James M. Buchanan was an economist known for his affiliation with the “Virginia School of Political Economy,” otherwise known as Public Choice theory. Trained at the University of Chicago, his academic journey led him to teach at the University of Virginia, Virginia Tech, and George Mason University. Buchanan’s contributions to public choice theory, which extends economic analysis to political domains, earned him the Nobel Prize in economics in 1986.

Although Public Choice theory maintains a somewhat subdued presence in mainstream economics, Buchanan’s theories are held in disproportionately high regard within libertarian circles. This can be attributed to the fact that public choice theory takes a more realistic view of government benevolence than does mainstream economics. Just as important, however, Buchanan was one of the last libertarians to receive the highest honor in the field of economics, propelling him to a place of elevated status.

Despite Buchanan being a prolific writer and a meticulous scholar, his ideas are leading libertarians astray in some areas and may help explain the lack of progress in Austrian economics in recent decades. There are at least three aspects of Buchanan’s work that deserve closer scrutiny.

Buchanan’s Perspective on Cost: In the 1960s, Buchanan authored a brief text titled “Cost and Choice: An Inquiry in Economic Theory.” The organization and writing of this work resemble more a set of disordered musings than a structured publication. Nevertheless, the book has been highly influential among libertarians. One could encapsulate its core message in the single phrase: “cost is subjective.” Buchanan at times characterized himself as a “radical subjectivist.” Despite Buchanan’s somewhat nuanced stance in the book, his disciples have often interpreted his writings to mean that costs are a psychological phenomenon and “not measurable in monetary terms.” This leads to the ironic situation whereby libertarians misunderstand the idea of opportunity cost and overlook the substantial opportunity costs that governments inflict daily through their inefficient policies. Costs, by their nature, are objective and quantifiable magnitudes in the real world, even if psychological factors shape the market prices used to measure them.

Buchanan’s Views on Social Welfare Functions: In the mid-20th century, economists were searching for a coherent way to measure human welfare. They seemed to be making progress when Kenneth Arrow published a groundbreaking paper in which he proved that no social welfare measure can be formed from the preferences of the members of a community, which also satisfies certain criteria of “reasonableness.” Buchanan correctly criticized Arrow for this “impossibility” theorem. However, his criticism was based largely on the grounds that social outcomes shouldn’t be expected to adhere to a notion of individual rationality. In a twist of irony, Buchanan’s stance probably inadvertently advanced Arrow’s ideas. Buchanan’s dismissal of the reasonableness of the social welfare function concept altogether likely contributed to many libertarians accepting Arrow’s theorem in a knee-jerk fashion. Yet, the market process itself operates under the guidance of a particular social welfare function (as Arrow understood, despite Buchanan arguing the opposite). Thus, libertarians who accept Buchanan and Arrow’s ideas inadvertently reject the process underlying the market, which forms the foundation of modern civilization.

Buchanan’s Stance on Deficits and Debt: During Buchanan’s active years as a researcher, Keynesian economics dominated academic discourse. Keynesians at that time viewed government deficits as essentially costless during periods of resource idleness. Buchanan, by contrast, endeavored to resuscitate the common man’s belief that deficits burden future generations. While the Keynesians probably exaggerated their case, the reality is that current resources in the form of land, labor and capital must be marshalled to “finance” any increase in government expenditure. In that sense, larger deficits are “paid for” today and do not necessarily burden our children and grandchildren. The government issues bonds to pay for deficits, it is true, but when the payment comes due, some future taxpayer or bond buyer ultimately finances the payment. Moreover, the government can, in its unique position, perpetually roll over its obligations, thereby avoiding ever having to “pay back” some debts. (Granted, this is contingent on obligations not ballooning out of control.) The crux of how deficits impact the future lies not in the issuance of paper bonds, but in the nature of the spending, specifically the break down between consumption and investment, as well as the form investment takes. Moreover, just as with public spending, a substantial amount of private spending can be wasteful too. Buchanan’s influence has likely led libertarians to focus too much on deficits and debt, rather than on the character of spending—both public and private.

Undeniably, Buchanan has made positive contributions to economics, particularly in the field of public choice. However, it was probably inevitable that someone would eventually recognize the applicability of economic concepts to politics. Buchanan’s elite academic credentials and impressive publication record made him well-positioned to seize the opportunity, resulting in his Nobel recognition. Yet, if not Buchanan, would it not simply have been someone else?

Friedrich Hayek’s observations about the prize resonate here. The Nobel can unduly amplify the recipient’s influence, especially in areas where their wisdom might be less profound than in the domain that earned them their reputation. Buchanan cautioned us against taking an overly-optimistic view of politics. It’s time libertarians removed the rose-tinted glasses and saw Buchanan’s ideas in their true light.

 

James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.