Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

The Limits of Public Choice

Summer 2000

Public Finance and Public Choice-Two Contrasting Visions of the State by James M. Buchanan and Richard D. Musgrave (MIT Press, 1999, ix + 272 pgs)

In March, 1998, a series of public discussions between James Buchanan and Richard Musgrave took place at the University of Munich; these along with questions from the audience and an Introduction and Conclusion by Hans-Werner Sinn, are transcribed in this valuable book.

I found by far the most enlightening aspect of the discussion the portrait of Richard Musgrave. Now approaching ninety, he is the "grand old man" of public finance and was vastly influential during the New Frontier and Great Society, of blessed memory. He embraces nearly every statist fallacy in existence to a point approaching self-parody.

Both of our authors display the expected concern with "public goods" which, it is alleged, the unhampered market cannot optimally supply. Musgrave happily quotes David Hume as a precursor of this doctrine. But faced with Hume's suspicion of government, Musgrave is much less appreciative: "I do not join Hume's proposition that in viewing government `everyone ought to be considered a knave' . . . I would rather draw on people's capacity to serve as responsible members of the community, so that government may do its important tasks and do them well" (p. 82).

Professor Musgrave's faith in governmental beneficence, though initially startling, readily falls into place if one reviews his life. As Hans-Werner Sinn notes: "Musgrave has a social democratic background. He . . . has grown out of the German public finance tradition. His thoughts can be traced back, and often developed in opposition, to public finance economists like Schäffle, Sax, and, in particular, Adolph Wagner, one of the Kathedersozialists [sic] . . . A consistently favorable view of the beneficial functions of the government sector has characterized Musgrave's work throughout his life" (p. 6).

Readers who recall Mises's withering scorn in Omnipotent Government for Wagner's statism and militarism, characteristic of the Socialists of the Chair in Wilhelmine Germany, will view Sinn's characterization of Musgrave with foreboding. Nor can one take solace in the hint that Musgrave's opinions in part developed in opposition to Wagner.

It quickly becomes apparent that in the crucial respect, Musgrave is the perfect Wagnerite. Explaining his beneficent view of government, he rejects the theory that the malignant growth of the public sector during the twentieth century stems from "a self-aggrandizing Leviathan. Budget growth, or much of it, is seen in pathological terms, reflecting the fallacies of majority voting, the usurpation of power by self-serving politicians and bureaucrats, and fiscal illusion. I am skeptical of that model" (pp. 64-65).

Quite the contrary, Musgrave tells us, the budget can easily be too small. Government spending is good for you! In support, Musgrave appeals to-you guessed it-the renowned Socialist of the Chair Adolph Wagner. The share of GNP going to the public sector in the industrialized countries of the West now ranges from 30 to 60 percent, a vast increase from the situation at the beginning of the twentieth century. The growth, Musgrave alleges, can be explained by Wagner's law of public expenditure growth. The law is "traceable to major factors: structural changes in the economy, democratization of society, and an increased concern for social justice" (p. 64).

One might at first suppose that Musgrave could be readily refuted. No fancy theories need be adduced: one has only to glance at the record of the dismal twentieth century, with all its appalling wars and massacres. Given the manifest invidious consequences of the modern state, how can our Harvard eminence be so blind? Can any reasonable person, faced with the historical record, think government a beneficent force?

Musgrave's response is for me the highlight of the book: "The twentieth century has been marked by two terrible wars, made more deadly than those of the past by the advancing technology of destruction . . . It is true that there have been unthinkable episodes of brutality, such as the Stalinist terror and the Holocaust. But many of these terrible events occurred during the first half of the century, and I would suggest that the second half has been a success" (p. 227). How unfortunate that the victims of Mao's massacres in China, or Pol Pot in Cambodia, are not able to learn these glad tidings.

The man is really unbelievable. He simply cannot grasp why anyone would wish to restrict the state. In one discussion session, William Niskanen asked him, "What type of institutional arrangements do we need to assure time consistency? . . . How do we prevent each generation from treating the future as a commons?" (p. 235).

I should have thought obvious the purport of Niskanen's incisive question. How do we limit the government so that it will not leave future generations with a crushing burden of debt? How do we prevent inflationary booms that have later disastrous consequences? Would not these, and similar issues, leap to one's mind in assessing Niskanen's comment?

Musgrave actually takes the question to indicate the need for greater governmental activity. "I agree [!] that equity across generations is not something that the market can handle, so government is needed" (p. 235). He calls for a properly funded Social Security system, to make sure that the benefits of future retirees do not fall. The burden of the taxes required to pay for these benefits goes unmentioned.

But I have laughed at Musgrave enough: it is time to get down to arguments. He maintains that the govern- ment must decide questions of distribution by computing the "social welfare function." That is to say, we must compare the gains and losses to particular people from proposed schemes of redistributive taxation.

But hold on a moment. Has not the social welfare function long since been cast out of economic theory? Did not Arrow's Impossibility Theorem kill it? Yes, our author admits, if you mean "a Bergson-Samuelson social welfare function, [which] requires interpersonal and cardinal utility comparison" (p. 45), then the social welfare function has not been successfully derived.

This by no means settles the matter, our author avers. Why not use a social contract to determine the function? Musgrave regrettably does not explain his favored procedure in detail, but he does sketch out its main features. Each person has equal worth: thus, individuals "start out with equal inputs and equal voice into what is to be considered fair in society" (p. 56).

What results from these deliberations? Musgrave supports a combined principle of fairness. Like Rawls, he inclines to think that "inequality is fair only where it is to the benefit of everyone" (p. 86). This however must be modified by Lockean rights of entitlement, to which he would give "one-quarter weight with three-quarters of the Rawlsian concept" (p. 56). (Incidentally, this does not mean that people may hold one-quarter of their income exempt from confiscation. Rather, it requires only that the government give entitlements some weight in its deliberations.)

Whether Musgrave deserves his reputation in public finance is not for me to judge: what I can say is that as philosophy, his remarks are incompetent nonsense. For one thing, there appears no connection between his starting point and his conclusion. He begins with people who, it is alleged, have an equal voice in determining the principles of justice. How does he know that people under conditions of equal voice will arrive at his peculiar formula-take _ Rawls, ¼ Nozick, mix, and serve? He does not tell us.

However one may deplore Rawls's difference principle, one must at least give its distinguished author credit: he gives reasons for the principles of justice he advocates. Musgrave, in one of his best insights, rejects Rawls's argument: "Reasoning in terms of risk aversion (the basis for Rawls's derivation of the difference principle) is attractive to the economist's penchant for maximization but I question its usefulness as a principle of justice" (p. 46). But he puts nothing in its place.

Readers will have noticed a glaring omission in my review. I have so far said nothing about Musgrave's antagonist, James Buchanan. This failure is not one of my ever-increasing fits of absentmindedness. Buchanan confines himself to reiteration of his well-known views, and breaks no new ground.

It would be uncharacteristic of me to let an author off scot free, so I shall conclude with a few critical remarks about Buchanan. In his pursuit of the mirage of "pure procedural justice," the view that justice consists entirely of rules of decision, Buchanan accomplishes an amazing feat. In one place, he is less in favor of property rights than Musgrave. "I [Buchanan] don't buy at all into Nozick-type entitlement claims" (p. 85).

Further, he essays no reply to Musgrave's criticism of his social contract approach: "Why should self-interested individuals, when knowing of their superiority, agree to an impartial choice, even though still in a Hobbesian setting they could secure a better bargain?" (p. 45-46). But Buchanan's contractarianism, whatever its failings, is at least better than Musgrave's rehash of tired social-democratic clichés.

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