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Book Review – Constitutional Economics

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Constitutional Economics
by James M. Buchanan (Cambridge, Massachusetts: Basil Blackwell, 1991); 137 pages; $29.95

What are the reasons behind the growth of government in the 20th century? And why has it been so difficult to diminish the size of government even when many in society may have come to the conclusion that government is too big and is interfering too much?

Trying to answer these questions has been no easy task, but an answer has been offered by a group of economists who have become known as the “public-choice” theorists. They apply the logic of market relationships to the problem of understanding human behavior in political relationships. One of the founders of public-choice theory is James M. Buchanan, the 1986 recipient of the Nobel Memorial Prize in Economic Science. Constitutional Economics is a collection of essays and monographs by Professor Buchanan published by the Institute of Economic Affairs in London over the past twenty-five years.

Professor Buchanan argues that governmental intervention and regulation have been based on three assumptions. First, every failure of the market economy to function smoothly and perfectly can be corrected by governmental intervention. Second, those holding political office and manning the bureaucracies are altruistic upholders of the public interest, unconcerned with their own personal economic well-being. And, third, changing the responsibilities of government towards more intervention and control will not profoundly and perversely affect the social and economic order.

Professor Buchanan shows that what many consider “market failure” is, in fact, a failure to appreciate how markets really work. The mathematical models used by mainstream economists, he argues, have made many of those economists ignorant of how a real competitive economy operates. And it has given those economists a false confidence about the ability of government to do better than when people are able to exchange freely with one another.

But the core of public-choice theory is the idea that politicians and bureaucrats should be thought of as ordinary people pursuing their own profit-maximizing self-interest, rather than as selfless Olympian gods focusing only on the common good. Politicians want to be elected. They go before the voters and offer governmentally supplied goods and services. And they form constituent-coalitions with groups who desire those governmentally supplied goods and services.

And bureaucrats want larger budgets for promotions, expanded staffs and increased salaries. Thus, they form alliances with those groups in society which expect to gain from the expanded government largess.

But what makes the political process tend towards an ever-growing government, Professor Buchanan explains, is the problem of “the concentration of benefits and the diffusion of burdens” that arise from governmental programs and activities. In the social division of labor, only a small portion of the general population specializes in the supplying of any particular commodity or service. As a result, governmental spending on any particular program can have an immense financial impact on those specializing in the production of the commodity or service towards which the governmental spending is directed. The benefits of the governmental spending are concentrated on them. All special-interest groups, representing different sectors of the economy, have a strong incentive to lobby for the maintenance and the increase of the government programs directed towards them. And these groups have incentives to form coalitions for mutual assistance in order to gain increases in the government expenditures from which they benefit.

The burden of these various governmental spending programs, however, is diffused across society as higher costs borne by the citizenry as a whole. These burdens may take the form of higher prices or less variety in the market (due to regulatory policies) or higher taxes (to finance various spending programs). But from the individual citizen’s point of view, the cost of trying to fight every special-interest group in the name of a personal benefit of saving a few dollars here (on the price of a good) or a few dollars there (from a slightly lower tax) isn’t worth the effort.

Hence, the different incentives at work in the political process create a bias, Professor Buchanan argues, that produces the tendency for government to grow, in terms of both regulation and spending.

Furthermore, in his essay “The Consequences of Mr. Keynes,” Professor Buchanan demonstrates quite forcefully how — by constructing a theory that supposedly showed that capitalism was unstable and that discretionary governmental policy could assure “full employment,” — John Maynard Keynes supplied the ideological rationale for the changes concerning the role of government in American society that has produced the huge governmental budgets and deficits we face today.

The question now is how to reverse this process, both ideologically and in terms of the incentives for people to want to reverse the process. Unfortunately, neither the public-choice theorists nor anyone else has yet provided the easy answer to that problem.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).