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| In the fifteen years immediately following World War II, unquestionably
the most significant development in public economics was the emergence of "public
expenditure theory." This development arose in the attempt to define a comprehensive
theory of the state around the notion of "market failure." For public economics,
this was a significant development because, until that time, analysis focused on the tax
side of the budget. Most of public economics could aptly be called "public
finance" because the central preoccupations revolved around how "best" to
raise the revenue required for public activitiespublic activities whose rationale
lay entirely outside economic scrutiny. There were, to be sure, hints of what such a
rationale might look like, for example, Pigou's famous treatment of the "smokey
factory." But these hints remained partial and disparate until Paul Samuelson, in
what became a famous series of articles on "public goods," set out what
purported to be a coherent and synthetic justification for governmental intervention in
economic processes. Samuelson provided an account of what James M. Buchanan was later to
refer to as the "productive state."*1 In the
Samuelson formulation, the critical element in this justification is the market failure
that public goods give rise to in an extreme form. In this sense, public goods are a kind
of distillation of various possible barriers to the market's capacity to exploit all the
possible gains from exchangegains that might in principle be appropriated by the
citizens who compose the relevant group-polity-nation. The 1950s and 1960s saw a huge
burgeoning in the normative analysis of markets, most of it oriented toward showing some
market failure, so understood, and often associated with a putative case for some form of
governmental intervention. |
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| It is now folklore that the normative thrust of public goods analysis was
an important element in the birth of the public choice movement. One central ambition of
public choice scholarship was to insist that "political success" needed to be
demonstrated before the market failure in question could establish a preference for
government activityand to demonstrate that such political success might be more
difficult to achieve than the public economics presumption might suggest. Put another way,
market failure was itself assessed by reference to a benchmark that economists came to
understand only by contemplation of market operation in other (private goods) arenas.
Market failure on its own meant nothing: Politics would have to submit to the same test.
This much is familiar. And Buchanan's work has been critical in making it so. |
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| It is, however, important to note that the public choice tradition has
never denied the logic of the market failure argument as such. Indeed, Buchanan himself
made extremely significant contributions to the market failure-public goods literature.
For example, what are almost certainly Buchanan's two most famous
articles"Externality," with W. C. Stubblebine, and "An Economic
Theory of Clubs"fall precisely into this area of inquiry. In fact, public goods
theory constituted a major (perhaps the predominant) element in Buchanan's research agenda
throughout the 1960s. The Demand and Supply of Public Goods is to be seen as an
important part of that body of work and should be read alongside the articles in volume 15
in the Collected Works, Externalities and Public Expenditure Theory, as Buchanan's
attempt to synthesize and focus his views on those "public goods" issues. The
Demand and Supply of Public Goods should perhaps also be read alongside the earlier
contributions of Samuelson and Richard A. Musgrave. John G. Head provides a survey of this
literature contemporaneous with The Demand and Supply of Public Goods that includes
an article-length review of Buchanan's book.*2 |
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| It is interesting specifically to contrast Buchanan's approach with the
earlier Samuelson exposition. Two features are notable. First, whereas Samuelson's central
purpose is to establish "optimal conditions" for the supply of public goods, and
to show thereby that the Pareto optimum could never be a market equilibrium, Buchanan
seeks to derive that market equilibrium directly. Such derivation is necessary to
Buchanan's broad purpose of explicitly comparing market performance with political
performance: Buchanan has much less interest in conceptually possible but institutionally
infeasible ideals. Second, and related, much of Buchanan's treatment reads like a purely
positive account of institutional choice. The quest for mutual advantage through
exchangewhether a two-person exchange as for ordinary private goods or a many-person
exchange as in the public goods caseserves in The Demand and Supply of Public
Goods as a motivator of action as well as a relevant normative test. Accordingly, The
Demand and Supply of Public Goods is an important piece of Buchanan's contractarian
theory of the "productive state" with the ambiguity between the positive and
normative use of the contractarian approach deliberately allowed full rein.*3 The contrast with Samuelson's much more overt (if incomplete)
normative treatment, with the independently derived "social welfare function" as
an express articulation of the "ethical observer's optimum," is worth noting. In
this respect, Buchanan is much more faithful to the Wicksellian approach than is
Samuelson, although both Samuelson's and Buchanan's treatments of the public goods
question derive ultimately from Wicksellian sources. (In Samuelson's case, the derivation
is through Musgrave's paper on Erik Lindahl's version of Knut Wicksell's analysis.)*4 |
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| And it is worth emphasizing that Wicksell's original contribution
represents the origin of public choice to politics as well as the point of departure for
subsequent literature on public goods and market failure. It is therefore unsurprising
that Buchanan, for whom the Wicksell influence is more explicit, should have made
independent contributions in both areas and been a determined proponent of their
inextricable connections. |
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| The particular occasion for writing the first draft of The Demand and
Supply of Public Goods was a series of lectures given at Cambridge University in
1961-62. The audience originally conceived for the book was therefore a group of
relatively able undergraduate and graduate students. But little of the flavor of a
textbook is detectable herethere is no dry pedagogy and surely no concession to the
undergraduate concentration span. What Buchanan provides here is a clear statement of the
contractarian approach to public goods problems, very much in the "voluntary
exchange" tradition of Wicksell and Lindahl. |
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| Geoffrey Brennan
Australian National University
1998 |
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