Happy Birthday To Free Market Liberalism

This year what we think of as modern free market liberalism turns 50.

We can thank the 1962 book by the American economists James Buchanan and Gordon Tullock, The Calculus of Consent, for laying the intellectual foundation of the philosophy of limited government.

Call it economic rationalism or “neoliberalism” if you like.

This is not to suggest that all free marketeers have read deeply in the academic field – public choice – that this book spawned. Or that the philosophy of freedom isn’t a lot older. Supporters and opponents are more likely to focus on the more famous names of Adam Smith and Friedrich Hayek. No surprise there. Calculus of Consent is dense and mathematical.

Smith and Hayek studied the market. They were looking at the way human society was spontaneously and efficiently ordered by price system. Buchanan and Tullock shifted the focus; grounding free market thought not in how markets work, but how politics doesn’t.

Half a century later, that is still where the debate is.

Buchanan and Tullock start with a simple, seemingly obvious assumption: people are people. Whether they work in the private sector or in public service, all people respond to incentives. Everybody pursues their own goals and interests. Everybody has their own preferences about what they would like to do. Economists sometimes describe people as “profit-maximising” but this isn’t quite right. People can be salary-maximising, or enjoyment-maximising, or compassion-maximising, or leisure-maximising. Anyway, we’re all trying to maximise something.

The first half of the 20th century saw economists explore the implications of self-interest as it existed in the marketplace. They derived theories of monopoly, public goods, information problems, externalities, and predatory pricing. And they argued that when markets break, government must clean up.

Buchanan and Tullock just extended those theories to government itself. They argued that the public policy question isn’t whether markets have flaws. It is what happens when you try to resolve those flaws through collective action. The Calculus of Consent applied economic analysis to non-market decision making. The book explores the incentives faced by individuals acting in a political environment. After all, people don’t stop being people when they enter a voting booth or sit down at their computer in the Department of Agriculture. Everybody is still motivated by their own personal goals.

This was a necessary corrective to political economy, and a radical one. It is easy to imagine solutions to social and economic problems – the optimal solution is simple to design on paper. But designing and implementing those solutions in the real world is not a trivial matter. Getting self-interested individuals to work towards collective goals is hard. Special interests seek advantage. People use the public apparatus for private gain. Politicians drop good policy and embrace good politics. In a democracy the majority tend to support what is good for the majority, not what is theoretically ideal. What was optimal easily becomes corrupted.

The public choice school is relentlessly realist. It offers a vision of politics without the romance. Public choice counsels caution – if not outright scepticism – about government activity. It underpins the popular claims like Ronald Reagan’s “government is the problem”.

In his 1963 review of the Calculus of Consent, the British economist James Meade criticised his colleagues for being “much too ready to call in the State as a deus ex machina to remove the imperfections of the laissez-faire market”. It was an uncomfortable critique. Meade was a former Labour Party advisor and a firm advocate of government intervention.

The lesson Buchanan and Tullock drew from their research was that rules matter. Buchanan spent his career looking at the structures which could constrain government action and therefore keep the actions of the public service as close to the desires of the public as possible. He won an economics Nobel Prize in 1986 for this work.

So far, so good. A full recognition of the problems of collective action in government should lead to a general reluctance to trust government to act on our behalf. Not to no government, but to modest government, constitutionally restrained. The British political philosopher Mark Pennington says the goal is a “robust” political order. That is, one which is designed to face political as well as market failures – and to limit the damage caused by either.

Certainly, public choice hasn’t penetrated mainstream policy thinking. Conservative politicians (at least those of the free market variety) should be sympathetic but are as embedded in the system as anybody else. The public may be sceptical about bureaucrats and politics but they still, instinctively, want government to fix things. There always ought to be a law. And clever people pushing policy ideas tend to assume their ideas will be implemented wholesale and uncorrupted.

But we shouldn’t underestimate how much Buchanan and Tullock’s book influenced the political contest.

Even the most populist supporter of small government uses language and insights gained from public choice – the understanding, implicit or explicit, that the question isn’t whether society has problems, but whether we can really rely on the strange institution of government to solve them.