The Domain of Constitutional Economics (Buchanan, 1990)

In this essay, James M. Buchanan explains the research program of Constitutional Political Economy (CPE) as an inquiry regarding the study of rules, how rules work and how rules might be chosen.  Buchanan defines it as follows: "Constitutional Political Economy is a research program that directs inquiry to the working properties of rules, and institutions within which individual interact, and the processes through which these rules and institutions are chosen or come into being".  He argues that the central elements of CPE are: (1) methodological individualism; (2) rational choice.

First, Buchanan distinguishes CPE from conventional economics in that orthodox economics is about choice within constraints, whereas constitutional economics focuses on the choice among constraints.   Second, he separates constitutional economics from constitutional politics.  Constitutional economics focuses on cooperative over conflictual human interaction.  Politics is related to a distributional game, which involves transfers of value between coalitions of persons.  Constitutional economics involves the comparison of alternative sets of rules and the analysis of the process through which agreements on rules may be obtained (the cooperative model is rescued).

Constitutional economics is influenced by two traditions: (1) classical political economy; (2) contractarian political philosophy.   Under the classical political economy of Adam Smith, the existing politicized regime is described and an alternative regime is presented.  As a consequence, the laws and institutions that define the economic-political order can be subject to reform.  Under the contractarian political philosophy, the individual exchanges his own liberty with others who also give up liberties in exchange for the benefits offered by a regime.

Buchanan concludes that constitutional economics rests on the faith on "man's cooperative potential": "Persons are independent units of consciousness, capable of assigning values to alternatives, and capable of choosing and acting in accordance with these values.  It is both physically necessary and beneficial that they live together, in many and varying associations and communities.  But to do so, they must live by rules that they can also choose."

The following questions arise from reviewing the article:

(1) Why are the reciprocal exchanges of liberties central to the domain of constitutional economics?

(2) What reasons does Buchanan give for the failure of conventional economics to use their analytical devices to the derivation of institutional-constitutional structure?

(3) What does Buchanan means by stating that the analysis under constitutional economics is consistently individualistic?

(4) According to Buchanan, why an exchange and not a maximizing paradigm describes the research program of constitutional economics?

(5) Why is methodological individualism the foundational position for constitutional economics?

The article can be found here:

http://www.walkerd.people.cofc.edu/400/Sobel/2A-8.%20Buchanan%20-%20Constitutional%20Economics.pdf

What Should Economists Do? (Buchanan, 1964)

In this essay, James Buchanan argues that the economist should focus in "the theory of markets", instead of the "theory of resource allocation" or "theory of choice".  He criticizes the vision of Lord Robbins, who considered that the economic problem involves the allocation of scarce means among alternative or competing ends.  Buchanan considers that following Robin's path is to acknowledge the study of economics as one of applied maximization, where the utility function of the choosing agent is defined in advance and choice becomes purely mechanical.  According to Buchanan, the central idea of the discipline should be the cooperative association of individuals (behaviour of exchange, trade or agreement).

Buchanan considers the model of perfect competition to have limited explanatory value except when changes in variables exogenous to the system are introduced.  There is no place within this model for the internal change driven by the Smithean propensity of men. Furthermore, he considers the market as "the institutional embodiment of the voluntary exchange process that is entered into by  individuals in their several capacities" and defines economics as the study of the whole system of exchange relationships.  Finally, Buchanan emphasises that economists should be "market economists".

Several questions arise from revising this essay:

(1) What is the main criticism of Buchanan to the definition of economics stated by Milton Friedman?

(2) According to Buchanan, what is the paradox within the theory of choice?

(3) Why Buchanan considers that the use of the term "catallactics" or "symbiotics" is preferable to the use of the word "economics"?

(4) Why the model of perfectly competitive general equilibrium excludes the social content of the individual behaviour in market organization?

(5) Why is there no explicit meaning of the term "efficiency" when applied to aggregative or composite results?

(6) What is the basic distinction between economics and politics regarding the nature of the social relationships among individuals examined by each field of study?

The essay can be found here:

http://mx.nthu.edu.tw/~cshwang/teaching-economics/econ3171/References/01-Buchanan=What%20should%20Economists%20Do.pdf

Public debt, cost theory, and the fiscal illusion (Buchanan 1964)

In this essay from Public Debt and Future Generations, Buchanan explains how public debts probably generate fiscal illusions of both the Vickrey and the Puviani sort.  Individuals probably do undervalue the future tax liabilities that an issue of debt embodies, and, even if they do not, they should probably still prefer debt to the current tax alternative.

Some questions arising from the essay are the following:

(1) What is a public debt illusion?
(2) To what extent does the presence or absence of a public debt illusion affect the temporal location of debt burden?
(3) What is an individual's share in the liability that an issue of interest-bearing public debt represents?
(4) What determines the individual's undervaluation of future tax liabilities in the presence of  a public debt illusion?
(5) Why when facing a pure Ricardian choice between the levy of an annual tax in perpetuity and an extraordinary tax, the individual will prefer the debt-annual tax alternative?
(6) Is the fiscal illusion a part of the explanation for the debt accumulation in the U.S. and Europe?

James Buchanan's text The Fiscal Illusion can be found in the following link:

http://www.econlib.org/library/Buchanan/buchCv4c10.html