Sunday, January 13, 2013

The Significance of James Buchanan

Tyler Cowen has a list here.

A couple points:

- I think Cowen does the legacy a disservice by not talking about constitutions explicitly. He mentions "rules of the game" and the "original position", which is basically the same thing, but I don't think this drives home what to me is the really important part of the argument: the two-stage nature of public decision making. It's important to talk about these as stages (with one coming first) because constitutions actually change your outcomes by influencing decisions in the second stage. Another way to think about this is in terms of fixed and variable institutions (like in producer theory). What Cowen means by "rules of the game" are things that are fixed in the short run and variable in the long run. Legislation and policy is variable in the short run.

- Cowen mentions "He provided a public choice analysis of why Keynesian economics would not lead to the appropriate budget surpluses during good times and thus would contain dangerous ratchet effects toward excess deficits." This of course is what I have some problems with. I would say that Buchanan makes two mistakes here: (1.) a history of thought mistake, in diagnosing exactly what Keynesians and their models say or assume, and (2.) an analytic mistake, in addressing how we should expect this to play out. The first is actually easily corrected. The second is a little more involved, I think. But the empirical evidence makes it pretty clear that he was wrong, I think. Think of every argument we've had about fiscal policy and the debt in the last several years. This is clearly not a world where Keynesian economics is driving policy in an over-indebted direction. The picture is complicated by (1.) automatic stabilizers, and (2.) long term trends in entitlements that have nothing to do with deficit financing or Keynesian stabilization. I think that's part of what throws people. I'd like to explore this more, but I'm still not sure if it's worth the investment of time.

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