Tag Archives: Public Choice

James Buchanan, 1919-2013

james buchanan
Economics has lost one of its greats. James Buchanan has passed away at age 93. Born on a Tennessee farm in 1919, he continued working as a farmhand to put himself through college, milking cows twice a day. From there he went on to a long and varied career, culminating in his being awarded the 1986 economics Nobel.

He won that Nobel for his role in developing public choice theory. After the Prize Committee made its announcement, a flock of economically innocent reporters asked him to explain what the heck that was. They were astonished at his simple answer: it is applying the economic way of thinking to politics. It is treating politicians the same as everyone else – self-interested, responsive to incentives, a bit vain, eager to please and be pleased – flesh and blood human beings, basically. The reporters scoffed; why, that’s nothing more than common sense!

Maybe so, he replied. But most economists don’t actually think that way.

It says a lot about the state of the discipline that Buchanan distinguished himself by simply having common sense. Economics since Paul Samuelson has been plagued by physics envy, and Buchanan stuck out like a sore thumb for being more in the mold of Adam Smith, who was more interested in people than disciplinary prestige. Today’s economists are fixated on being quantitative. They want to be scientists and engineers. Leading journals simply will not publish articles that don’t contain regression analysis or at least some sophisticated mathematics. It’s not scientific otherwise.

Buchanan’s most famous book, The Calculus of Consent, has plenty of equations and geometric analysis; he spoke his discipline’s language. But the book wasn’t about appearing scientific. It was about how people behave in the real world. Buchanan rejected the perfect competition model, which sacrifices a great deal of realism to achieve its mathematical elegance. Instead, Buchanan simply applied the economic way of thinking as consistently as possible.

Buchanan also didn’t want to be a savior of humanity, unlike the Galbraiths and Krugmans of the world. “Economics is the art of putting parameters on our utopias,” he said. He was more humble than that. He wanted to be a student of humanity. And he was a good one.

The whole reason Buchanan was wary of over-mathematicization in economics is that the human condition is messy. The clean, elegant models his colleagues were constructing didn’t much resemble real people. And that is a problem; economics is about people. At its core, it is a social science. It is about how people exchange with each other, and the different ways people find to get along (or not) with each other.

Economics is also a way of thinking. What made Buchanan stick out was his dogged consistency in thinking like an economist. That’s what led him to public choice in the first place. Most economists, seeing a market failure, automatically recommend political solutions. Buchanan, knowing that political institutions are subject to all the same foibles as market institutions, was wary of such easy fixes. Buchanan, with typical pith, argued instead for looking at “politics without romance.” The real world is often too complicated for intellectuals’ grand plans to work.

That remarkable consistency led Buchanan to make a lot of contributions besides public choice. Much of Buchanan’s early work had to do with deficit spending. He was against it, which was as unusual in the 1950s as it is today. Even so, his books Democracy in Deficit [PDF] and Public Principles of Public Debt remain influential in today’s spending debate .

He also changed the shape of the ongoing Pigou-Coase debate by inventing the concept of club goods. A club good lies somewhere between a public good and a private good. An apple is a private good because if you eat it, I can’t. It’s gone. National defense is a public good because it is both non-rival – your enjoyment of it doesn’t diminish mine – and non-excludable. The military defends everyone, not just some.

But that dichotomy leaves out a whole host of goods that have some characteristics of both – cinemas, public pools, and cable television come to mind. If one person is in a pool and another person gets in, there’s still plenty of room for both. Their fun is non-rivalrous. But as more and more people get in, everyone’s fun becomes more and more rivalrous, with diminishing returns. The solution to this problem is to set up a club – charge members a fee to join, and build a fence to exclude non-members. Buchanan’s club goods concept has implications not just for pools and theaters, but for communications networks, utilities, and anything that may be subject to a natural monopoly.

Perhaps my favorite bit of Buchananite wisdom is his dichotomy between pre-constitutional analysis and post-constitutional analysis. People respond to incentives, remember. And the rules of the game are what shape those incentives. If you want different results, often you need different rules. A constitution, at heart, is what sets up those rules. What the different branches of government are, what their powers are, how they are elected or appointed, and so on.

Pre-constitutional analysis looks at these different rules and what incentives they provide. It’s more theoretical. Post-constitutional analysis is more empirical – now that these rules are actually in place, how are people behaving? As someone interested in institution-level reform, this way of thinking is invaluable in my own work.

But enough on his intellectual contributions. James Buchanan was a person, too. I only met Buchanan once, and very briefly at that. But even in that brief interaction his kindly Southern genteel manner that charmed friend and foe alike was apparent. He may have been in his 80s at the time, but his eyes and his mind were still sharp, and he was anything but cranky. He worked into his 90s, and age never dulled him. But time wins all battles, and now one of the world’s purest economists is gone. He will be missed.


Politics in a Nutshell

Peter Boettke describes Gordon Tullock’s public choice approach on p. 134 of his new book, Living Economics:

Politics is about concentrating benefits on well-organized and well-informed interest groups, and dispersing costs on the unorganized and ill-informed masses.

That’s precisely why non-political solutions to social problems are desirable wherever possible. When the universal human impulses of self-interest, rationality, and maximizing utility find themselves in an institutional environment like Congress or City Hall, corruption and special privilege are the results almost every time.

Markets respect no special interest. This is why failing companies swarm to Washington; government exists to cater to them.

Regulation of the Day 204: How to Buy Liquor

UPDATE: Welcome, Reason Hit & Run readers! More Regulations of the Day are here.

Self-checkout lanes have been popping up in grocery stores across the country over the last several years. Some people worry that without the adult supervision of a cashier, underage kids might be able to illegally buy alcohol at these self-checkout lanes. California state Rep. Fiona Ma even introduced a bill that took effect on January 1 that prohibits Californians of any age from using self-checkout lanes to purchase alcoholic beverages.

Has this been a huge problem in the past? Two independent studies have been done to find out. A 2009 UCLA study, cited by Rep. Ma to support her bill, found that underagers failed in 80.5 percent of their attempts. A separate study done by researchers at San Diego State, found that young hooligans had a 90.6 percent failure rate.

So yes, kids can buy booze at self-checkout lanes. But it’s probably less successful than other methods. As Joe Eskenazi put it in SF Weekly’s blog, “The best way to get alcohol remains to rely on a fake ID, theft, or someone’s skeezy 23-year-old cousin.”

Of course, there is another factor in play here, and likely Rep. Ma’s real motivation. That factor is rent-seeking. Many grocery cashier jobs are unionized. The more people use self-checkout lanes, the less they use the cashiers. Unions don’t appreciate the competition, so they work with lawmakers like Rep. Ma to legislate their preferences over consumers’.

According to Maplight.org, labor interests donated $150,450 to Rep. Ma’s campaign fund in 2009-10. They are by far her largest contributors.

This is an example of what economist Bruce Yandle calls a Baptist-and-bootlegger problem. Back in the old days, many Baptist preachers favored Prohibition because they believed drinking was morally wrong. Bootleggers favored Prohibition, too. Black market profits are far higher than in legal markets. So the bootleggers would manipulate the Baptists into favoring a bad policy by using the language of morality.

Fast-forward to today. Almost nobody wants increased underage drinking. And unions don’t want competition. So the bootleggers make up a story about how automated checkout lanes are causing runaway underage drinking. Social conservatives jump on board, wanting to strike a blow for morality. The bill gets passed, the Baptists feel good, and the bootleggers financially benefit. So do legislators.

Consumers, of course, are left out of this coalition.

Public Choice 101

Ben Powell does a great job of explaining why it’s easy for spending to go up, but hard for it to go down. Well worth two minutes of your time.

The Environmental-Industrial Complex

Sometimes the green part of green regulations isn’t the environment. It’s money.

Economics says that people act according to their incentives. Public choice theorists say that politicians and regulators also act according to their incentives — just like the rest of us. Those incentives include maximizing agency budgets and winning elections.

This short video from Reason.tv shows public choice theory in action:

Making a Difference – A Very Small Difference

The House passed a budget enforcement resolution yesterday. It sets 2011’s discretionary spending $7 billion below what President Obama has requested.

Next year’s discretionary spending target is $1.12 trillion for next year. The $7 billion difference represents savings of 0.625 percent. Barely a rounding error. If total spending (including mandatory and defense spending) ends up at $3.5 trillion next year, the savings becomes 0.2 percent.

Of course, 2010 discretionary spending was $1.39 trillion. 2011 spending will very likely end up much closer to that than the targeted $1.12 trillion. The appropriations process is not kind to non-binding resolutions, however well-intentioned. Especially when the resolution “doesn’t detail how Congress should reach that [deficit reduction] goal.”

Congress lacks the will to cut $270 billion of spending. The interests benefitting from that spending will scream bloody murder the second their programs are put on the chopping block. In an election year when incumbents are more fearful than usual, no politician worth his salt wants to cause an uproar.

Congress need not worry too much, though. Even in anti-incumbent years, re-election are almost always above 90 percent. The vast majority of congressional turnover happens through retirement, running for other office, or death.

The pattern is holding this year, so far. The University of Virginia’s Larry Sabato recently pointed out that 5 incumbents have lost their state primary elections this year, while 240 were re-nominated. That’s a 98 percent success rate. There will be a few more casualties, especially in the November general elections.

Most members are safe. They can, and should, rock the boat by cutting unnecessary spending. If anything, the most aggressive cutters might become folk heroes like Chris Christie in New Jersey. They just don’t have the guts.

I will be more than happy if Congress proves me wrong. We’ll find out over the next few months.

The Two Americas

Maybe there is something to John Edwards’ “Two Americas” conceit after all. Except the warring factions aren’t the haves and have-nots. They are what Steven Malanga calls tax eaters and tax payers. And the two see the world very differently. See this revealing excerpt from today’s WSJ Political Diary (subscription required).

Pollster Scott Rasmussen uses several questions to break down voters demographically, but one of his most original tweaks is to differentiate between those voters he calls the “Political Class” and those he calls “Mainstream Americans.” The “Political Class,” representing about 14% of the electorate, tend to express “trust” in political leaders while rejecting suggestions that government is its own special interest and often works with big business against consumers. In contrast, “Mainstream Americans” represent about 75% of the voting public and identify with or lean toward a more populist skepticism about the intentions and actions of political leaders.

Striking is how the two groups divide on the question of repealing ObamaCare. “Mainstream Americans” support repeal by an overwhelming 73%, while the numbers are almost exactly reversed among the “Political Class,” 72% of whom oppose repeal.

Sen. Shelby Lifts Holds

Sen. Richard Shelby, who placed holds on over 70 of President Obama’s nominees, has lifted all but three of them. Politico reports:

A spokesman for the senator said Monday that with attention brought to these two concerns, the political maneuver had “accomplished” its goal and was no longer necessary.

Translation: “We were getting too much bad publicity.”

The three holds that Sen. Shelby is keeping in place have directly to do with the Alabama-based pork projects that he believes will make him look good to the Alabama voters he will be facing in November. So, in a way, nothing has changed.

This brings up a legitimate question: can earmarking abuse sometimes be an agent for smaller government?

Few, if any, of President Obama’s appointees will work to decrease the size and scope of government. Now that their path is cleared, they will probably do net harm to taxpayers. This is the nature of government workers, whether Republican or Democratic.

Sen. Shelby’s motive for blocking them is despicable: stealing from taxpayers to improve his re-election prospects. But one wonders if those same taxpayers would have been better off if Sen. Shelby had stuck to his guns.

Regulation of the Day 111: Buying Wine in New York

It is illegal for grocery stores to sell wine in the state of New York. Only liquor stores are allowed to sell the stuff.

This regulation, a relic of Prohibition, lives on because of one of the central concepts in public choice theory: diffused costs and concentrated benefits.

The benefits are concentrated in one constituency: liquor stores. Regulations give them get millions of dollars in free business. That means they have millions of reasons to lobby to keep the status quo.

Consumers, on the other hand, are hurt by the ban by the exact amount that liquor stores benefit. But that hurt is spread far and wide. No one consumer feels enough pain to hire a high-priced lobbyist to open up the market.

That means New York’s misguided restrictions on competition are likely to continue for some time. It’s hard to imagine an aggrieved shopper suing New York’s wine cartel because she has to make an extra trip to get the wine on her grocery list. Or because she pays a bit more than if she lived in a different state.

(Hat tip: Jonathan Moore)

Health Insurance and Campaign Contributions

Congressional Democrats are thinking of revoking the health insurance industry’s antitrust exemption; some insurers have spent as much as $20,000,000 opposing the current legislation.

Of course, insurers also gave $20,175,303 to President Obama’s 2008 campaign, roughly triple what McCain netted.

On one hand, this might look like the dog biting the hand that feeds. But really, it isn’t.

If the health care legislation passes, there is a good chance that every American would be required to purchase health insurance.

Suppose that happens. $40 million and change plus some antitrust troubles is a really small price to pay for a legal guarantee of vastly increased business, forever, plus looking like you didn’t want the favor.

As my friend Jeremy Lott is so quick to remind, it’s a wonder that politicians can be bought off so cheaply, given what they could charge for their services.

It is just as surprising that insurers would spend $20 million opposing legislation that would yield many times that in profit. As economist Bruce Yandle notes, “industry support of regulation is not rare at all; indeed, it is the norm. And in the United States it is as American as apple pie.”