The Spectacle Blog

Nobel Laureate James Buchanan and Public Choice Theory

By on 1.17.13 | 3:06PM

Last week James Buchanan, Nobel Laureate in Economics and George Mason University professor, passed away at the age of 93. He was awarded the Nobel in 1986 as one of the founders of Public Choice Theory, an approach to the study of political behavior that applies the insights of economics to the public sector and political realm. As Buchanan put it, public choice is "politics without romance." While it may seem naive in 2013 -- a credit to the field Dr. Buchanan developed and advanced -- a reigning assumption among academics in the early 1960s was that government agents always acted solely in the public interest. Buchanan's work launched an entire field of study focused on the incentives individuals face within bureaucracies and the effect these have on economic, political, and policy outcomes.

An important shift occurs in the public choice framework. As economist William Shughart II points out, the unit of analysis in public choice is the individual, not the collective. In other words, governments don't act. Bureaucrats, voters, politicians, judges, lobbyists and staffers do. Shughart goes on to note that the problem for the economist is to figure out how the individual preferences of bureaucrats are expressed in the collective decision-making process. Figuring that out means means analyzing the "institutions of democratic governance," or the rules and systems, under which "public choosers, choose". The study of those decision frameworks, (e.g. constitutions, laws, democratic processes, parliamentary procedures) is itself a field of inquiry known as constitutional political economy.

Some of the major insights of public choice theory developed over the past fifty years include the "median-voter theorem," William Niskanens's "budget-maximizing bureaucrat," and Buchanan and Richard E. Wagner's development of "the fiscal illusion," a very relevant subject in today's debt and taxation debates. Fiscal illusion is when a citizen prefers higher levels of public spending where that individual's tax burden is obscured through complex taxation or debt finance. 

And for anyone interested in the radical shift in thinking that occurred during the Keynesian revolution, which effectively gave politicians a blessing to embrace debt finance, Buchanan and Richard E. Wagner's 1977 volume, "Democracy in Deficit: The Political Legacy of Lord Keynes," is an important contribution. And it's very relevant to the fiscal scene in our federal government today. 

There have been many tributes to James Buchanan in the past several days. GMU economist Alex Tabarrock assembles several of these at Marginal Revolution. For further reading, Edward Lopez considers Buchanan's remarks in his 1963 address to the Southern Economic Association, "What Should Economists Do?" which critiqued the limitations of mathematical formalism in understanding how humans act, coordinate and "truck, barter and exchange." 

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