41. Rules Versus Authorities: Buchanan and Simons and Fiscal Policy

According to Knight, Wootton’s book “combines informed good sense and real wisdom with superficiality and pretentious (one might almost say, fraudulent) irrelevance, economic and political—all presented with verve and charm” (1946, p. 451). Hayek’s view, according to Wootton, “seems hardly to amount to more than the statement that socialized planning is ‘irrational’ because it is incompatible with the free market determination of prices” (1935, p. 348).

Richard Musgrave’s work, for example, was characterized as “a ‘planning approach’ in public finance” (Neal 1940, p. 247).

“We are not interested here in examining either the logical coherence or the empirical validity of the description of the national economy that is embodied in this most basic of Keynesian models. Our emphasis is on the attitudes of those who accepted such a model of economic reality as the ground upon which to construct policy prescriptions” (Buchanan and Wagner 1977, p. 82).

Parts of this section were published as a plenary talk (see Johnson 2018b).

Simons’ “monetary-fiscal doctrines were very individual, neither traditional nor currently popular, and in one sense radical (extreme or drastic). Their general quality may be gathered even from the ‘Laissez Faire’ pamphlet just discussed—readers familiar with that will recall its advocacy of the one hundred percent reserve idea, and a fixed quantity of money. But the present volume offers a much fuller and better presentation of his entire position in this field, in four additional essays: ‘Rules versus Authorities in Monetary Policy’—the ‘key’ article in this group; ‘Hansen on Fiscal Policy—a vigorously hostile, critical review of Professor Hansen’s Fiscal Policy and Business Cycles; ‘On Debt Policy’—a short paper on the federal debt problem; and ‘Debt Policy and Banking Policy’” (Taylor 1948, p. 654).

Simons has routinely confounded historians’ ability to clearly summarize the positions of the “old Chicago School.” It was perhaps these seeming inconsistencies that led Buchanan to relegate Simons to the fringe of his consciously identified influences. Taylor (1948, p. 652), attempting to summarize Simons, stated that his “‘Credo’ is his strong advocacy of a marked reduction of existing inequalities of wealth and power, to be achieved through sufficiently progressive taxation, appropriate governmental spending for mass education, public health, consumer subsidies, etc., and through anti-monopoly policies—not through direct regulation of wages, prices, and profits or ‘interference’ with the ‘free market system.’ His peculiar faith that highly progressive taxation and redistributive fiscal policy as a whole, in complete contrast with governmental efforts to influence wages, prices, etc., for the same egalitarian purpose, need have no harmful effects at all on the vigorous functioning of the business economy, is a piece of economic theory I would question here if I had the space. But it is one of many evidences that his heart lay with ‘the people,’ not with ‘the interests’”.

University of Chicago. (1945, June 15). Announcements: The College and the Divisions, Sessions of 1945–1946, XLV(7), 219. The readings list of Simons’ 1946 fiscal policy course can be found at Irwin Collier’s Economics in the Rearview Mirror. Available at http://​www.​irwincollier.​com/​chicago-henry-simons-last-course-fiscal-policy-1946/​.

“There remains one point which has not been properly emphasized, namely, that genuine liberal reform must aim primarily at explicit changes in the rules of the economic game and must minimize reliance on control or regulation through nominally administrative bodies with large discretionary, policy-determining powers” (Simons 1948, p. 322, n. 13).

It is not clear why Buchanan chose this topic for his dissertation. One can speculate that the ambitious and motivated Buchanan, anxious to get started, chose the topic during his first quarter at Chicago while enrolled in Simeon Leland’s State and Local Taxation course. Leland had been central member of the New Deal group at Chicago in the 1930s, whose expertise was in the problems of the coordination of fiscal units in a federalist system. In one instance, however, Buchanan seems to self-reflect on “the pedestrian parade of factual detail which often epitomizes the published doctoral dissertation reflects the forced mating of reluctant author and uninspiring material” (1958, p. v).

The departure of Leland for a deanship at Northwestern followed by the death of Simons, all during the spring quarter of 1946, left Buchanan with Roy Blough as the only possible dissertation advisor in public finance. Though Simons had held a high opinion of Blough as a practicing economist and supported bringing him onto the Chicago faculty, Buchanan was less impressed, failing to share Blough’s interest in the technical details of administering policy (see Johnson 2014). For a more detailed exposition of Buchanan’s education at Chicago, and Johnson (2018a) on Blough’s approach to economics.

Buchanan was always highly suspicious of redistribution through the fiscal mechanism and preferred to place it outside the scope of his analysis (e.g., Buchanan 1951, p. 358; see also Buchanan 1952a). His choice to exclude redistribution from positive economic analysis underpinned many of Buchanan’s objections to Musgrave’s approach, which included redistribution as one of the three fundamental obligations of government, along with allocation and stabilization. Buchanan also differed significantly from Simons on redistribution through the fiscal mechanism; Simons viewed “taxation as the proper means for mitigating inequality” (1938, p. v).

Wicksell had argued that the benefit principle was most consistent with “modern tax administration, specifically the parliamentary approval of taxes” (1967, p. 72). His unanimity rule required that all new expenditures be paired with tax schemes for consideration by parliament. Representatives would vote on successive expenditure-tax pairs, until one received unanimous consent. This guaranteed each individual would receive benefits commensurate to the cost (Wicksell 1967, pp. 89–90).

On the importance of Buchanan’s Fulbright year in Italy (1955–1956), see Buchanan (1958, 2007), Eusepi and Wagner (2013), Marciano (2009), and Medema (2005).

Buchanan makes few personal references to Simons; an exception was an interview with Manuela Mosca in Blacksburg, Virginia on June 27, 2008 (Mosca 2011). The focus was Antonio de Viti de Marco, and Buchanan was asked about Simons’ highly critical review (Simons 1937) of the English translation of First Principles of Public Finance (1936). Buchanan thought Simons was “very sharp, very bright” but too locked into the English-language public finance viewpoint.

Though claiming that he had “for many years…[accepted]…the ‘new orthodoxy,’” of Keynesian deficit financing, during his Italian year, Buchanan began to struggle with the issue of public debt within the context of his politics-as-exchange paradigm (1958, pp. v–vii). The initial claim is rather doubtful, as there is no evidence in Buchanan’s writings that he ever accepted Keynesian-style management of the macro-economy and a lot of evidence to suggest that Buchanan was always highly suspicious of government/technocrat interference. Buchanan would undoubtedly respond that “if there is no evidence of the ‘new orthodoxy’ in my published papers, this reflects a full and unquestioning integration of the doctrine in my own thinking rather than the reverse” (1958, p. v).

While economists such as Hansen and Musgrave were “preoccupied with the economics of fiscal policy” few recognized that “the ‘politics of fiscal policy’…may turn out to be the crux of the problem” (Spahr on Musgrave in Salant et al. 1948, p. 409).

“But two separate and divergent routes to reform may be taken, one which we may label ‘democratic,’ the other clearly as ‘nondemocratic.’ Unfortunately, those who tend to be most critical of democratic politics tend to support structural changes that will, if implemented, remove economic decisions from democratic controls” and place them in the hands of a small group of elite decision makers (Buchanan and Wagner 1977, p. 89).

See also Simons (1944, p. 179): “The importance of rules, and of focusing democratic discussion on general principles of policy, calls for emphasis…Only with rules of policy can common national interests be protected against minorities…only by adherence to wise rules of action can we escape a political opportunism which jeopardizes and destroys what we wish to protect and preserve.”