– August 27, 2018
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I have had the good fortune in my academic career to be part of some amazing intellectual adventures. Almost 20 years ago, Douglass North was working on a book that would become Understanding the Process of Economic Change, and to aid in that process he organized a series of conferences with the Mercatus Center.

The focus of the conferences ranged from cognitive psychology and philosophy of mind to institutional economics and economic history. I was invited to be part of these working groups, and eventually we met to discuss drafts of North’s book. But others in the group were also working on their books, so we kept running these manuscript conferences for books in process. Those include works by Avner Greif, Timur Kuran, Deirdre McCloskey, Joel Mokyr, and North with John Wallis and Barry Weingast.

These conferences were in fact the subject of a story in The Chronicle of Higher Education back in 2014. My forthcoming book with Paul Aligica and Vlad Tarko on public administration and classical liberalism benefited greatly from such a manuscript conference at a formative phase in the writing process.

Another amazing intellectual adventure of which I’ve been a part is our Adam Smith Fellowship program at Mercatus. This program began less than a decade ago with 15 students and three faculty, and has now grown to over 100 students and a dozen faculty. At the center of the program is an intense reading of works by Ludwig von Mises, F.A. Hayek, James Buchanan, Gordon Tullock, and Vincent and Elinor Ostrom, as well as classical authors in philosophy, politics, and economics such as Adam Smith, David Hume, and J.S. Mill.

The 2018–19 Adam Smith Fellowship program begins this week, and in the group I will be involved with we are exploring the very foundations of public economics and democratic society. This, of course, was the critical area of scholarly exploration by James M. Buchanan, the 1986 Nobel Prize winner in economic science. It was also the critical area of scholarly exploration for Elinor Ostrom, the 2009 Nobel Prize winner. Both Buchanan and Ostrom were significant figures in the advancement of research in public choice and political economy in the second half of the 20th century and into the 21st century.

Thorny Issues

Too often economists and social scientists, and certainly the general public, gloss over the thorny issues of public economics in a democratic society. The assumption that there is a tight link between the public and the political community, and that a certain machinery is in place and operating correctly to ensure this tight link, is simply not accurate.

Let me define the public as those who are affected by governmental decisions, and the political community as those who are taken into account in the weighing of the governmental decisions. Political decisions have significant external effects, and for governmental decisions to be democratic the negative externalities of such decisions should be limited or nonexistent.

This, of course, is discussed brilliantly in The Calculus of Consent, in which Buchanan and Tullock analyze the external costs of political decisions and the decision-making costs of unanimity. A unanimity rule (100 percent agreement) would eliminate all negative externalities from politics, but such a rule would make decision-making prohibitively costly. Buchanan and Tullock propose making the trade-off by summing the two costs and minimizing the sum. This is their modern analytical answer to Jean-Jacques Rousseau’s timeless question of how people can be free while subject to wills other than their own.

This may all seem very philosophical, but it gets very practical if you think hard for a second. For our political structure to meet the standards set by the democratic principle of treating one another as dignified equals, we must have an analytical framework that aids in answering questions about the scope and scale of governmental decisions, as well as answering questions concerning the how, what, and for whom of public goods and services. By definition, in the public sector, we cannot rely on market prices to provide the answers. We are in the realm of nonmarket decision-making.

As Ludwig von Mises in Human Action put it: “Where economic calculation is unfeasible, bureaucratic methods are indispensable” ([1949] 2007, 311). To put this in a concrete way, the rules of bureaucratic management are going to have to attempt to do for governmental services what property, prices, and profit-and-loss accounting do within the market setting. Make no mistake, governmental decision-makers have to make trade-offs, and they face, however imperfectly, budget constraints.

As Mises points out: “There is no doubt that the services rendered by the police department of the City of New York could be considerably improved by trebling the budgetary allocation. But the question is whether or not this improvement would be considerable enough to justify either the restriction of the services rendered by other departments — e.g., those of the department of sanitation — or the restriction of the private consumption of the taxpayers” ([1949] 2007, 309).

Public administration begins, in essence, where the realm of economic calculation ceases. But how are government decision-makers going to accomplish this? Public-finance and public-economics scholars have developed the ideas of fiscal equivalence and the benefit principle to address these issues. Basically, fiscal equivalence means governmental responsibilities must be divided such that there is a match between the externality being addressed and the decision unit responsible for addressing it. We don’t need the federal government to be in charge of garbage collection, and we don’t expect our town council to make decisions with regard to national defense.

Moreover, the benefit principle says that just taxation implies that those who benefit from the public goods and services pay the tax and those who don’t receive the benefits do not. Viewing both of these ideas in unison provides the necessary background for organizing the democratic polity in a way that brings the relevant public into alignment with the relevant political community.

The Habit of Theorizing

But wait a second: have I said how this is done, or just provided a description of what must be done if government is going to operate according to democratic principles? One of the reasons economists tend to gloss over this distinction is their habit of working in public economics with theoretical models that postulate a stable social-welfare function and the fiction of a benevolent, omniscient social planner.

James Buchanan from the beginning of his career agitated against these models, and argued that we must instead reject the assumption that the state is both benevolent and omniscient (the “fisc” as he dubbed it in his 1949 paper), and instead model politics as a bargaining process. (Also see Coyne 2015.) But it is a peculiar bargaining process. As Vincent and Elinor Ostrom so eloquently put the issue:

Whereas the income received for providing a private good conveys information about the demand for that good, taxes collected under the threat of coercion say little about the demand for a public good or service. Payment of taxation indicates only that taxpayers prefer paying taxes to going to jail. Little or no information is revealed about user preferences for goods procured with tax-supported expenditures. ([1977] 1999, 84)

As a consequence, they argue, public economics must constantly seek to find arrangements for collective decision-making that reflect individual preferences.

If this is not possible, then any hope for truly democratic governance through the public sector disappears. Collective decisions are made that do not reflect the preferences of the people. Costs are imposed on some for the benefit of others. The feedback loops that in theory hold governmental decision-makers responsive to the demands of citizens are loose or broken altogether.

In this situation, the governmental imperative to curb private predation results in the creation of the opportunity for public predation and exploitation of the many in the public by the few in the political community. Rather than liberal democracy, we face the reality of a politics based on discrimination and exercising dominion over others. Going back to Rousseau, we cannot find any way in the logic of that situation to ensure people can be free while subject to wills other than their own.

Absent the ability to accurately price public goods, political decisions do not minimize externalities, and decision-making authority is not so organized as to match the size of the externality with the decision unit appropriate for the task. In an appropriate comparative analysis of governance, this unhappy answer to basic questions in public economics should compel us to re-examine the arguments for private governance (see Stringham 2005, 2007, 2015).

Perhaps the claims about the inefficiency of the private provision of governance are overstated when one compares and contrasts that provision with the public provision of governance. Instead, in the comparative analysis of political and economic systems we should adopt a presumption in favor of the emergence of self-governance (see Boettke and Leeson 2015). As Peter Leeson (2014) has so succinctly put it: self-governance works better than you think.

The inability to elicit accurate demand-revealing processes in public-goods provision is a hidden secret in public economics and political economy. Various mechanisms have been proposed that purport to solve the problem, but they do so in theory and not in practice.

The purported solutions tend to rely on assumptions that actually brush the problem away rather than tackle it. Dysfunction in the public sector is pervasive, and decisions are made not in a democratic fashion, but in accordance with the basic logic of politics: concentrate the benefits on the well-organized and well-informed, disperse the costs on the unorganized and ill-informed, and do so in way that concentrates those benefits in the short run and disperses those costs in the long run.

This is the ordinary, but peculiar, business of politics. When pushed to its extreme, not only does our politics drive a wedge between the public and the political community, but it places certain privileged political actors in a position to be tyrants over their fellow citizens. They govern over and not with others in the society under examination.

From such a simple question as how authorities price the schools your kids attend, the roads you drive on daily, and the police services you rely on to protect your person and property, one can contemplate and discuss the most profound questions in social philosophy related to freedom, dignity, and equal treatment. That is a conversation very much worth having.

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References

Boettke, Peter J., and Peter T. Leeson, eds. 2015. The Economic Role of the State. Northampton, MA: Edward Elgar.

Buchanan, James M. 1949. “The Pure Theory of Government Finance: A Suggested Approach.” Journal of Political Economy 57 (6): 496–505.

Coyne, Christopher. 2015. “Lobotomizing the Defense Brain.” Review of Austrian Economics 28 (4): 371–96.

Leeson, Peter. 2014. Anarchy Unbound. New York: Cambridge University Press.

Mises, Ludwig von. (1949) 2007. Human Action: A Treatise on Economics. Indianapolis, IN: Liberty Fund.

Ostrom, Vincent, and Elinor Ostrom. (1977) 1999. “Public Goods and Public Choices.” In Polycentricity and Local Public Economies: Readings from the Workshop in Political Theory and Policy Analysis, edited by Michael D. Ginnis, 75–103.

Stringham, Edward, ed. 2005. Anarchy, State and Public Choice. Cheltenham, UK: Edward Elgar.

Stringham, Edward, ed. 2007. Anarchy and the Law: The Political Economy of Choice. Oakland, CA: Independent Institute.

Stringham, Edward. 2015. Private Governance: Creating Order in Economic and Social Life. New York: Oxford University Press.

Wagner, Richard. 2016. Politics as a Peculiar Business. Northampton, MA: Edward Elgar.

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Peter Boettke

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Peter Boettke, a Senior Fellow at AIER, is a University Professor of Economics and Philosophy at George Mason University; the BB&T Professor for the Study of Capitalism, Vice President for Research, and Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at GMU.
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