16 October 1986

THIS YEAR’S ECONOMICS PRIZE AWARDED FOR A SYNTHESIS OF THE THEORIES OF POLITICAL AND ECONOMIC DECISION-MAKING (PUBLIC CHOICE)

The Royal Swedish Academy of Sciences has decided to award the1986 Alfred Nobel Memorial Prize in Economic Sciences to

Professor James McGill Buchanan, George Mason University, Virginia, USA,

for his development of the contractual and constitutional bases for the theory of economic and political decision-making.

Summary
This year’s Alfred Nobel Memorial Prize in Economic Sciences is awarded to James M. Buchanan for his contributions to the theory of political decision-making and public economics.  Traditional economic theory explains in great detail how consumers and entrepreneurs make decisions regarding purchase of goods, choice of work, production, investments, etc. In a series of studies, Buchanan has developed a corresponding theory of decision-making in the public sector. This comprehensive theoretical formulation which goes under the name, “The New Political Economy” or “Public Choice”, and lies on the boundary between economics and political science and has some of its origins in the work of the Swedish economist Knut Wicksell. Buchanan’s contribution is that he has transferred the concept of gain derived from mutual exchange between individuals to the realm of political decision-making. The political process thus becomes a means of cooperation aimed at achieving reciprocal advantages. But the result of this process depends on “rules of the game”, i.e., the constitution in a broad sense. This in turn emphasizes the vital importance of the formulation of constitutional rules and the possibility of constitutional reforms. According to Buchanan, it is often futile to advise politicians or influence the outcome of specific issues. In a given system of rules, the outcome is to a large extent determined by established political constellations. A relevant example is that those who would like to correct individual tariffs should concentrate instead on the fundamental rules of international trade, such as GATT regulations.

For nearly forty years, James M. Buchanan has devoted himself to development of the contractual and constitutional bases for the theory of economic and political decision-making. In so doing, he has become the leading researcher in the field which has come to be known as “public choice theory”.

For a long time, traditional economics lacked an independent theory of political decision-making. Modern welfare theory often relied on the premise that public authorities could apply relatively mechanical methods to correct different types of so-called market failures. Stabilization policy theory – regardless of whether it was Keynesian or monetarist appeared to assume that political authorities endeavored to achieve certain macroeconomic or socioeconomic goals regarding employment, inflation or growth rates. Buchanan and others in the public choice school have not accepted this simplified view of political life. Instead, they have sought explanations for political behavior that resemble those used to analyze behavior on markets.

Individuals who behave selfishly on markets can hardly behave wholly altruistically in political life. This results in analyses which indicate that political parties or authorities that to at least some extent act out of self-interest, will try to obtain as many votes as possible in order to reach positions of power or receive large budget allocations. This type of analyses has become universal in recent years, and is perhaps the most widely known aspect of public choice theory.

Principles of Unanimity
Buchanan has extended the parallels between economic and political decision-making even further. Market behavior is based primarily on voluntary agreements and the exchange of goods and services which give rise to mutual advantages for the agents in market transactions. A prerequisite of the market system, however, is the establishment of a legal system that protects ownership rights and the realization of contractual agreements. The political system may also be regarded as a system based on voluntary agreements.

Beginning with Knut Wicksell’s early analysis of the relation between public expenditures and taxes, Buchanan has formulated a theory of the public sector and political decision-making based on the principle of unanimity. As a result, decisions concerning the dimensioning and financing of collective efforts may be regarded as the outcome of voluntary agreements among citizens. Every citizen would thus in theory receive a welfare gain if the value, to him, of collective measures exceeds what he must forego in the form of taxes.

In this perspective the political process becomes primarily a way of cooperating to achieve mutual advantages – and not a means for redistributing resources among individuals. Owing to the high costs of arriving at decisions, however, the unanimity principle is difficult to apply in practice. The costs of making decisions based on a high degree of mutual agreement have to be weighed against the costs an individual faces when a majority decision goes against him. It thus becomes imperative to distinguish between fundamental decisions concerning the rules which govern future decisions on all kinds of issues and the decisions themselves.

Once constitutional rules are adopted, the outcome on concrete issues is often given by the internal dynamics of the political system. Thus the design of constitutional rules and the possibility of constitutional reforms take on great importance. Attempts to advise politicians or affect the outcome of specific issues are often futile; for any given rule system, the outcome is determined largely by prevailing political constellations.

The Importance of Fixed Rules
Buchanan’s foremost achievement is that he has consistently and tenaciously emphasized the significance of fundamental rules and applied the concept of the political system as an exchange process for the achievement of mutual advantages. He has used his method with great success in the analysis of many specific problems and issues. Long before large budget deficits arose, for example, he showed how debt financing dissolves the relation between expenditures and taxes in the decision-making process.

Developments over the last few decades have confirmed Buchanan’s realistic view of the scope of economic policy and the importance of continuously reconsidering fundamental rules of the game, while retaining stable rules. Economists now working in the area of stabilisation policy are much more interested in fixed rules than they were a few decades ago when “fine tuning” was in fashion. Earmarked taxes and qualified majority as methods of achieving better correspondence between public expenditures and taxes are now considerably more topical questions than they were twenty years ago when attempts were made to restrict the political administrative decision-making process as little as possible.

Important Publications
Buchanan’s best-known work is probably Calculus of Consent (1962; written in collaboration with his colleague, Gordon Tullock). Different applications are given in, e.g., Public Finance in a Democratic Process (1966), and The Demand and Supply of Public Goods (1968).

Buchanan’s visionary approach is presented in The Limits of Liberty (1975) and Freedom in Constitutional Contract: Perspectives of a Political Economist (1977). In more recent works, Buchanan has continued his analysis of the tax state and systems of rules in The Power to Tax (1980; with G. Brennan) and The Reason of Rules (1985; with G. Brennan).

In addition to these monographs, Buchanan has published numerous articles in scientific journals; collections have appeared in What Should Economists Do? (1979) and Liberty, Market and State (1986).