The Essential James Buchanan (Essential Scholars)

These notes are old and were written while reading — they don’t necessarily reflect my current views.

Most foundational among these 1949 insights is this: because neither the state nor society is a singular and sentient creature, a great deal of analytical and policy confusion is spawned by treating them as such. Collections of individuals cannot be fused or aggregated together into a super-individual about whom economists and political philosophers can usefully theorize in the same ways that they theorize about actual flesh-and-blood individuals.

There is nothing—no one thing that is analogous to your individual preferences—for you and your neighbour to “maximize.” → Therefore we should just talk about utility not social utility.

These creditors do not think of themselves as paying for whatever projects are funded with the borrowed money. And they are correct in that thinking. These creditors are not the purchasers of the debt-financed projects; instead, they are purchasers of future interest payments that make it worthwhile for them to sacrifice their consumption today. Thus, debt-financed government projects are not paid for by the government’s creditors.

The idea behind Ricardian equivalence is that rational individuals recognize that when government finances today’s spending with debt, the tax obligations of people in the future will rise. This debt, of course, must be serviced and repaid. If today’s taxpayers care about their future selves and about their children and grandchildren, they will—if they are fully rational—increase their savings today so they or their heirs will have on hand enough money to pay the higher taxes that are destined to be imposed tomorrow. Or so goes the argument of economists who believe in the reality of Ricardian equivalence. → Either this holds (it doesn’t) or we are running a Ponzi scheme

Buchanans thoughts to this are super interesting:

Buchanan’s rejection of Ricardian equivalence does not rest on any assertion that individuals irrationally fail to recognize that increased govern- ment indebtedness entails higher future tax burdens. Rather, his individualistic approach to public finance takes account of the fact that the lower taxes that individuals enjoy today (as a result of debt financing of today’s expenditures) are a sure source of additional disposable income today. But these same individuals do not know if they or their heirs will be the particular taxpayers in the future who will have to service the debt.

If they or their heirs have low incomes in the future, they will not pay much in taxes and the burden of the debt will therefore be borne by others. Because no one knows when he or she will die or can predict exactly what his or her taxable income will be when the debt must be repaid, the value of a dollar that with certainty is not taxed away today is higher than is the value of a dollar that only might be taxed away tomorrow. Each of today’s citizen-taxpayers is thus made to feel wealthier with debt financing than with tax financing. Each person, in turn, is prompted by debt financing to spend more today on con- sumption items.

Buchanan introduced the notion of Club goods which are used by multiple people but have a capacity, which when reached reduces the marginal utility of the good.

“Buchanan analytically derived an answer for these two questions—an answer meant to identify both an optimal quantity or “size” of the club good and an optimal number of users to share it.” → I love this guy.

Buchanan is a huge fan of federalism; he argues that this brings market mechanisms to government, by letting people move freely among states, this lets them vote with their feet. He also sees government structures on different levels controlling each other making sure no group of people gets exploited.

This point warrants emphasis: politics contains a built-in externality. Government policies apply to everyone, whether or not they agree, unlike mar- ket exchange which only takes place if and when all parties to the exchanges agree. The nature of government means that whatever it does, it unilaterally imposes costs on some people. → Thats why he is sceptical of solving externalities through government.

Government failure arises from two problems. First, in many cases the information necessary to allocate resources efficiently is not available to pol- icy-makers. Second, even if the information necessary to implement optimal policies is available, policy-makers often do not have strong enough incentives to implement such policies.

To take an extreme example, if individual A would gain more utility from owning a slave than person B would lose from being a slave, this would not justify person A enslaving person B. To take a less extreme example but one that often forms the basis of public policy, if taking a dollar from A to give to B would give B more utility than A would lose, this fact alone does not justify taking the dollar from A and giving it to B.

Buchanan understood the strong temptation to make this efficiency argument. It is, after all, correct. But to make this argument shifts the terms of the debate to that of socialists and other critics of the market order. Yes, a market order is indeed more productive. Yet for Buchanan the ultimate and sufficient jus- tification for a market order is that it is essential to protect individual liberty.

At its simplest, this theory of human behaviour is summarized in the economist’s downward-sloping demand curve.

Only by requiring unanimous consent can voters be assured that whatever they approve is truly in everyone’s interest.

In addition, as an objective matter of economic science, Buchanan pointed out that this engineering conception of the economy is simply incor- rect. Because the economy isn’t a sentient creature with purposes, it has no goals that can be pursued and met. The economy is nothing more than that which emerges, undesigned and unintended, when countless sentient indi- viduals, in pursuit of their own goals, exchange with each other. And so the economist should study the many ways that individuals exchange, as well as study the unplanned order that emerges from these exchanges.