The Democracy of Self-Interest: Buchanan’s Case Against Perfect Governance

In this episode of Fascinating!, Rik from Planet Vulcan delves into the brilliant mind of Nobel laureate James M. Buchanan, whose Public Choice theory flips the romanticized view of selfless government on its head. Buchanan argued that politicians and bureaucrats, just like market participants, are driven by self-interest—because, let’s face it, they’re human too. With sharp wit and a healthy dose of Vulcan skepticism, Rik unpacks Buchanan’s belief in the power of evolving systems over the rigid ‘intelligent design’ of governance, while debunking the myth of perfect competition and flawless governance.

From Buchanan’s rugged Scottish roots to his intellectual growth under the influence of Frank H. Knight and Friedrich Hayek, this episode traces his journey from questioning central planning to championing spontaneous order. If you’ve ever felt that centralized control is like a deus ex machina in a story best left to unfold naturally, this one’s for you.

Transcript

Good day to you, and welcome to Fascinating!  I am your host Rik, from Planet Vulcan.  My continuing mission on Planet Earth:  to search for signs of intelligence and to encourage its spread.

In this essay, I wish to draw attention to the work of a distinguished American economist, Nobel laureate James M. Buchanan, and to encourage the spread of his ideas.

Buchanan’s life work was centered around a deep understanding of the evolutionary nature of a socioeconomic system, and a skepticism of claims that intelligent design which aimed at some hazily defined “perfection” could produce more favorable outcomes than cultivation of the continuously evolving and emerging order.

James M. Buchanan is best known for his pioneering work in public choice theory, which applies economic principles to political decision-making. Buchanan's contributions centered on how collective decisions in the public sphere—such as those made by governments or other political institutions—are shaped by individual interests and incentives.  The myth has always been, and still is to a surprising extent, that public officials are primarily motivated by ideals of service to the public good.

Moreover, the knowledge that there is an alternative to policies of intelligent design to be put into effect by governments is not widespread.  It is not something that is included in the public education of children.

A short curriculum vitae for Buchanan:

Buchanan’s family was part of the Scottish diaspora, where many Scots emigrated to escape the upheavals which occurred after the kingdoms became united in 1707.  They brought many Scottish cultural traditions with them, particularly a fierce attachment to individual liberty. 

Buchanan received his education at several institutions:

His undergraduate degree was from what is now known as Middle Tennessee State University, and he soon after earned a master’s degree in economics from the University of Tennessee in 1941.

From there he pursued further graduate studies at the University of Chicago, from which he received his Ph.D. in economics in 1948.

One of his major influences while studying at Chicago was Frank H. Knight.

We should also make some laudatory remarks about Frank Knight, a brilliant and original thinker known for, among other things, his refusal to adhere to any particular school of thought.  He took the same attitude as the legendary Bruce Lee, whose attitude towards the various schools of martial arts he expressed in a phrase, “If it helps you in a fight, use it”.

One of Frank Knight’s favorite expressions is a quote from Mark Twain which you have heard many times on this podcast: “It ain’t ignorance that’s the problem; it’s knowin’ so durn much that ain’t so”, aka ecnarongi, which is ignorance spelt backwards.

Knight, along with other faculty at Chicago, advocated free markets with limited government intervention, and he emphasized the essential role of prices in providing the signals that coordinate market activity and allocate resources efficiently.

He is also famous for distinguishing between the concepts of uncertainty and risk, where the distinction he made was essentially between known unknowns (risk), and unknown unknowns (uncertainty).  

He explained that the value of making such a distinction is that it explains the role that profits play in the economic system, if we think of profits as the payoff to entrepreneurs who deal successfully with the unknown unknowns.  This is not the same thing as the payoff to managers for taking intelligent risks, i.e. dealing with the known unknowns, a type of payoff which should be distinguished from true profit.

By the time Knight entered the profession in the mid-20th century, it was already a long-established idea in economic theory that there is some sort of ideal market structure characterized as “perfect competition”.  In the perfect competition model, neither producers nor consumers would be large enough to be able to influence prices; buyers and sellers alike would have complete and costless information; there would be no barriers to entry into or exit from a market; there would be no transactions costs; nor would there be anything else that would upset the magic of the price system in allocating resources efficiently.

The model of course contains unrealistic assumptions, as Knight and most other economists understood.  Those who believe in the value of regulations and interventions often cite the failure of real-world markets to conform to the ideal of perfect competition as justification for regulating and intervening, so as to navigate us all towards something more closely resembling the model.  Ironically, in doing so they are arguing from a model of perfect governance, where regulators would be able to compensate for deviations from the ideal of perfect competition.

Knight argued convincingly that political intervention on such grounds was not justified, because it makes more sense to compare real-world competition not to ideal competition, but instead to real-world alternatives; and that real-world competition is generally more effective than real-world intervention, as opposed to an irrelevant perfect governance model, in improving general well-being.

Back to Buchanan:

After receiving his Ph.D. in 1948, he taught for two years at his old school, the University of Tennessee, while continuing his intellectual development.

He then taught at Florida State University, where he achieved the academic rank of associate professor. During his time at FSU, his ongoing intellectual development included some of the ideas that would later become foundational in public choice theory.

In 1955, he became a Fulbright Scholar and studied at the London School of Economics, where he was introduced to European approaches to economics and political theory.

Included among the European approaches he was exposed to were the following:

At the LSE, he would have encountered economists deeply engaged in welfare economics and social choice theory, fields concerned with the collective welfare of societies and the aggregation of individual preferences into social decisions. The majority of those who worked in these fields were devotees of the intelligent-design approach, and believed with what can only be characterized from our vantage point in the present as hubris.

An exception was the scholar Lionel Robbins, a prominent figure at LSE, who was known for opposition to interpersonal utility comparisons, influencing Buchanan's thinking on the limits of economic planning.

Additionally, William H. Riker and Kenneth Arrow, both influential in the field of social choice theory, were working on the challenges of democratic decision-making, a topic Buchanan would later tackle in The Calculus of Consent, co-authored with a like-minded economist named Gordon Tullock.

Arrow’s Impossibility Theorem, published in 1951, demonstrated the inherent difficulties in aggregating individual preferences into a coherent collective choice, a concept that aligned with Buchanan's later work on the challenges of collective decision-making and the imperfections of democracy.

Although the Austrian School of Economics was not specifically based at the LSE, Buchanan was influenced by Austrian Friedrich Hayek, who had been a major figure at the LSE until the early 1950s. Hayek’s writings, particularly his emphasis on the limitations of central planning, the importance of decentralized knowledge, and the spontaneous order of markets, were important to Buchanan's development of public choice theory and constitutional economics.

Hayek's views on individual liberty, skepticism toward government intervention, and the dangers of collectivism had a lasting impact on Buchanan.

Moreover, European political thinkers such as Jean-Jacques Rousseau and John Stuart Mill had long emphasized the relationship between individual liberty and democratic governance. Buchanan's exposure to these traditions further deepened his interest in how constitutional rules could be designed to protect individual freedoms within democratic systems, a theme he would explore in greater depth in his later work on constitutional economics.

Buchanan was also exposed to ongoing debates in Europe about the balance between market mechanisms and state intervention, especially in the postwar context of rebuilding European economies. European intellectuals were grappling with how much state intervention was necessary to rebuild economies ravaged by World War II, and most leaned toward active government roles in economic planning.

From our perspective today, we can recognize that the results achieved by those who leaned toward more active economic planning and intervention were far inferior to the results achieved by Ludwig Erhard in Germany in particular.  People still refer to Germany’s quick recovery after the war as a Wirtschaftswunder, or economic miracle, and it contrasted sharply with the sluggish performance of other European countries who nationalized their industries and regulated markets with a heavy hand.

According to the conventional wisdom at the time, Erhard did everything wrong.  He abruptly removed wartime price controls and rationing at a time when most everyone else was sure this would lead to chaos, and not to the orderly growth that actually emerged quite quickly on his watch; he embraced a capitalist, free-market system, encouraging competition and entrepreneurship. By eliminating excessive government intervention in the economy, he allowed businesses the freedom to invest, innovate, and expand.

All of this at a time when most of the profession agreed that economic planning would be the wave of the future.  Chancellor Erhard’s example was no fluke; even so, it took many more decades for planning to die out as an ideal, and it’s taking even longer for Earthlings to recognize that massive open-loop regulation is likewise a path to a dead end, and that the economic system is a superorganism that regulates itself and everyone who is a part of the system.

Buchanan’s exposure to these debates reinforced his skepticism toward state intervention and his belief in the need to constrain government through constitutional rules. His later work would argue that unchecked government intervention, driven by political self-interest, often led to inefficiency and rent-seeking, an idea rooted in both his American training and the European political-economic debates he encountered at the LSE.

If you are not familiar with the term rent-seeking, it refers to those who enter into corrupt alliances with government as a more effective path to earnings than the path of competition.  Think of the producers of zinc, for example, who lobby to make sure that the United States still mints the penny.

After his fruitful stint at the LSE, Professor Buchanan taught at the University of Virginia from 1956 to 1968.  He established the Thomas Jefferson Center for Studies in Political Economy here, where much of his early work on public choice theory was developed.

After a year teaching at UCLA, he moved on to Virginia Tech and spent his next 14 years there, continuing his work on public choice and constitutional economics, and founded his first Center for the Study of Public Choice.

From 1983 through 2007 he did his teaching and research at George Mason University, where he founded another Center for the Study of Public Choice.

He died in 2013 at the ripe old age of 94.

Buchanan is most famous for his work in public choice, which analyzes how economic tools can explain political behavior. He argued that just like in markets, individuals in politics - politicians, bureaucrats, voters - act based at least partly on self-interest rather than purely for the public good. This insight challenged the notion that government officials or institutions are inherently more altruistic or efficient than private individuals.

He also made important contributions to other subjects such as the provision of public goods, for example such things as national defense, fire protection, policing and courts, or whatever else might be characterized as public goods; and to what he called constitutional economics, which focused on how the “rules of the game” are created and enforced.

Buchanan received the 1986 Nobel Prize in Economics for his work in public choice theory, ideas which are fundamentally reshaping how economists and political scientists think about the role of government, democracy, and collective decision-making processes.

James M. Buchanan’s work continues to influence both economics and political science. His insights highlight the importance of designing institutions and rules that can mitigate the inefficiencies and self-interested behaviors inherent in political decision-making. His work laid the foundation for modern studies of government inefficiency, rent-seeking, and the economic analysis of law and politics.

Buchanan’s work deserves wide and ongoing attention from anyone who is serious about making effective improvements in the well-being of humankind.

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