The foundations of James Buchanan's work: exchange and gains from trade in all aspects of life, including markets and politics.

• Author: Alvey, James E.
• Position: Report

1. INTRODUCTION

   James Buchanan won the Nobel Prize for economic sciences in 1986. This paper sketches the foundations of his work and how it developed over time. Although he began as 'a regular public finance economist' (Buchanan, 1995), he became part of the movement which sought to broaden the boundaries of economics which had narrowed after 1870. Buchanan has been a leader in new sub-disciplines, such as Public Choice, Constitutional Political Economy, and to some extent New Institutional Economics. He is interesting because, unlike others in the economic imperialist camp (see Duhs, 2005), throughout his oeuvre he shows a serious interest in the relationship between economics and ethics. At various times Buchanan has addressed what Sen calls 'the ethics-related view of motivation' (Sen, 1987, p. 4). A comprehensive treatment of his work is beyond the scope of this paper.

   Buchanan's early specialization led him to think about how the state was understood. Even in the late 1940s he discussed the fundamental difference between the 'organismic' view of the state and the 'individualistic' theory of the state (Buchanan, 1949, 496). In later work Buchanan developed a theory of social contract and a whole research programme called constitutional political economy. The germ of this work was evident in 1949.

   Around the same time he began to advocate understanding markets in a 'gains from trade' framework; gains, of course, had to be secured by enforced contracts (1959, p. 129; 1975b, p. 229). By the mid 1960s Buchanan was calling for economics to focus on catallactics, or exchange (1964, p. 214). The gains-from-trade/contracting approach, he discovered, could be integrated into his constitutional economics programme by considering politics as a sort of exchange. In markets, and in politics, Buchanan's approach was to start from the status quo and look for Pareto gains.

   Much of Buchanan's work is positive analysis. In the 1960s, he claimed that economic theory, for example public goods theory, 'can be, and should be, wholly wertfei [value free] in an explicit sense' (1967, p. 197). Buchanan was methodologically self-aware in his writings and he tried to make clear when he ventured into normative analysis. Buchanan's understanding of positivism may have led to a strong preference for the 'ivory tower' (Buchanan, 1995). In any event, while Buchanan did make policy recommendations, he was content to write articles and books, staying largely clear of the 'fury of policy argument' (1967, p. 193). I contend that Buchanan's positivism softened over time.

   Buchanan has written on many topics over a long career but the Nobel Prize was awarded 'for his development of the contractual and constitutional bases for the theory of economic and political decisionmaking.' He makes it clear in his Nobel Lecture that economic policy must be considered within the context of the political decision-making framework and that a model of the state and politics is needed before considering the effects of different policy choices (1987a). Somewhat surprisingly given his earlier views, Buchanan admitted frankly that in investigating the relation of the individual to the state, his goal was 'ultimately normative'; he added that economists investigating this central topic must place their discussion within the 'more comprehensive realm of discourse' of political philosophy (Buchanan, 1987a, p. 335; see also 1991, p. 4). By the 1990s, Buchanan went so far as to call for a closer relationship between economics and ethics (Buchanan, 1994, pp. 82-3). While his particular conclusions differ greatly from Aristotle's, the call for a thorough engagement with political philosophy and ethics is thoroughly consistent with Aristotle. At least in his mature views, Buchanan seems to be very much at odds with those who claim that anything worthwhile in 'economics' is value-free engineering.

   The remainder of the paper comprises seven more sections. Section 2 presents Buchanan's fundamental assumptions. Section 3 discusses some methodological themes in his early work, especially his definitions of economics and political economy. Section 4 presents Buchanan's views of the ethics of markets and exchange. Section 5 presents six visions of the social contract presented by leading social contract theorists. Section 6 presents Buchanan's view of the ethical minimal state. Section 7 presents his view of constitutional political economy. Section 8 provides some concluding remarks.

2. FOUNDATIONAL ASSUMPTIONS

   On many questions, Buchanan says that the starting point for him in economic analysis is classical political economy and especially the work of Adam Smith (Buchanan, 1964a, pp. 213-4; 1994, p. 12). While I may disagree with his interpretations of Smith (and others) I can appreciate that other interpretations are possible. In any event, Buchanan adopts several assumptions, some of which can be traced to the classical economics tradition. Some assumptions underpin all of his work; others are adapted to the particular context. The following eleven assumptions I take to be Buchanan's fundamental assumptions. They fall into two groups. The first six relate to the individual in isolation or in the interactions in markets. The remaining five assumptions refer to the individual in a market or social choice setting.

   The first and second assumptions seem joined together in Buchanan's mind: he is 'profoundly individualistic, in an ontological-methodological sense' ([1975] 2000, p. 3). First, Buchanan's ontological view of strict subjectivism means that there is no distinction between the individual's utility function and his behaviour (1991, p. 225). Individual choice is all that there is. The notion that there is an objectively correct bundle which maximizes an individual's utility function is meaningless (1991, p. 226). Buchanan is skeptical about theological claims; he does consider human beings as a species, although it is a very thin conception. Second, Buchanan adopts methodological individualism, which assumes only autonomous 'individuals choose and act'; while he concedes that some social influence is possible, his concession does not go nearly as far as the 'communitarians' claim (1987c, p. 586; 1991, p. 14). Third, he says that a 'philosophical complement' to methodological individualism is that 'the ultimate sources of value' lies 'exclusively in individuals' (1987c, p. 586). This is important because these 'ultimate normative criteria ... inform the choices among institutions,' including rules, in constitutional economics (1987c, p. 586). (See also assumption eight below.) Buchanan adopts a more nuanced view in his recent work on culture (see 1994). Fourth, he puts supreme value on freedom, although the formulation varies. Buchanan sometimes says that the primary goal of each human is to maximize his liberty, understood in the 'negative sense' of not being coerced 'by someone else' (1984, p. 107); at other times he propounds the more subtle view that the goal is maximal freedom within the constraints one gives oneself individually or by agreement with others (the incorporation of ethical constraints consistent with one's interests tends to be the focus of some of his later works). Fifth, he assumes homo economicus, meaning that individuals 'seek their own interests' defined in a 'non-tautological' way (1987c, p. 587). Sixth, Buchanan assumes rational choice, by which he means that all economic agents are able to choose between alternatives in an 'orderly manner' (1991, p. 15).

   Seventh, in group settings, cooperative behaviour can secure mutual gains (1964a, p. 218). What Buchanan has in mind by cooperation is trade in various forms, starting with the trade of goods between individuals. This is one of the main themes of his economics: gains from trade. Markets achieve individual goals not national goals (1964a, p. 219). Eighth, Buchanan holds 'normative individualism,' the 'normative premise that individuals are the ultimate sovereigns in matters of social organization'; while individuals can delegate, they remain the principals (1991, pp. 225, 227). Ninth, the political unit is construed as a manifestation of a social contract. This contract is analogous to other contracts. Buchanan calls himself a 'contractarian' ([1975] 2000, p. 11). Here is another major theme in his work. Tenth, the political counterpart to the rationality and methodological individualist assumptions in social decision making is the 'equal weighting' to 'individual evaluations'; Buchanan and his constitutional economics has a 'democratic foundation' (1991, p. 16). Finally, he does not want abuses by democratic majorities; this leads Buchanan to adopt constitutional democracy (1987c, p. 586). Particularly in public goods provision, he stresses unanimity (or, failing that, consensus or near unanimity) (1959, pp. 127-8, 135, 137; 1991, p. 47).

   Some important implications follow from these assumptions. In much of the period after World War II, economic discussions, especially in Welfare Economics, were conducted in terms of utility. Not using this language may have led to being ignored. Buchanan did not want that to happen with his writings. Hence, when he wrote for the mainstream journals (as he did on various occasions), following Robbins, Buchanan made it clear that interpersonal comparison of utilities cannot be made; 'utility' is purely subjective (1959, p. 126). Further, he opposes all utilitarian projects which attempt to construct social aggregates by adding up utilities. No '"social" aggregates' have meaning, properly speaking (1964a, p. 215). This whole aggregative approach Buchanan says assumes an organic understanding of the state and he opposes that to his own individualistic approach (1949). The distinction between these two paradigms shows up frequently in his work over the next fifty years.

   Aspects of Welfare Economics, such as the Social Welfare Function of various...