1.1. Who is James Buchanan?
The aim of this dissertation is to answer the question what the institutional structure of society should look like from a rational choice perspective. If one wants to analyze the role of institutions in a society of rational individuals, one cannot ignore the field of Public Choice theory. While this covers a wide range of authors, ideas and topics (Mueller 2003), it is useful to focus on the extensive work of James M. Buchanan41 rather than give an overview of the whole field. This 1986 Nobel Laureate in Economics is often considered to be the founder and most important proponent of Public Choice theory. After his first publications helped establish the field, he never stopped enlightening his colleagues with inspiring ideas and new insights. Throughout the years, Buchanan has covered a wide range of topics from a number of methodological perspectives. As a result, his extensive body of work is characterized by some ambiguities and inconsistencies as well. Where
41 Throughout this chapter and unless mentioned otherwise, I am referring to The Collected
Works of James M. Buchanan as they have been edited and published by Liberty Fund (Buchanan 1999). This is by far the most complete collection of Buchanan’s writings. It consists of 20 volumes and over 6,500 pages. This collection contains – a few exceptions aside – all of Buchanan’s publications. For reasons of simplicity, I attribute the views expressed in co-authored works to Buchanan. This is in no way intended to downgrade the efforts of his collaborators.
necessary, I will investigate these and try to clarify what Buchanan’s main point is.
Buchanan consistently applies the concepts and tools of economics to research areas that lie beyond its traditional domain of market relations. In doing so, he has helped establish Public Choice theory, which he defines as the research area that “applies the techniques and analytic apparatus of modern economics to the study of political processes” (X, xvii). Public Choice thus consists of economists using their own conceptual apparatus and methodology in their analysis of the functioning of public institutions (Mueller 2003: 2). In order to see what the public domain looks like from this perspective, I will examine Buchanan’s intellectual background (second section), his theoretical assumptions (third section) and the way these result in his theory of constitutional choice (fourth section). Then, I will try to formulate some criticisms (fifth section) and consider their implications for Buchanan’s normative views (sixth section). Finally, I will try to draw some general conclusions (seventh section).
I thus aim to show how Buchanan’s normative views arise from the specific theoretical assumptions in his economic conception of rationality. Of course, since the different aspects of his work are closely entangled, several assumptions tend to have the same normative implications, just as well as a single assumption can have a number of normative implications. All this inevitably leads to some overlap between and repetition in different parts of this chapter. While I believe that this way of analyzing and evaluating Buchanan’s work has its value, it is up to the reader to decide whether it is worthwhile or not.
If Public Choice theory is economics applied to politics, it is important to understand correctly what exactly economics is. In this respect, I immediately want to stress that Buchanan has a particular conception of economics. It is situated squarely within the Austrian tradition of von Mises and von Hayek who stress the subjective nature of choice and thus also of economics, which can be defined as the science of choice. Buchanan proposes a completely subjective definition of cost, which leads him to discard the possibility of determining the efficiency of some choice or institutional structure independently of an individual’s judgment (VI, 23-25, 30, 41, 87; XII, 8). In the same vein, Buchanan gives a subjective definition of economics as the “theory of exchange of whatever it is that persons value” (XII, 23). In the language of an economist, what individuals value is what they prefer. Because an individual’s preferences do not exist in some objective sense, independent of his choice, it is impossible to derive an objective utility function (XII, 26). This is also why Buchanan defines economics as the study of ‘catallaxy’ rather than
that of ‘maximizing’. Instead of limiting economics to the study of optimally allocating the existing means in order to achieve certain goals or ends (maximizing), Buchanan wants to focus on the process of voluntary trade and exchange (catallaxy) (XII, 115-117, 470; XVI, 32, 60, 240).
Applying the conceptual apparatus of economics to politics, Buchanan has filled up a huge lacuna in theorizing about the role of the public domain in society. Until the foundation of Public Choice theory, the bulk of the literature on institutional design suffered from a lack of explicitly defined theoretical underpinnings about the ways institutions like markets and states function. While classical economists still realized the importance of an institutional framework for societal interactions to run smoothly, neoclassical economists increasingly relied on concepts of the market and the state as ideal-type abstractions. The fact that these were reflected only to a greater or lesser degree in reality receded into the background. Instead of engaging in formal modeling of idealized equilibria, Buchanan wants to renew the attention for the institutional conditions to be fulfilled in order for socially desirable outcomes to arise.
In doing so, Buchanan also explicitly criticizes most political philosophers and their romantic view of the state as benevolent despot (VII, 204; X, 39). They naively assume that governments automatically serve the public good, however this may be defined. Those who conceive of politics as being concerned about some general will, like Jean-Jacques Rousseau (1762: 26), take for granted that public servants try to find out what this entails and how to realize it. Yet even those who think that politics is really about private interests trust the state to serve exactly these interests. Social choice theorists, for example, who aggregate private interests in order to construct a social welfare function, presume that governments systematically take this function as their main objective.
Buchanan deserves credit for making this view explicit and questioning its validity. He urges one to be wary of the goodwill of political representatives and public servants. Simply assuming that they are benevolent and public- spirited is a sign of grave naivety. In this respect, Buchanan wants to revitalize the classical insistence on a theoretically unified model of individuals. Instead of simply assuming a public-spirited nature, Buchanan relies on the model of individuals as Homines Economici in both their private and public roles. In his attempt to construe institutions that guarantee social order, he thus wants to avoid assuming that everybody is cooperative by nature.
1.2. Why study James Buchanan?
As will become clear, I want to focus on what I believe is Buchanan’s main goal, namely to formulate proposals concerning the design and reform of institutional arrangements in order to facilitate social life, while respecting each individual’s liberties and interests. Within the game of life, Buchanan thus focuses on defining and adjusting the rules in ways that allow the players to play the game in mutually beneficial ways. I try to interpret Buchanan’s oeuvre in this light, making abstraction from themes and topics that do not immediately touch upon this aspect. I fully acknowledge that such a thematic approach largely neglects the evolutions that his work has undergone during the last 45 years. Nevertheless, I believe that it can be valuable, partly because it is also how Buchanan’s Collected Works are structured. I aim to present a general overview of his work rather than perform a detailed study of his main works, primarily because I believe that quite a few of his most revealing insights can be found in some of his less well-known articles and monographs. Since not every aspect of his work can be treated in the limited space of this chapter, I realize that this method is a second-best solution. Nevertheless, I hope it helps the reader to understand and appreciate Buchanan’s insightful contribution to this dissertation’s central topic.
Buchanan has consistently aimed to do what he considers to be the task of every social scientist, which is to propose institutional reforms that facilitate social life. In this light, he has to find a criterion to determine which institutional changes form an improvement and which do not. To answer this meta-ethical question of which principles, values and ideals are suitable in deciding what is morally good, Buchanan argues that the values and preferences of individuals are the only relevant standards. What is morally desirable is to be equated with what is preferred by the individuals themselves. This implies that the public good is whatever individual citizens deem valuable. The most important value in Buchanan’s theory is freedom, which he defines “only in its negative sense: an individual is at liberty or free to carry on an activity if he or she is not coerced from so doing by someone else” (XIV, 219). Buchanan delineates private spheres in which individuals should be left alone without outside interference. Within these “behavioural spheres of action” (XVII, 162), each individual is free to choose his own goals and to try and realize these. Individual freedom is nothing more than the number of options open to the individual (XVI, 387). As I will show later on, this not only implies an instrumental image of individuals, it also leads to a view of institutions as externally constraining the action range of individuals. According to Buchanan, “rules define the private spaces within which each of us can carry on our own
activities” (X, 5). The general thrust of his work is quite basic: if individual freedom is a highly praised value, institutions and rules should be arranged in such a way that these protect the liberties of individuals (XVI, 329).
An important reason for studying Buchanan therefore lies in his emphasis on the importance of institutions in society. As Robert Tollison remarks, “more than anything else, Buchanan’s basic insight that rules are important can be said to have driven most of his written work over his career. More than any other single scholar, he is responsible for this emphasis and its emergence in modern economics and political science” (X, xi-xii)42. In this respect, Buchanan places himself within the tradition of Adam Smith (X, 15), with whom he shares the view that, in short, “institutions matter” (VIII, 131).
Buchanan’s emphasis on the importance of institutions in society is best understood using the analogy with rules of a game (IX, 5; XIV, 271-276 XVI, 23, 103, 339; XVIII, 269). Providing the framework within which individuals interact, rules are necessary if one wants to play a game. They bring predictability and, as a consequence, enable individuals to engage in collective actions. As will become clear, Buchanan has his own take on the Monty Python dilemma from this dissertation’s opening quote.
Buchanan focuses on institutional matters, because he believes that improvement is hard to think of when one treats the institutional setting as given. In contrast, improvement can be attained by changing this setting itself (XV, 290-294). Therefore, Buchanan ultimately aims to compare, evaluate and propose alternative institutional arrangements (XVI, 107). One could argue that Buchanan is not a typical economist, since economics is the study of how choices are made within given institutions and rules. Studying how choices are made among institutions and rules, he conceives of himself as a constitutional political economist (XVI, xi, 3-7, 127, 331, 357, 432). Buchanan wants to analyze the role of the political economy, which consists of “the whole set of constraints, or structure, within which individuals act in furtherance of their own objectives” (XVI, 250).
Buchanan thus returns to the classical insistence on studying “the choice of constraints as opposed to the choice within constraints” (XV, 4) which is the main focus of neoclassical economics. Analyzing individual decisions within given rules and institutions, neoclassical economists have largely ignored the
42 Notable contenders are the so-called institutional economists, like Geoffrey Hodgson
(1988), Keith Dowding and Desmond King (1998), who stress the importance of institutions in making possible and regulating economic interactions. Following Thorstein Veblen (1909), these economists show that theories that ignore the central role of institutions are inapt to gain insight in the functioning of an economy, since they form the preconditions for its survival.
fact that the latter are formed through individual choices (I, 377-383). Buchanan systematically stresses that society’s rules are ultimately made by individuals in democratic discussions. This is also why he puts his hopes for a better society in institutional design and reform (XI, 5; XVI, 147).
1.3. Why not study another political economist or political philosopher?
There are several strands of thought that combine a proper recognition of both the importance of institutions in society with an emphasis on the need for rational individuals to consent to them. Claiming “that legitimate authority of government must derive from the consent of the governed, where the form and content of this consent derives from the idea of contract or mutual agreement” (Cudd 2003), these theories refer to some sort of social contract that is to be agreed upon by all relevant parties. In this field, theorists also think about normative issues – like the desirability of institutions – from a rational choice perspective. They basically argue that institutions are legitimate when they are agreed upon by rational individuals who are expected to consider whether the arrangements at hand will help them to achieve their goals. Like Buchanan: “social contract theories take individuals to be the best judges of their interests and the means to satisfy their desires” (Cudd 2003).
Within this field, one can distinguish between contractarianism and contractualism. The former, which stems from Thomas Hobbes and is defended (amongst others) by David Gauthier and James Buchanan, argues that individuals should primarily be modeled as self-interested beings. In their view, institutions are legitimate insofar as they provide arrangements beneficial to each citizen: “justice, and so a social contract is only possible where there is some possibility of benefit to each individual from cooperation” (Cudd 2003). This strand conceives of justice as mutual advantage. The latter, which stems from Immanuel Kant and is defended (amongst others) by John Rawls, argues that individuals should primarily be modeled as reasonable beings. In their view, institutions are legitimate insofar as they provide arrangements that can be justified to each citizen in a public and reasonable way. This strand conceives of justice as impartiality. As will become clear later on, these differences have implications for the way in which public arrangements are analyzed and evaluated.
In order to defend my choice of Buchanan among these social contract thinkers, I need to argue why I do not focus on the others. While interesting, the work of David Gauthier falls largely beyond the scope of this research project, since it focuses primarily on the connection between rationality and
morality. As a contractarian, Gauthier (1986: 2) defends a “conception of morality as a rational constraint on the pursuit of individual interest”. In search of a rational basis for morality, Gauthier argues that constrained maximizers – individuals who are disposed to comply with mutually advantageous moral constraints – tend to benefit more from social cooperation than straightforward maximizers do (Gauthier 1986: 15). This shows that behavior guided by ethical concerns is on the whole to the agent’s benefit. Gauthier therefore argues that all moral principles (prescribing impartial constraints) are rational (prescribing the maximization of one’s interests43) (Gauthier 1986: 3- 4).
Instead of focusing on morality, Buchanan explicitly wants to analyze the connection between rationality and institutions. Nevertheless, Gauthier has something to say about the role institutions should play as well. He, for example, argues “that in a perfectly competitive market, mutual advantage is assured by the unconstrained activity of each individual in pursuit of her own greatest satisfaction” (Gauthier 1986: 13). Gauthier thus reserves a large role for markets, since they are able to attain the most efficient outcome while respecting each individual’s freedom. Nevertheless, he also admits that there is need for politics since the world does not function as a perfectly competitive market (Gauthier 1986: 18). In order to move beyond Gauthier’s scarce remarks, I deem it useful to focus on the work of Buchanan who analyzes these issues more thoroughly and extensively.
As I have already suggested, I choose to largely ignore the work of John Rawls. Even though I will try to stay away from his theory to the largest extent possible, I will touch upon some of his views, mostly in comparison with those of Buchanan. This way, I hope to show the appeal of Buchanan’s views as a way of answering some of the questions Rawls raises.