James M. Buchanan

James M. Buchanan is one of the originators of public choice theory and among the foremost economists of the 20th century. Together with Gordon Tullock, Buchanan revolutionized the way economists view political economy by introducing motivational symmetry between public and private actors. Before Buchanan’s contributions, it was standard practice to view market failures as prima facie evidence of the need for government intervention. Public choice theory forced scholars to confront the fact that government failures may be worse than the market failures the government is introduced to correct.

James Buchanan was born in October 1919. After serving in the U.S. Navy, he enrolled in the economics doctoral program at the University of Chicago, where he received his doctorate in economics in 1948. When he started at Chicago, Buchanan considered himself a “libertarian socialist.” A price theory course taught by his mentor, Frank Knight, convinced Buchanan that the market was the most appropriate means to the ends he desired as a libertarian. In addition to having been exposed to Knight’s work while at Chicago, Buchanan also became familiar with the writings of Knut Wicksell and the Italian school of public finance, all of which would have a profound influence on his contributions to political economy.

Between 1956 and 1969, Buchanan taught at the University of Virginia and Virginia Polytechnic Institute (VPI). While at VPI, Buchanan created the Center for the Study of Public Choice. In 1983, he was prevailed on to move with the Center to George Mason University, where he has remained since. In 1986, Buchanan was awarded the Nobel Prize in Economic Science. Among his most important books are The Calculus of Consent (1962), coauthored with Gordon Tullock, and Cost and Choice (1969). He later turned his attention to questions of social philosophy, publishing the Limits of Liberty (1975), Liberty, Market and State (1986), and The Economics and Ethics of Constitutional Order (1991). In these works, he laid out a contractarian theory of political philosophy that emphasized the need for establishing “rules of the game” to constrain self-​interested political actors where their interests do not align with those of the public.

Buchanan is best known for The Calculus of Consent, which was coauthored with Gordon Tullock. This work opened up the theory of public choice, still in its infancy, and refocused the profession’s attention on a realistic versus a romantic conception of politics. Against the prevailing tendency in political economy, Buchanan and Tullock argued that private costs and benefits guide individuals’ decision making in politics just as they do in markets. Simply moving from the private sphere to the public does not transform interests from those that are self-​concerned to those that are devoted to the public good. Depicting politicians as benevolent despots is therefore foolhardy. Realistic political analyses must start with the same assumptions about rationally self-​interested behavior as economic ones.

Buchanan’s “economics of politics” transformed political economy on several fronts. Implicit in its conclusions were questions relating to, among others, problems of functional finance, the theory of rent seeking, and democracy’s short-​sighted policy bias. Perhaps most important for advocates of the market, his theory provided a powerful warning against government intervention. To believe that government can correct market failures, we must first assume that political agents charged with this task desire to pursue the public good. Buchanan also argued against the ability of political actors to identify the public good. Furthermore, we tend to assume that, when confronted with a choice between using power for private ends and using it for public ends, politicians will choose the latter. But if political actors are as self-​interested as private actors responsible for market failure, why should this notion be true?

The logic of Buchanan’s insight suggests that calls for state intervention will often suffer from the fallacy of the “Emperor’s Singing Contest.” According to an ancient tale, the king wished to determine which of two singers was superior. He thus held a contest in which each would sing for him. On the day of the contest, the king listened to the first singer and was horrified by what he heard. He then declared the second singer the victor because she was clearly the better of the two. The problem, of course, was that, in reality, the second singer may have been even worse than the first. The tale suggests that those who observe market failure are prepared to automatically respond by calling for government correction without first considering what that “correction” entails. Allowing for symmetry between individuals’ motivations in politics and the market means that there may be good reason to think that in many cases government failure will be worse than that of the market. This reasoning is especially true if the constraints on undesirable behavior that decision makers face in the political sphere are weaker than those faced by decision makers in the market.

As a consequence of these conclusions, Buchanan is concerned with how to effectively design rules that bind rulers and prevent them from pursuing personal ends at the expense of society. He sees constitutions as a crucial mechanism for political constraint and distinguishes between two levels of rules. The first level establishes the overarching rules of the game. It establishes the “rules about the rules,” so to speak. This level is the realm of constitutions. The second level concerns the strategies that individuals pursue within the bounds of the rules established at the first level. This level is the realm of policy. Establishing constitutions to devise proper rules at the meta level will shape the incentives that guide rule making at the second level, where policies that directly affect citizens are implemented.

Buchanan’s insights have had a profound effect on the way political economists view the government’s relationship to the market. It is now largely true that the “public choice costs” of government activity are considered in deciding the desirability of proposed interventions. At the least, Buchanan’s work has forced political economists to reconsider how they model the behavior of political actors and to evaluate government actions not as if they were being undertaken by angels, but instead as if they are undertaken by real people.

Further Readings

Boettke, Peter. “Hayek, Arrow, and the Problems of Democratic Decision-​Making.” Journal of Public Finance and Public Choice 20 no. 1 (2002): 9–21.

———. “James M. Buchanan and the Rebirth of Political Economy.” Against the Grain: Dissent in Economics. Steve Pressman and Ric Holt, eds. Aldershot, UK: Edward Elgar Publishing, 1998.

Boettke, Peter, and Peter Leeson. “Liberalism, Socialism and Robust Political Economy.” Journal of Markets and Morality 7 no. 1 (2004): 99–111.

Mitchell, William, and Randy Simmons. Beyond Politics: Markets, Welfare and the Failure of Bureaucracy. Boulder, CO: Westview Press, 1994.

Wagner, Richard. To Promote the General Welfare: Market Processes vs. Political Transfers. San Francisco: Pacific Research Institute, 1989.