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Economic Insights

James M. Buchanan
James Buchanan stands as one of the
giants of American 20th century political
economy. This Nobel Prize-winning economist’s prolific work has generated interest in,
and new respect for, constitutional rules versus discretionary, centralized power.
Buchanan—along with Gordon Tullock
and Anthony Downs—created the public
choice movement. During that process, they
forced their colleagues to reexamine the most
fundamental assumptions regarding the
nature of government and the public policies
that emerge from any political process.
Economists now have the powerful public
choice analytical framework to use in examining the phenomenon that public choicers
call government failure.
Few economists have been as influential or as productive as James Buchanan, and
it is our pleasure to add his story and ideas to
our Economic Insights series.
— Bob McTeer
Federal Reserve Bank of Dallas

James M. Buchanan was born in
Murfreesboro, Tenn., in 1919. The son
of a poor, politically populist farmer, he
managed to enter Middle Tennessee State
College, where he received a bachelor’s degree in 1940. He obtained a
master’s degree the following year from
the University of Tennessee and a doctorate from the University of Chicago in
While he was at Chicago, two important events changed Buchanan’s
life: He met Frank Knight,1 and he
found and translated an essay by the
great Swedish economist Knut Wicksell.2 From Knight, Buchanan says he
learned “the message that there exists
no god whose pronouncements deserve
elevation to the sacrosanct, whether god
within or without the scientific academy. Everything, everyone, anywhere,
anytime—all is open to challenge and
From Wicksell, Buchanan concluded that governments are not efficient, purely altruistic entities that effortlessly correct market imperfections.
Instead, governments are aggregates of
individuals pursuing private rather than
the public interest through regulations
and tax laws. These private interests
create wasteful lobbying efforts known
as rent seeking.
Buchanan’s view of public finance,
and hence, the appropriate size of the
state, is derived from a model in which
the state supplies its constituents with
public goods or services, which are paid
for with tax revenues. The only appropriate rule under such conditions, he has
argued, would be unanimity among citizens. This is not possible in practice,

George Mason University/Evan Cantwell

The Creation of Public Choice Theory

James M. Buchanan
but a constitutional order that defends
the rights of minorities is acceptable to
Buchanan and other public choice theorists. Public choice economists support
strong legal rules that constrain rentseeking special interests from undermining an appropriate public-goods
After graduating from Chicago,
Buchanan held a number of teaching
positions, beginning as an associate
professor at the University of Tennessee in 1948, making full professor there
in 1950, then moving to Florida State
University. He made an important
move in 1956 to the University of
Virginia in Charlottesville, where he
taught and chaired the economics de-

Remembering His Favorite Professor and His Influence
One of Knight’s many crusades has been against the view, which he associates with John
Dewey, that science in some instrumental sense can be used to solve social problems in a community of free men. Knight believes that science applied instrumentally implies control, whereas the
social problem is one of attaining consensus, of securing mutual agreement. The “social engineer,”
so prevalent in the background of modern economic models, has no place in Knight’s approach to
social problems.
Modern man’s central problem, according to Knight, is a moral one. Historical liberalism has
destroyed conventional religion and has provided no effective substitute for it; as a consequence,
men have turned all too quickly to nihilism or to the deification of the state. What men need, therefore, is a common morality founded on truth, honesty, mutual respect, and “good sportsmanship,”
the ethics that liberalism should have produced but somehow failed to.…
Surveying the history of Western civilization since the Enlightenment, Knight sees no clear
indication that man can rise to the challenge presented by the liberation of his own mind. But in his
later writings especially, one senses his increased willingness to leave this question open….
In his critical attitude and outlook, in his abhorrence of nonsense even in its most sophisticated forms, Frank Knight has much in common with David Hume, although Hume does not appear
to have directly influenced Knight’s thought. These two critics share a determination to cut through
the metaphysical-linguistic fuzziness that enshrouds the human mind….
Knight has no “disciples” as such, and those who have been most influenced by his work are
as likely to criticize him as others are. This is because as a teacher he has been almost uniquely willing to look for merit in all questions and because he has refused to accept any final answers. ■
— “Frank H. Knight,” in Collected Works, vol. 19, 92 – 3

partment through 1961. During this
period, he resided for a year in Italy,
studying their tradition of public finance and political theory, an experience that further influenced his theoretical directions.
Returning from Europe, Buchanan
established the Thomas Jefferson Center for
Political Economy at the University of
Virginia and began attracting like-minded
thinkers and students to Charlottesville.
Working closely with Gordon Tullock,
G. Warren Nutter and Kenneth Elzinga,
he oversaw the formative years of the
new economic paradigm called public
choice theory. Buchanan never cared
for this name, but it caught on at a 1967
meeting held in Chicago under the
cumbersome title of the Committee for
the Study of Non-Market Decision Making. The renamed Public Choice Society was born at that meeting.4
After spending a year at the University of California at Los Angeles in
1968, Buchanan moved his public choice
center from Charlottesville to Virginia
Polytechnic Institute in Blacksburg,
where he served as a university distin-

guished professor from 1969 to 1983.
But the final move came in 1983 when
Buchanan took a position at George
Mason University in Fairfax, Va., just outside Washington, D.C., and brought the
Center for Study of Public Choice with
him. He remains today its advisory general director.
During his prolific career, Buchanan
has authored or co-authored more than
35 books, translated two others, contributed chapters to about 300 others,
and authored or co-authored hundreds
of articles — an amazing publication
record even if there were 10 of him. His
curriculum vita is over 80 pages long
and can be downloaded from www. In 1986, he was awarded the
Nobel Memorial Prize in Economic
Throughout his career, Buchanan
has dismissed two issues that typically
dominate economists’ thinking: He has
never cared about public opinion of his
work, and he does not care whether his
work makes the world a better place.5
Buchanan’s attitudes clearly reflect
Knight’s skepticism regarding human

How Can Government
Debt Be Controlled?
Because of this difference in the specification and identification of liability in private
and public debt, we should predict that persons will be somewhat less prudent in issuing the latter than the former. That is to say,
the pressures brought to bear on governmental decision makers to constrain irresponsible borrowing may not be comparable
to those that the analogous private borrower
would incorporate within his own behavioral
calculus. The relative absence of such public
or voter constraints might lead elected politicians, those who explicitly make spending,
taxing, and borrowing decisions for governments, to borrow even when the conditions
for responsible debt issues are not present.
It is in recognition of such proclivities that
classical principles of public fiscal responsibility incorporate explicit limits on resort to
borrowing as a financing alternative, and which
also dictate that sinking funds or other comparable provisions be made for amortization
of loans at the time of any initial spending–
borrowing commitment. Without some such
constraints, the classical theory embodies
the prediction of a political scenario with
cumulatively increasing public debt…. ■
—“The Old-Time Fiscal Religion,” in
Collected Works, vol. 8, 19– 20

attempts to better society as a whole.
Buchanan’s opinion on why he has always been an outsider in the economics
profession turns on three propositions:
First, I have been influenced by Frank
Knight and F. A. Hayek in their insistence that the problem of social order
is not scientific in the standard sense.
Second, I was greatly influenced by
Knut Wicksell’s admonition that economists cease acting as if government
were a benevolent despot. Third, I
rejected, very early in my thinking,
the orthodox economist’s elevation of
allocative efficiency as an independent standard of evaluation.6

At first glance, public choice theory
seems to be nothing more than common
sense: Governments are collections of
individuals whose interaction is deter-

mined by the same self-interest that
motivates people in the private sector.
The simple view that government is a
collective decisionmaking process that
altruistically solves social problems has
a long and, according to Buchanan, romantic tradition both in political theory
and in economics. Because of his thorough, individualistic approach to government and his adherence to subjective-cost doctrine,7 his public finance
models lie outside the neoclassical
mainstream belief in the collective
problem-solving model and in measurable, explicit opportunity costs. A pure
subjective-cost approach denies that
the actual costs of any action can ever
be known, even by the decisionmaker(s), because the act of choice is
itself cost, subjectively perceived. A
theorist adhering to this doctrine would
not carry out any benefit–cost analysis,
as costs are inherently not observable
and, therefore, not measurable.
Although the economics profession
has resisted Buchanan’s arguments,
public choice theory has, nonetheless,
found its way into public finance discussions and has had a strong influence
on government policies. As many
economists came to doubt the efficacy
of large, state-funded programs, they
saw public choice theory as a way to
examine what has come to be known
as government failure. For decades following Arthur Cecil Pigou’s famous
book The Economics of Welfare, economists saw government as a disinterested agency that could correct for
market failures. Buchanan and other
public choice theorists altered the
debate by proposing that government
may not really correct problems in the
marketplace because of the wealth
trading, or rent seeking, that occurs during the legislative process.
Extending his view that public policy emerges from the interaction of selfinterested individuals led Buchanan to
a systematic study of the institutions and,
in the case of the United States, the
constitutional parameters within which
public policy decisions are made. Buchanan’s analyses are always done

What Is Cost?
The essential element in this concept [of cost] is the direct relationship between cost and the
act of choice, a relationship that does not exist in the neoclassical predictive theory. In the
London–Austrian conception, by contrast, cost becomes the negative side of any decision, the
obstacle that must be got over before one alternative is selected. Cost is that which the decisiontaker sacrifices or gives up when he makes a choice. It consists in his own evaluation of the enjoyment or utility that he anticipates having to forgo as a result of selection among alternative courses
of action.
The following specific implications emerge from this choice-bound conception of cost:
1. Most importantly, cost must be borne exclusively by the decision-maker; it is not
possible for cost to be shifted to or imposed on others.
2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else.
3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
4. Cost can never be realized because of the fact of choice itself; that which is given up
cannot be enjoyed.
5. Cost cannot be measured by someone other than the decision-maker because there is no
way that subjective experience can be directly observed.
6. Finally, cost can be dated at the moment of decision or choice.
In a theory of choice, cost must be reckoned in a utility dimension. In the orthodox predictive
theory, however, cost is reckoned in a commodity dimension.…
Cost, then, is purely subjective in any theory of choice, whereas cost is objective in any theory that involves genuine prediction. ■
—“Cost and Choice,” in Collected Works, vol. 6, 41 – 2

within the framework of political economy rather than pure economics. Political economy deals with the understanding of collective decisionmaking
and its wealth and income distribution
effects on society. While some economists—notably David Ricardo and his
followers — have always been concerned with income distribution, they
have not approached the problem from
a public choice perspective, preferring
to concentrate on the distributive outcomes of market processes.
Although public choice theory seems
to favor outcomes supported by society’s more conservative members, Buchanan considers himself completely
I resist, and resist strongly, any and all
efforts to pull me toward positions of
advising on this or that policy or
cause. I sign no petitions, join no
political organizations, advise no party,
serve no lobbying effort. Yet the public’s image of me, and especially as
developed through the media after the
Nobel Prize in 1986, is that of a right-

wing libertarian zealot who is antidemocratic, anti-egalitarian, and antiscientific. I am, of course, none of
these and am, indeed, the opposites.
Properly understood, my position is
both democratic and egalitarian, and
I am as much a scientist as any of my
peers in economics. But I am passionately individualistic, and my emphasis on individual liberty does set me
apart from many of my academic colleagues whose mind-sets are mildly
elitist and, hence, collectivist.8

Another thing that sets Buchanan
apart is his view of the relationship between individuals and civilization. Influenced by what he considered the
government’s overreaching in the 1960s,
Buchanan believes the closer a person
can come to self-sufficiency, the better
off he is. That might seem a strange
position for an economist, but Buchanan defies easy classification, even
in how he lives his life:
I like space around me. I bought this
century-old log cabin and started fix-

ing it up and added to it and so forth.
I kept buying more land, more land,
more land. I found out something
about my utility function as I did that,
because I found out that every step I
took toward genuine self-subsistence
really gives me a big charge. If I can
build a fire in my wood stove and
don’t have to depend on electric heat
if we have a power outage, then I’m
that much happier. Or if I can go
across the street to the spring and get
a bucket of water as opposed to having an electric pump to the well, that
gives me a charge. Or if I grow my
own vegetables or pick my own
berries, which I’m doing now. This
year there is a good blackberry crop.
I became more and more interested
in having at least a backup, so selfsubsistent existence really did give
me a lot of utility.9

As this quote shows, Buchanan’s theories are exemplified in his own
lifestyle. ■

Why We Cannot Implement Simple Keynesian Policies
The political process within which the Keynesian norms are to be applied bears little or no
resemblance to that which was implicit in Keynes’ basic analysis. The economy is not controlled by
the sages of Harvey Road, but by politicians engaged in a continuing competition for office. The
political decision structure is entirely different from that which was envisaged by Keynes himself,
and it is out of this starkly different political setting that the Keynesian norms have been applied with
destructive results. Political decisions in the United States are made by elected politicians, who
respond to the desires of voters and the ensconced bureaucracy. There is no center of power where
an enlightened few can effectively isolate themselves from constituency pressures. Furthermore,
since World War II, the national economy has never been appropriately described as being in
depression of the sort idealized in the elementary Keynesian models. Throughout the three decades
of postwar experience, increases in aggregate demand have always been accompanied by increases
in price levels, by inflation….
There are also obvious and important differences between market and political competition.
Market competition is continuous; at each instance of purchase, a buyer is able to select among
alternative, competing sellers. Political competition is intermittent; a decision is binding for a fixed
period, usually two, four, or six years. Market competition allows several competitors to survive
simultaneously; the capture by one seller of a majority of the market does not deny the ability of the
minority to choose its preferred supplier. By contrast, political competition has an all-or-none feature; the capture of a majority of the market gives the entire market to a single supplier. In market
competition, the buyer can be reasonably certain as to just what it is he will receive from his act of
purchase. This is not true with political competition, for there the buyer is, in a sense, purchasing
the services of an agent, but it is an agent whom he cannot bind in matters of specific compliance,
and to whom he is forced to grant wide latitude in the use of discretionary judgment. Politicians are
simply not held liable for their promises and pledges in the same manner that private sellers are. ■
— “Keynesian Economics in Democratic Politics,”
in Collected Works, vol. 8, 98 – 9

— Robert L. Formaini
Senior Economist





See Formaini (vol. 7).
Wicksell (1967).
Breit and Spencer (1997), 165.
“Interview with James Buchanan,” Federal
Reserve Bank of Minneapolis The Region,
September 1995,
Buchanan (1992).
Buchanan (1992), 103. Also see Formaini
(vol. 4).
For an explanation of subjective-cost
doctrine, see Buchanan (1999).
Buchanan (1992), 105–6.
“Interview with James Buchanan.”

Sources and Suggested Reading
Breit, William, and Roger W. Spencer, eds.
(1997), Lives of the Laureates, 3rd ed.
(Cambridge, Mass.: MIT Press).
Buchanan, James (1968), “Frank H. Knight,”
International Encyclopedia of the Social
Sciences (New York: MacMillan), 424 – 28.

——— (1992), “From the Inside Looking Out,”
in Eminent Economists: Their Life Philosophies,
ed. Michael Szenberg (Cambridge, UK:
Cambridge University Press), 98 – 106.

Rowley, Charles K., Robert D. Tollison and
Gordon Tullock, eds. (1988), The Political
Economy of Rent Seeking (Boston: Kluwer
Academic Publishers).

——— (1999), Cost and Choice: An Inquiry in
Economic Theory (Indianapolis, Ind.: Liberty
Fund), orig. pub. 1969.

Wicksell, Knut (1967), Finanztheoretische
Untersuchungen (Jena, 1896), trans. by
James M. Buchanan as “A New Principle of
Just Taxation,” in Classics in the Theory of
Public Finance, ed. Richard A. Musgrave and
Alan T. Peacock (New York: St. Martin’s Press),
72 – 118, orig. pub 1958.

——— (2001), The Collected Works of James
M. Buchanan (Indianapolis, Ind.: Liberty Fund).
Buchanan, James, and Gordon Tullock (1999),
The Calculus of Consent: Logical Foundations
of Constitutional Democracy (Indianapolis,
Ind.: Liberty Fund), orig. pub. 1962.
Formaini, Robert L. (vol. 4), “Hayek: Social
Theorist of the Century,” Federal Reserve
Bank of Dallas Economic Insights, No. 1.
——— (vol. 7), “Frank H. Knight: Origins of the
Chicago School of Economics,” Federal
Reserve Bank of Dallas Economic Insights, No.

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