Presentation Speech by Professor Ingemar Ståhl of the Royal Academy of Sciences

Translation from the Swedish text

Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,

The Laureate of this year, James Buchanan of George Mason University, has been awarded the Prize for his development of the contractarian and constitutional foundations for the theory of economic and political decision-making. This is an ongoing lifelong research programme and it has made James Buchanan to a pioneer as well as the leading person in the new field of research that is now generally called Public Choice or the new political economy.

Standard economic theory studies mainly how households and firms interact in markets within the context of a pricing system. One way of describing this interaction is to regard the economic system as consisting of a very large number of voluntary exchanges of property-rights. The remarkable property with this system-with its billions of daily transactions or exchanges-is that it works and is coordinated in a spontaneous way. All individuals as members of households or of firms act mainly in their self-interest. Nevertheless the outcome of the whole system is usually in accordance with the “general interest”. The understanding of the market system with its spontaneous coordination and sometimes with failures of coordination such as unemployment, inflation, or environmental problems – has been the object of the economists’ endeavour since the time of Adam Smith.

The new field of research in which Buchanan has been one of the founders and most important contributors expands the scope of economic theory in various ways. The first contribution from Public Choice theory, that probably is the most widely known outside the academic world, is the extension and use of traditional economic micro-theory in the studies of the political system, the public administration, and interest organizations. The main aim of extending economic theory to these areas traditionally studied by other social sciences has been to create a coherent positive (or descriptive) theory of how the different components of the political system actually work and not a normative theory of how they should work. The same individuals that act mainly in their self-interest as members of households and firms and seek to increase utility or profit are also members of the political system. It is hard to believe that these individuals drop the self-interest and turn into economic eunuchs devoting themselves completely to social engineering in the service of the general interest. The development of the Public Choice theory is a promising step towards a more general economic theory that encompasses all the important components of the modern mixed economies. It is an important scientific achievement to have a theory that deduces the behaviour of different political and administrative organizations from the interest of their members.

This more general theory has also caused a change in the economists’ view of the conditions of economic policy. This second contribution from the Public Choice theory makes it easier to explain a number of political phenomena as the occurrence of large budget deficits where all the economic benefits go to the present generation (and to the voters and politicians of today) while most of the cost will be carried by future generations, partly without voting rights in the present decisions. Other problems that have been successfully studied are how well-organized producer interests will gain benefits at the expense of diffusely and less efficiently organized consumers’ interests. The voters in the middle will by almost mathematical necessity strengthen their position as the different political parties of the left and of the right try to obtain majority of their own by persuading the voters in the middle to change side. An important conclusion of this strain of research is that attempts to correct different economic coordination or “market failures” by political and administrative measures might instead create new and possibly equally serious “policy failures”.

A third area of Public Choice in which Buchanan has made a most important contribution concerns the foundations of economic as well as of political decision-making. Inspired by Knut Wicksell’s contribution, Buchanan started already in 1949 to analyse how public expenditure and tax decisions in principle could be constructed on a basis of unanimity. The voluntary exchange between two persons could be generalized and extended to a social contract in which no person would be a looser. This contractarian view of the state was then developed into an economic theory of constitutions in which the optimal decision rule is determined by weighing the high decision costs of unanimity against the losses different persons will experience when demands for unanimity decrease.

The important issue will be the design of the constitutional contract and the rule system of society that established a proper balance between the coercion that is necessary to protect the citizens against external and internal threats and uncertainty, and the risk that the coercive powers of the state will be exploited by special interest groups. This research has led Buchanan to a deep understanding of the importance of social systems of rules and norms. A further consequence of this research is a social theory that not only integrates political and economic decision-making but also includes important parts of the legal rule-system.