James M. Buchanan Nobel Laureate in Economic Sciences, 1986
This is not about James Buchanan, the 15th President of the United States (the only president, by the way, who remained a lifelong bachelor), this is about James Buchanan, the economist and leading figure in Public Choice Theory. The connection to politics, however, is obvious. Buchanan’s work transformed the whole structure of political decision making, looking at how constitutional rules should be changed and how much power politicians should be given. Though remaining something of an outsider all his professional life, Buchanan fundamentally changed the way economists think about the nature of political processes and, being an American conservative, he frequently argued for having smaller government, lower deficits and fewer regulations.
How does self-interest affect politicians’ decisions?
It was at the University of Chicago that James Buchanan, still a young researcher of public finance, first read the work of Swedish economist Knut Wicksell. He would later describe it as the most exciting intellectual moment of his career, and the starting point of his journey to winning the prize in 1986. In a nutshell, Wicksell offered a different way of looking at the structures in which political decisions were made. And he argued that economists needed to stop thinking of politicians as saints.
At a glance
Born: 1919, Murfreesboro, Tennessee, USA
Died: 2013, Blacksburg, Virginia, USA
Field: Public Finance
Prize-winning work: Developed the contractual and constitutional basis for the economic and political decision-making theory
Old school: Wrote his books out in longhand before doing a revised version on his typewriter
A-ha! moment: Realized that the prevailing view on public debt was all wrong while being in a hotel in Rome with a broken lift and no air-conditioning
A farmer’s life: Had 60 cows on his farm in Virginia
Get new questions as they launch
Buchanan, who had a picture of Wicksell in his office ever after, decided to spend much of his career thinking about how politicians’ and bureaucrats’ self-interest would affect their decision making.
Armed with Wicksell’s wisdom, I could dare to challenge the still dominant orthodoxy. I called upon my fellow economists to postulate some model of the state, of politics, before proceeding to analyze the effects of alternative policy measures.
Are politicians motivated by the greater good?
Though Public Choice Theory wasn’t a new branch of economics, Buchanan became its strongest proponent and leading figure. As he put it, Public Choice gives “a new insight into political reality. How do people behave as political leaders who’ve been elected to legislative offices, as party leaders, in executive office?” He emphasized that it was overly simplistic and, quite frankly, absurd to think of politicians as benevolent civil servants, waking up every morning wishing to make the world a better place, with the greater good of all people as their only objective.
“Politicians do in many cases try to further what they think is the interest of the whole group, but in a sense, they’re just like the rest of us. Sometimes they’re motivated in terms of their own private interest, just like a business man.” So they might care more about getting re-elected or increasing their own power than stopping climate change or world hunger.
Why doesn’t democracy work perfectly well?
Prior to Buchanan’s work, no economist had seriously taken this idea into account. Economic science thought about market players as individuals caring for utility maximization, or in other words, consumers trying to get the best value while spending as little as possible. They didn’t analyze political behavior in the same way. Knowing that someone who behaves selfishly in other areas of life will do so in political life as well, Buchanan emphasized that democracy couldn’t always work as perfectly as predicted. He therefore suggested setting up constraints on the authority or power of politicians. “They will operate depending on what rules they’re working within. And so we need to think about that when we lay down the structure of the rules.”
How can constitutional rules be modified?
Buchanan often referred to politics as a game, and he underlined the vital importance of the ‘rules of the game’, the constitution. In his work, he examined how constitutional structures could be modified.
We must have a strong government. But we can restrict it within constitutional limits, by division of power, by federal structures, by competition among local units.
Buchanan was always a supporter of wide spheres of individual liberty, but also called himself a ‘libertarian within limits’. He explained how for society to work, it needed to rely on basic rules being enforced by the state.
“There’s always pressure in both directions of the spectrum. Pressure towards anarchy, or the terrorist threat, if we don’t enforce the rules severely enough. On the other hand, there’s the pressure for the government to get larger and larger and larger. Somehow, we have to find the right balance.”
Do governments have too much power in their hands?
Entering Public Choice as a finance economist, Buchanan had been working mostly on tax policies, government spending and public debt. Part of his research dealt with the question of how much power the government should have to take resources away from individuals. He felt strongly that governments were concentrating more and more power in their own hands, and called the development a ‘threat to liberty’. “It’s more and more invasive, extracting more and more taxes from us, regulating every aspect of activity, while being unable to put its own fiscal house in order.”
To Buchanan, Switzerland is a good example of a country in which the various checks and balances work. “There’s very little complaint about it being an unjust society, without having a monstrously large government, or a strong central bureaucracy. With the government having a minimal degree of interference in peoples’ lives. That’s something that I value.”
When should we say no to a referendum?
One thing Buchanan particularly liked about Switzerland was having people participate in decision-making processes through referenda. “It’s very helpful in providing a legitimacy to government,” he explained. But he knew of course that what the majority believes in isn’t necessarily the right thing to do.
I certainly would not support a scheme where you’d have an instant referendum with majority voting on each and every issue, that would be totally unworkable.
Still, Buchanan believed in people taking part in the political discourse – in an orderly way, at least. “I was very upset by the experience of the 1960s, especially in universities, where many people were just rebelling against the rules. For society to be viable, it needs to obey whatever rules are in existence and then try to change those rules in a gradual process.”
How can a constitution balance everyone’s interest?
Buchanan did not agree with the assumption that the state was in any way superior to its citizens. “Everybody should be very sceptical of people who purport to have the authority to tell them how they ought to organize their lives. Beware of those who come around saying this is the way we ought to do things,” he advised.
In the political process, a constitution must be able to balance everyone’s interest - trying to agree on a set of rules under which we can carry on our separate activities, and not have too much negative influence on each other.
Compared to other economists at the time,
Buchanan had lots of close relationships with European researchers and academic communities. He spent time in Italy and Britain to learn more about the domestic culture and the continent’s relationship between the individual and the state.Europe moving towards genuine integration
In the early late 1980s, Buchanan felt that Europeans didn’t seem willing to really sacrifice national sovereignty in any way, and he hoped this would change. “Europe may miss the opportunity I think it has”. He believed in genuine integration. Again, he used his favorite example: the Canton model in Switzerland.
The nation states can still exist as very important autonomous units, but within a federal structure. Europe needs to give power to the central authority to enforce integration, enforce the free trade area, and get some degree of monetary integration.
The American Dream fulfilled
Buchanan’s work was outside mainstream economics at the time. But he didn’t care. “I’ve never been very much attracted to going along with what’s fashionable,” he explained. “I go along with whatever interests me.”
He was also a bit of an outsider in other respects. Born in Tennessee, Buchanan stayed in the South all his life, teaching and researching at the George Mason University in Fairfax, Virginia, far away from America’s Ivy League universities. He decided never to advise a political party or hold a government job. “I’m perhaps as near to being an ivory-tower academic as you’ll find,” he remarked.
At his farm in Virginia, he found the solitude and isolation he enjoyed. “I like to grow my own vegetables and have my own beef. I don’t want to be dependent on people.” He had lived on a farm as a child already, and his family background was rather poor, weakened further by the Great Depression of the 1930s.
I do embody something of the American myth of social mobility. For how many boys from middle Tennessee, educated in tiny, poor, and rural public schools, have received Nobel Prizes?
Renewed optimism for the future
Buchanan frequently acknowledged his rather pessimistic view on the world, feeling throughout all of his career that government failed to act in the interest of the people. But when the Berlin Wall came down in 1989 and the Western world was changing fast, his mindset started to change too. “There’s always room for pessimism about the ability of political structures to act rationally. But, in the larger context, we need to be optimistic, and I am optimistic about Europe.” After all, he still believed in the ability of mankind to compromise.
Living together with individual liberty, reasonable prosperity, peace, and justice. These aren’t scientific problems. There’s no solution out there waiting to be discovered. The mindset that is required is not a scientific one, it’s a mindset that comes from dialogue, on an equal basis.
See how UBS can help
Whether it's about investments, your business, or anything to do with your financial future
The value of investments can go down as well as up. Your capital and income is at risk.