The 12 Economists of Christmas: James Buchanan

We’ve all heard stories about regulators behaving badly. At one extreme, a quality assurance inspector neglects to do his job properly, and a dangerous product is delivered and sold to the public. At the other extreme, risk-averse regulators hold up the approval of a promising new medical treatment, and thousands suffer needlessly while they wait. Sometimes outright corruption is involved: a top regulator looks the other way while a company or an industry behaves badly, only to be rewarded with a plum position in the private sector when he leaves the public sector.

Despite these obvious truths, economists have traditionally put government actors on Santa’s nice list. In response to hypothesized instances of “market failure,” where the unregulated allocation of goods and services results in an inefficient outcome that hurts the public (such as when businesses pollute the environment, and those who are harmed have no recourse), many economists have believed that governments must step in to fix the problem. But this government intervention raised a new question: why shouldn’t we expect that government actors may also fail?

James Buchanan was among the first economists to point out that government players are far from infallible. As he noted, “Politicians and bureaucrats are no different from the rest of us. They will maximize their incentives just like everybody else.” Along with fellow travelers like Gordon Tullock and William Niskanen, Buchanan spearheaded a new field of economics, called public choice, which studied the incentives and decision-making processes of public figures.

According to Buchanan, people do not lose their humanity when they take public office. They have the same motivations as people in the private sector, and in some cases, they actually have more opportunities for mischief without the market mechanisms that keep the private sector in check.

For instance, the budgets of private firms are usually constrained by their need to remain profitable or go out of business. As a result, they can only spend as much on salaries, new hires, and fancy coffee machines as their bottoms lines will allow. By contrast, government bodies usually have the option of raising new taxes. And politicians or bureaucrats who make the case for new public revenues need not be constrained by the public interest. They may instead want to use the new funds to increase their power through new hires or expanded authority.

This is just one rough illustration of what Buchanan called “politics without romance.” This is not to say that all or even most regulators deserve a lump of coal in their stockings this winter. But by better understanding the incentives that shape public decision-making, we will be in a better position to understand how we can elicit the best possible outcomes from public institutions.