Where Chicago meets London
James M. Buchanan, Virginia Political Economy, and cost theory
Originally published in Public Choice
James M. Buchanan argued that not only the study of public choice, but also property-rights economics as well as law and economics, can be traced directly to the work of scholars associated with the Thomas Jefferson Center for Studies in Political Economy and Social Philosophy at the University of Virginia (UVA). We draw attention to that point by raising the following question: what was the common knowledge at UVA that made it uniquely suited for the development of each of those related, yet distinct subdisciplines of political economy? Fundamentally, the answer is the unique combination of Chicago price theory and London School of Economics cost theory developed at UVA, where opportunity costs were regarded not as constraints to which individuals passively respond. Rather, they are the reciprocal of the act of choice itself. That subtle distinction has significant implications not only for public policy, but, what is more important, the proper scale and of governmental responses to market failures. The unique combination of the Chicago and London schools was central to the development of a neglected branch of price theory at the University of Virginia.