs. The resulting cost shifting leads to the overprovision of government goods and services as majority voting rules allow for many separate coalitions. When factions dominate the voting process, projects tend to be funded that cannot be justified on an aggregate cost-benefit basis. Value taken in the form of such transfers make the investment wasteful in an overall sense.
 

Politicians and Public Servants

          What about the behavior of politicians, legislators, and bureaucrats? Buchanan explains that problems are exacerbated by the rational, self-interested behavior of such individuals. He contends that when people enter government they act on the same motives as when they are agents in the private sector. It follows that bureaucrats want to maximize their budgets thereby obtaining greater power, larger salaries, and so on. Government officials make choices based on their self-interest thereby generating pressure for higher taxes, bigger budgets, more regulations, and more power. Politicians act, at least to a certain extent, out of self-interest and will attempt to gain as many votes as possible to reach positions of power and to receive larger budget allocations.

          Public Choice studies the behavior of politicians and bureaucrats in a representative democracy like we have in the United States. Before Public Choice, economists assumed an objective welfare function which government officials sought to maximize and thought that political agents were inspired to pursue that objective welfare function. The assumption was that nobody in government maximized for himself there was only the public good. Buchanan understood that political decision makers are not necessarily seekers of the public good but instead they are interested players who trade to their own advantages such as increased power and reelection. He says that people do not change when they take an oath of office or when they join a government agency.

          Politicians, bureaucrats, and other public servants may say that they are devoted to the public interest, common good, general welfare, or social justice, or that they act from some altruistic motivation, but Buchanan maintains that public officials are not motivated by disinterested service to the public and that they, like everyone else, endeavor to maximize their own utilities. It is in the interest of political representatives to spend and say to their constituents that they voted for the benefit of their community. The result is competition between politicians for constituency support through the use of promises of discriminatory transfers of wealth. Bureaucracies tend to grow because of rent seeking, pork-barrel politics, deficit spending, and a tax system with loopholes, exemptions, credits, and so on. A massive expansion of the power to tax has enabled public officials to promote evermore alleged social ends.

          The rules of decision making regarding public spending are outlined in the constitution and create in the representatives a tendency to spend more than the revenue collected. Democratic governments have a significant tendency toward deficit spending unless they are constrained by some fundamental constitutional principle like that of the classical balanced budget. In addition, there was once the pre-Keynesian principle that public expenditures were to be funded by taxation and private spending was to be financed with people's income. Both citizens and politicians abandon their fiscal discipline when they resort to a debt-financed government. When the proper scope of the government is extended, it is difficult to limit its expansion. When budgets are maximized and deficits are incurred, the results include higher government spending, inefficient allocation among government agencies, and inefficient production within them.

          Keynesians have failed to consider the implications of the intergenerational transfer of the debt burden. The burden of debt is passed on to future generations rather than paid for currently with the consumption of real resources. The phenomenon of stealing through the majoritarian processes of government is exacerbated through fiscal deficits that produce intertemporal wealth transfers.
 

Constitutional Reform

          Buchanan claims that we need fundamental constitutional change if special interest legislation and factional rent-seeking or transfer-seeking activity is to be minimized. He says that we should be concerned with processes or procedures (i.e., rules and principles) through which interacting individuals create certain states of affairs. Men need to rethink and redesign their institutional structures in order to revive the classical political economy of the 18th century. He says that lasting reform results from adopting a constitutional perspective with respect to systemic change in the rules of government.

          Buchanan employs primarily an "economic man" assumption and sees government officials as revenue maximizing rather than as wealth maximizing. He therefore wants rules that constrain the revenue-raising ability of government and the government freedom to select the spending mix. Buchanan advocates constitutional revisions in order to provide safeguards and to avoid a slippery slope. He says that taxes should be earmarked for particular services so that each type of government activity is financed by a tax on a base that is logically related to that activity. Buchanan explains that a system of multiple excise taxes, rather than a small number of broad-based taxes would enable taxpayers to better control government by allowing them to avoid some taxation by decreasing their purchases of high-taxed items. In addition, he advocates constitutional rules requiring balanced budgets. Under a balanced budget requirement, money would be so limited compared to demand for it that near unanimity would be required before financing for a project would be approved.

          Buchanan says that his contractarian approach and unanimity principle provide a way of normatively evaluating existing constitutional provisions and proposed constitutional changes. Unanimity thus becomes the benchmark for efficiency. He predicts that something like a 2/3 super-majority rule for the operations of the productive state should be, and would be, agreed upon at the constitutional stage. Buchanan says that people would want rules that are not so permissive that they permit the demise of individual property rights.
 

Contractual Rights versus Natural Rights

          Buchanan states that each person has an ethical obligation to join an ongoing constitutional dialogue but he fails to adequately describe the source of this ethical obligation. Remember that he has dismissed the possibility of any absolute moral values. He is a social contractarian who does not subscribe to the notions of natural law, natural rights, or natural objective moral value. Contractarian individual rights for Buchanan come from having reached an agreement. They are not something that is established by reference to human nature. Buchanan's subjective, nominalist, and deterministic philosophy would be much stronger if he had acknowledged that natural rights are an objective characteristic of the human social realm. If he had, then he may have realized that the "rules of the game" are metanormative in nature and that only the protective state can be justified. Such a state would be concerned solely with protecting the self-directedness of individuals thus ensuring the freedom through which individuals can pursue their flourishing and happiness. There would be no justification for the productive state or the redistributive state.
 

 

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