What should be done about market failures? When a public good is underprovided, a transaction produces an externality, or consumers and producers have asymmetric information, many people leap to the conclusion that government must intervene to solve the problem. However, they all too often only examine the market failure, never seriously looking into the institution they’re asking to solve the problem. They prescribe solutions as though government is an ideal institution that can implement solutions perfectly.
Economist James M. Buchanan challenged these idealized solutions. He pointed out that governments are not run by omniscient benevolent despots, but by individuals. Individuals acting in the political arena are the same individuals who act within markets. They are just as self-interested and prone to ignorance as any other population. The main difference is that the political arena has different incentives. When other economists theorized about market failure, Buchanan asked “failure by comparison with what?” He pointed out that “The implicit presumption was always that politicized corrections for market failures would work perfectly. In other words, market failures were set against an idealized politics.” Buchanan and other public choice theorists rejected this idealized view of politics. Buchanan aptly described public choice theory’s skeptical analysis of politics in three words: “politics without romance.”
James M. Buchanan was born today in 1919 and received the Nobel Memorial Prize in Economic Sciences in 1986 for his work in the field of public choice theory. He was a trailblazer in his time, paving the way for discussion in the realm of economics and politics as to how the self interest of politicians, bureaucrats, and voters affected government-implemented policies. In 1964, he became the first president of the Public Choice Society. He also helped found the Center for the Study of Public Choice. He passed away last year on January 9, 2013.
Buchanan’s classical liberal values can be seen quite clearly in his reaction to Kenneth Arrow’s work on voting. In his famous impossibility theorem, Arrow showed that elections with three or more options could never meet certain standards. Voters could never achieve a stable ranking of preferences, and there would always be a risk of cycles emerging among selected options. Arrow and others saw this as a sign that “fair” voting was impossible. Yet to Buchanan, this was a good thing, as it presented a check against majoritarian tyranny. Buchanan wrote:
“Any attainment of a unique solution by majority voting would amount to the permanent imposition of the majority’s will on the outvoted minority. Would not a guaranteed rotation, as produced through the cycle, be the preferred sequence here? In such a cyclical sequence, the members of the minority in the first round are enabled to come back in subsequent rounds and ascend to majority membership. My concern, then and later, was always with means of preventing discrimination against members of minorities rather than ensuring that, somehow, majority rule produced stable sets of political outcomes.”
In light of his work and support for classical liberalism, we at Students For Liberty would like to urge you to learn more about James Buchanan’s work today in honor of his birthday. Read some of his articles, such as Politics Without Romance or What Should Economists Do?. If you’re feeling particularly inspired, I highly recommend taking the time to read his books, including The Calculus of Consent (co-authored with Gordon Tullock), The Limits of Liberty, and Democracy in Deficit (co-authored with Richard E. Wagner). After all, future progress often hinges on the foundation of knowledge starting out; in the realm of public choice theory, Mr. Buchanan did many future generations a great service.