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Public Finance and Public Choice: Two Contrasting Visions of the State

Mark Skousen

So there I was in the late ‘60s, an undergraduate economics major at BYU, a very conservative institution. My introductory textbook was Paul Samuelson’s Economics; my history of economic thought textbook was Robert Heilbroner’s The Worldly Philosophers; and for my public finance course we used The Theory of Public Finance by Richard A. Musgrave. In other words, my “conservative” BYU professors were all using the most Keynesian of textbooks. No Friedman, no Hayek, no Mises.

Musgrave, a Harvard professor, argued the need for a triumvirate government: (1) to provide public goods that the private sector couldn’t; (2) to redistribute wealth and institute social justice; and (3) to stabilize an inherently unstable capitalist economy. That “mainstream” interventionist theory was taught with hardly a ripple of skepticism.

Fortunately, much has changed since I graduated. Friedman, Hayek, and Buchanan have won Nobel Prizes in economics, and the textbooks are filled with market solutions and anti-Keynesian alternatives, including monetarism, privatization, and public choice. Even Samuelson highlights the “public choice” work of Buchanan and Gordon Tullock in his latest textbook. (I can’t let this paragraph end without expressing my outrage that Tullock did not share the Nobel Prize with Buchanan in 1986; even Buchanan admits that Tullock was the “catalyst” behind public choice theory.)

The fact that Buchanan, not Musgrave, won a Nobel is telling. Musgrave is in his late eighties. Most of his books are out of print, and he remains an unabashed Keynesian. Still, the influence of his approach to the task of the state is pervasive, since the best that free-market economists have done is to help slow the growth of government, not reverse it.

Public Finance and Public Choice is a script of the papers and comments presented at a 1998 conference in Germany by Buchanan and Musgrave. In their debates, Musgrave defended social insurance, progressive taxation, and the growth of the public sector as the “price we pay for civilization.” Buchanan blamed democratic politics for a “bloated” public sector, “with governments faced with open-ended entitlement claims,” resulting in “moral depravity.” He wants to constrain government through constitutional rules and limitations and describes their differences thus: “Musgrave trusts politicians; we distrust politicians.”

Musgrave responded: “Is the state of our civilization really that bad? . . . There is much that should go on the credit side of the ledger. The taming of unbridled capitalism and the injection of social responsibility that began with the New Deal . . . . Socializing the capitalist system . . . was needed for its own survival and for building a good society.” He also mentioned the “enormous gains” by blacks and women in the twentieth century, apparently assuming that those groups could have made no “gains” were it not for government intervention.

The two professors’ exchange on the extent of justifiable government activity is enlightening, but I have two complaints about the book. First, Buchanan and Musgrave assume the reader has a great deal of economic sophistication. They don’t define terms and often argue on a level suited to graduate students. Second, I would have liked to have seen a clearer discussion of today’s hot issues—privatization of Social Security, budget surpluses, tax reform, and the Medicare crisis.

Moreover, one of the problems with this debate is that the two economists are not completely at opposite ends of the political spectrum. This is no debate between an anarchist and a socialist. Both advocate a substantial public sector. In fact, Buchanan admitted that he is philosophically between Musgrave and Hayek. For all his skepticism about the ability of public-sector decision-makers to arrive at good economic decisions, Buchanan still endorses what seems to me an inordinate amount of government activity.

One of the reasons Buchanan’s (and Tullock’s) public-choice approach has been so effective is that it applies market principles to government finance. By assuming that public decision-makers will act in their self-interest, just like everyone else, they were able to strip away much of the “romance” (as Buchanan puts it) of government action. The power of that analysis is clearly lost on old Keynesians like Richard Musgrave, but should not be lost on younger economists.

Although this is not a book for those who are in the early stages of their economic educations, seasoned economists will find some provocative exchanges between these two well-known pillars of the profession.

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