Journal of the History of Economic Thought, Volume 22, Number 4, 2000

BUCHANAN AND MUSGRAVE ON

PUBLIC FINANCE AND PUBLIC CHOICE:
A REVIEW ESSAY
BY

WARREN J. SAMUELS
James M. Buchanan and Richard A. Musgrave, Public Finance and Public
Choice: Two Contrasting Visions of the State (Cambridge, MA: MIT Press,
1999) vii, pp. 272, $27.50. ISBN 0262024624.
The subtitle of this unusual but fascinating and valuable work tells the story of
the different views of the two protagonists, James M. Buchanan and Richard A.
Musgrave: two contrasting visions of the State. The story will be of interest to
specialists in public nance, the history of economic thought, and the economic
role of government. Among other things, the story demonstrates conclusively the
important consequences of ones preconceptions in the development of both
theory and policy. Both men insist on that, and it is true.
The book derives from and in effect records a 2327 March 1998 conference
centering on discussions between the two giants at Ludwig-Maximilians University in Munich. The book also includes a record of each days discussion comments and questions from the audience that are generally insightful and
stimulating plus a Foreword and a Summary by Hans-Werner Sinn. The text
accordingly is divided into ve days.
The Day One papers examine the sources of each mans thinking. Buchanans
origins include his early Tennessee life, his training at Chicago, his discovery of
Wicksell and the Italian public nance tradition, and his reaction to the
upheavals of the 1960s. His anti-statism and pessimism seems due less to his
studies with Knight than to the residue of loss as a member of a defeated
people in the Civil War (p. 15); Knight served to reinforce his antipathy to
pro-nationalist sentiment.
Musgraves origins include his early European education, his emigration to
the United States, his training in the public sector economics (e.g., public goods
theory) of Pareto, Wicksell, Lindahl, Samuelson, and Arrow, and his concerns
with ethical aspects of public nance. His acceptance of the U.S. political system
as an integral part of a multifaceted socioeconomic order (p. 31) may well
derive from its having provided a haven from Nazi persecution; for him the U.S.
system of government represented freedom, not oppression.
Day Two has Musgrave addressing the tasks of public nance, and
Buchanans response. Musgrave defends much of the growth of the public sector
ISSN 1042-7716 print; ISSN 1469-9656 online/00/040499-09
DOI: 10.1080/10427710020006253

2000 The History of Economics Society

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and surveys the means and ends of each of his tripartite domains of public
nance: af rmative policies for production of public goods, transfers for relief
of poverty and social insecurity, and macroeconomic scal policy, as well as tax
reform. Buchanan decries overproduction of public goods, says he cannot
understand Musgraves notion of merit goods, distinguishes between desirable
distribution and political redistribution, and emphasizes Congressional marketing
of tax loopholes. He would justify governmental expenditures for education as
promoting equal opportunity, not as producing public goods. Political redistribution (once you allow politics to get into the distributional element (p. 85)as
if politics is not involved willy nilly in distribution from the beginning, e.g.,
through providing protection for property and contract (p. 83)) is denigrated.
He, not inappropriately, says that if you throw transfers or redistributions
openly into the political arena, you are almost going to guarantee class con ict
or the churning state, and you are not necessarily going to get the distribution
going from the rich to the poor or whatever you might like (pp. 8586).
Buchanan insists that Musgrave trusts politicians whereas he distrusts them,
stressing constitutional constraint on politicians against Musgraves more tolerant and permissive European attitude (p. 88).
On Day Three, Buchanan presents a brilliant concise exposition of the logic
and role of constitutional constraints on political action. The constraints are of
two types: procedural, such as voting rules, for him ideally unanimity; and
domain, limiting the range of legislative choice (ordinary politics ). Buchanan
insists that majority rule leads to natural discrimination (though neglecting the
power of hold-outs to unanimity etc.). He laments the popular equation of
democracy with majoritarianism (though not fully appreciating the role of
special interests in any constitution-formation).
Musgraves response notes that correlative to the problem of checking the
power of government are those of enabling the exercise of power by government
and of government checking the power of private interests. His main concern,
however, other than to cite changes in Buchanans position (cracks in the
armor (p. 132)), is to defend majority rule, emphasizing the af rmative case for
it, the power which anything like unanimity gives to small minorities, the role
of coalitions in social cohesiveness, the stability of majority-rule systems, how
vote trading may lead to de cient as well as excessive budgets (with no
independent test of either), and the place of redistribution in the budget.
Day Four commences with a brilliant policy analysis of scal federalism by
Musgrave. Using his tripartite model, he examines taxation and expenditure in
unitary, federated, and cooperating independent states, neatly identifying the
issues. Among other points, Musgrave says that ef cient spatial arrangements
depend upon the basket of public goods that are demanded and their spatial
characteristics (p. 157) against the backdrop of considerations of economic
ef ciency in juxtaposition to those of retaining or surrendering national autonomy (p. 155); the limits of the Tiebout model of intergovernmental competition
(pp. 158ff; see also 188, 193194), including the point that the spatial allocation
of service functions does not come about automatically but must be implemented
by policy design (p. 160); that distributional concerns must be met largely, if
not entirely, at the central level (p. 161); and that the structure of federalism

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depends upon the relative desires of member units for independence and
diversity and for a more closely knit union (p. 163).
Buchanans response emphasizes what he calls the larger ef ciency due to
limiting the power of government; he calls this political philosophy as opposed
to scal economics, though Musgrave might classify it among the various
sensibilities that must be accommodated (as above). Buchanan has a sensible
dual insight: that federation limits the power of local politicians to impose costs
on citizens while enabling more monolithic centralized authority to direct and
manage more and more (pp. 18083), So federalism is a kind of equilibrium
(p. 183). He also notes the objective circumstances that in uence a sense of
community and loyalty at the level of the nation-state (p. 183). Once one adjusts
for his particular antagonism toward the State, Buchanans analysis is not so
different from Musgravesbut that antagonism is pure Buchanan and a central
part of the story of both this book and modern public nance, Buchanans
public choice largely emphasizing that antagonism. The question arises, does
Buchanan appreciate that his approach is functional less as Truth and more as
a particular sensibility, itself serving as a check on government at all levels? In
any event, considerations of competition among governments and exit from a
jurisdiction are important to both men.
On Day Five, Buchanan addresses the combined topics of morals, politics, and
institutional reform. He feels that institutional reform to restore political order
and peoples con dence therein is needed. Such reform must be focused on
moral rather than economic-ef ciency considerations. The possibilities for
helpful reform are limited, but institutional modi cations can be made that
facilitate the genuine transformations in behavior patterns that must occur
(p. 206). Buchanan is a sensible constructivist with his own activist agenda.
He does not shirk from what has been called the high priest role. He has his
own diagnosis of and prescription for societys supposed ills (for an example of
an opposite, and equally presumptuous and tendentious diagnosis, see Isserman
and Kazin 1999, the subject of a perceptive critique in Staples 2000; for a more
or less comparable diagnosis but a less constructivist prescription, see Sowell
1999).
Buchanan nds that modern society has manifested an erosion of moral
standards (p. 211) and that this moral anarchy is the result of greater
opportunities for scal redistribution generating increasingly narrowly de ned
and opportunistic self-seeking in politics (p. 209). Alas, Buchanan (1) downplays
how much erosion of historical traditions (p. 210, but see 239) is due to
markets and market-trained behavior; (2) ignores how much opportunism etc.
exists in relation to non-speci cally redistributive governmental activity, e.g.,
in providing and, of necessity, changing the legal foundations of the economy;
(3) minimizes the role of legal change of law and moral change of morals;
and (4) either neglects or rejects the fact that modern democratic governments
have been, or seemed to have been, increasingly responsive to a wider range
of interests, i.e., more than the monarch and his/her courtiers, etc. The logical
results of Buchanans analyses, now as earlier, are, rst, the maintenance of
status quo law and, second, the establishment of a relatively narrow elite.
Substantively, however, he is both more permissive and more democratic.

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Buchanans pessimism, expressed in part in Cold War terms (individualism

versus collectivism), is rampant. But he is manifestly on target when, rst, he
queries, What is the raison detre of the nation-state, as it exists? Simple
honesty forces us to acknowledge, in 1998, that little other than history itself
ties citizens of national political communities together (p. 212)I ignore
the role of national governments as an instrumental means of collective action,
e.g., in providing the legal foundations of economy and societyand, second,
his af rmation of, the deliberate organization of federalized structures that
embody devolution of authority to units that are suf ciently small to command
personal allegiance but that, at the same time, do not evoke tribal urges, de ned
broadly to include those based on ethnic, racial, or religious boundaries
(p. 212; see also 222).
Perhaps easier said than done, but thus does Buchanan transcend some or
much of his seeming neglect of social control along non-market linesthough
he does not confront the role of historical traditions in fomenting aggression
based on tribal urges. In this respect I may be more pessimistic than
Buchanan.
Buchanan appreciates that the classical liberalism of the Enlightenment and
Classical political economy is caught in a dilemma. It recognizes the role of
markets, under suitable legal and moral conditions, in channeling behavior
toward mutually bene cial ends. It also recognizes the need to constrain
opportunistic behavior. But it is threatened in part by the communitarian
sentiments that enable law and morals, and in part by a perceived moral
anarchythough the latter, Buchanan rightly (in my view) believes, is preferable to absolutist moral systems of enforced revealed truth (pp. 21216; see
also 222). Indeed, he opposes any system in which people have authority that
they enjoy exercising by making others subservient (p. 241).
Buchanan moves on to institutional reform wherein his concern is to reduce
the exaggerated size of the public sector relative to the total economy, i.e.,
puncture the bloated welfare-transfer state (p. 217). This he would seek by
two constitutional rules: one limiting the share that public spending bears to
GDP at, say, twenty- ve percent, the other requiring that all taxes and spending
programs be subject to a generality requirement, the latter to reduce incentives
for majoritarian rent seeking (p. 219). Buchanan is convinced that existing
spending levels have been generated by a biased decision process (p. 218)
that permits sequences of majority coalitions to create both higher spending and
vast external diseconomies while advancing their own interests. A non-exaggerated level of government spending is a function of and tautological with certain
political institutions. Exaggerated is political rhetoric clothed in the language
of institution-dependent economic-ef ciency analysis (pp. 21819).
Buchanan is not optimistic that such reforms will suf ce to regenerate liberal
societybecause of what he perceives to be the destruction of social capital:
This capital has been eroded only to be replaced by attitudes that embody
irresponsibility, dependency, differential exploitation, opportunistic advantage
seeking, short-run hedonism, legal trimming, litigation, mistrust, and intolerance, especially for the politically incorrect (pp. 22021).

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Buchanans formulaic solution is that, Ronald Reagans evocation of the

American Puritans promise of a shining city on a hill must become more than
a romantic dream (p. 221).
Alas, this is but a deployment of myth. Puritan society was not entirely
friendly to commercial, market society; it had its own absolutist moral system of
revealed truth; and it had its shares of dysfunctional tribal urges. It is a shame
that Buchananite political and moral philosophy is given voice through a
political slogan perpetrating a myth. But given Buchanans own mix of freedom
and control, continuity and change, and hierarchy and equality, perhaps there is
not much deep philosophy with which to work.
Buchanan seeks a stable secure sociopolitical order (p. 222), but one that
perpetuates his notion of order; classical liberalism is more open than that. The
rub comes, in part, when Buchanan says he prefers governments everywhere
acting as instruments of citizens rather than as exploiting agents for rent-seeking coalitions (p. 222). The problem is, how does one distinguish between the
two?
In his response, Musgrave challenges in some detail Buchanans gloomy
assessment of the twentieth century in general and in the United States in
particular. Tellingly, Musgrave points to political actions in matters of race,
women and other minorities that had arguably bene cial impacts on attitudes,
behavior, and morality. He rejects Buchanans use of Weberian ideal types (his
model of moral order) as states of affairs among which we must choose, i.e.,
as desirable or available (p. 226). He rejects Buchanans speci c moral order in
its pure form as amoral at best (p. 226). And he pointedly chastises Buchanan
and his spiritual cohorts for acting irresponsibly, Reforms are needed, but
matters have not been helped by the continuous pounding given to government
by Professor Buchanan and other critics, thereby adding to the very disrespect
for government they seek to reduce (p. 229; Musgrave also notes that pious
Pilgrims burned their witches (p. 228)). Musgrave thinks Buchanan is part of
the problem. Buchanan obviously thinks likewise of Musgrave. Thus, two
contrasting visions of the state. Yet both men favor liberal market economies;
their differences must be seen in a larger perspective.
The remaining pages of Musgraves response present a warm but friendly
indictment of Buchanans diagnosis and cure. Musgrave reminded his audience
that government has responded to problems in a democratic fashion, that puritan
morality cannot solve all problems and, inter alia, that justice is not found only
in markets, and that the tragedy of the Samaritan cannot preclude helping those
truly in need and creating institutions wherever possible that preclude such
need (p. 230).
One thing that neither Musgrave nor Buchanan consider is the degree to which
received law and received morality have been the products of elitist control of
society. If, for Buchanan, moral anarchy is preferable to moral absolutism, a
wide distribution of the opportunity to seek rents may be preferable to a narrow
one. But rent-seeking is largely only another name for seeking to change the law.
Some instances are clearly disreputable but the general phenomenon is neither
disreputable nor unnecessary. Moreover, why should Buchanan et al. be the only
ones to program legal change?

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Sinn points out in his introduction that Musgrave has a consistently favorable
view of the bene cial functions of the government sector whereas Buchanan
has been consistent in his suspicious views of the government (p. 6) and
unwilling to acquiesce in the conventional presumption that the state, or
collectivity, was everywhere benevolent, or, at least, that it may be presumed to
be so for the purpose of analytical exercise (p. 17). Thus stated, the difference
is misleading. Certainly Musgrave does not endorse every action of government
(otherwise the juxtaposition of favorable to bene cial could amount to a
tautology), and Buchanan neither opposes all collective action nor rejects the
inevitable politicization of the legal framework of markets. Musgrave wants to
put government to good use, along allocative, distributional, and stabilizational
lines, i.e., to enrich and empower the exercise of political choice; whereas
Buchanan wants to limit and constrain political choice. Musgrave has a generally
af rmative view of government as an institution of collective action, whereas
Buchanan has a generally hostile view, and this difference almost wholly
governs their work.
Because Musgrave accepts the inevitably activist state as a factual matter, he
has been able to argue that the proper size of the public sector is, to a signi cant
degree, a technical rather than an ideological issue (Musgrave and Musgrave
1973, p. 5). However, other writers, no less accepting of inexorable governmental activism, nd no conclusive principle to govern the size of government
(Burkhead and Minor 1971, pp. 9899).
Buchanan has a different quest. As he once wrote to me, he is in search of
rules and analyses to provide an invincible intellectual fortress with which to
check the power, i.e., activism, of government. In this activity he has been
exceptionally imaginative and creative, in part using the power of deduction,
combined with his particular ideology, to generate models and results seemingly
dispositive of the issues he addresses, yet, in my view, by no means conclusively
so.
Both men operate within neoclassical economics, Musgrave on its left ank
and Buchanan on its right. Both, for example, accept methodological individualism (though Musgrave posits a social welfare function), and both use some
form of a voluntary exchange approach in analyzing government. But whereas
Buchanan found in Knut Wicksell a unanimity principle, Musgrave found
concern about prior distribution. Whereas Buchanan decries the exercise of
public choice, Musgrave sees it as an inherent part of the scal state (pp. 39, 49,
and passim). Both men stress the need for knowledge of the predictable
consequences of particular government policies.
Buchanan started out as a committed libertarian socialist. Study with
Frank Knight at Chicago converted him to a libertarian advocate of laissez-faire
within limits. The original position, he relates, was libertarian in my conviction that politicized restrictions on individual liberties should be minimized and
socialist in my judgment that only political action could break up and control
the power concentrations that directed economic life. The later position stressed
the coordinating properties of markets (p. 16). This is the Chicago position that
markets are inherently competitive or power diffusing. But what happened to the
nominally private concentrations of power that form and manipulate both

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markets and the legal foundations of markets? Buchanan has read Vilfredo
Paretos sociological work but came away seemingly with only the obscurantist
narrow slice of Pareto optimality and left behind the rest of the masters
model of mutual manipulation at the stages of both constitution and legislation. This is particularly egregious because Buchanans adoption of Wicksellian unanimity, or approximate unanimity, amounts to both building in past use
of power at both stagesviolating Wicksells requirement that existing distribution have approvaland gives to a minority a veto over change of law.
Buchanans ostensible libertarianism seems to have trumped his socialism.
Buchanan faults John Rawlss use of procedural justice to generate a speci c
result (p. 57). But something lies behind and trumps Buchanans affection for
markets and protection of the individual against social control: His vision of a
good society and the dangers to it that he perceived in the 1960s. He writes of
how his own attitudes toward both the vulnerability and viability of the
American socio-economic-political order were dramatically modi ed, of how
Methods, manners, morals and standards were cavalierly tossed on the junk
heap of history (p. 22)all in addition to the perceived scal irresponsibility generated by Keynesian nostrums (p. 23).
Buchanan is caught on the horns of the objectivity versus advocacy dilemma.
He writes that neither he nor Musgrave approaches the subject matter ideologically, in the ordinary meaning of the term. Neither of us start from some
preconceived political-philosophical stance, and neither of us has been associated closely with this or that political party, movement, or cult (p. 14; he does
acknowledge that they have different visions, p. 14). He describes his own
modeling of revenue-maximizing government as precautionary rather than
descriptive (p. 24), but his prescriptive work clearly assumes such a state in his
effort to limit majoritarian democracyand to do so in ways that do not seem
to undermine majoritarianism (p. 26). One problem is that government must
willy-nilly choose between competing interests and no principle of generality,
such as the rule of law, will avoid this problem (pp. 2627, 41). But
Buchanans dif dence is belied by the strong policy prescriptions he draws
from his ostensibly precautionary models: It has long seemed to me that
he has chosen and developed his models to both give effect to his vision
and promote the policy conclusions to which they lead/which are built into
them.
Musgraves work, of course, does more or less likewise, though without the
more evident strident visionrepresenting a contemporary version of the old
German approach to managing the scal household, now under democratic
rather than monarchical conditions. (My own view is sympathetic to both
anarchic libertarianism and criticisms of elite use of government while stressing
the descriptive and interpretive importance of social control and governmental
choice in all systems and how both Buchanans and Musgraves approaches
constitute an agenda for government.)
Buchanan does recognize the critical relationship between the performance of
the public sector and political structure (p. 19 and passim) and this is something
that Musgrave insists upon. It is the basis of his explicit resort to the concept of
a social welfare function, whereas Buchanan has only an implicit one in his

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prescriptions about structure and whose preferences get to count in public

choice. Musgraves positivism lies not in any ultimate focus on description but
in his search for the most ef cient and effective means to achieve allocative,
distributive, and stabilization ends. But it is predicated upon the acceptanceat
least in part, if not large partas legitimate (p. 64) of the growth of the public
sector in the twentieth century; it is neither optimal nor un awed but necessary
(p. 65). He accepts cost-bene t analysis as a policy tool notwithstanding its
limitations.
Both men invoke ef ciency in the public sector as if it were more or less
an objective matter. Both of them prefer ef ciency-enhancing to ef ciency-reducing policies but do not acknowledge that ef ciency is a matter of whose
interests are to count and that that is very much what politics is all abouteven
if one decries the churning state. Both of them tend, therefore, to act as high
priests, especially perhaps Buchanan, who is very much alert to the need to
manipulate public opinion, for example, emphasizing the challenge of making
sure that ostensibly ef ciency-enhancing political institutions be seen as such
by participants in the inclusive collective enterprise (p. 126; see 20523). Alas,
there are no more unique ef cient institutions than unique ef cient resource
allocations.
Pervading these discussions are the consequences of the problem of seeking
nondiscriminatory policy in a world of inequality. Harold M. Groves emphasized
the paradox that treating unequals equally is to treat them unequally, whereas
treating unequals unequally may be the only way to treat them equally. One
problem, of course, is to determine what is the operative inequality, another is
how to deal with it, and still another is how to pay for it.
What does/can equal opportunity mean in a world of material inequality
not only of wealth but of access to government? Both minorities and majorities
have captured and used state power to abuse and take advantage of others, in
part by structuring markets in ways that bene t them.
Patriotism, morality, and religion have been the bastion of many types of
scoundrels. There are no easy solutions to the putative problems and failures of
collective action. I say putative because most problems have roots deeper than
the government policy under immediate discussion, because purported and actual
objectives vary, because gains and costs are correlative and subject to selective
perception, and because creation and destruction, and freedom and control/repression always co-exist, typically for different people.
All this, in part, is what politics is all about.
One thing is very clear: Both Buchanan and Musgrave have given their
disciples the analytical tools and agendas with which to advance their respective
visions or ideologies, and careers. The tension between their respective approaches has simultaneously marked public sector economics since the 1950s
and comprised a microcosm of the legal-economic world around them. Whereas
Musgraves work is more prosaic than Buchanans, but surely exasperating to
those who share Buchanans world view, Buchanans may be more stimulating
but no less exasperating to those who would take a less ideological and less
obscurantist view of the economic role of governmentespecially the anarchist
who nds selective state activism in both mens systems.

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A question occurs to me: Both are decent men. Has Buchanan failed and
Musgrave succeeded in internalizing their respective relations to authority, i.e.,
resolving the con ict of adolescence between freedom and security? Or is the
matter different? Musgrave, for his part, has witnessed Nazi and U.S. authority;
it is not surprising that he is prepared to accept in principle the latter, warts and
all. Buchanan, on the other hand, carries with him, at least in part, the burden
of his familys Civil War heritage and an acquired ideology. For all of
Buchanans emphasis on individual liberty, he rejects, rebels against, and deeply
resents the anarchistic challenges to established authority and culture that took
place in the 1960s and the extension of access to government that transpired over
two centuries. Surely more is going on in his mind than the mechanics of public
choice, as anti-government as is his version thereof. One feels sorry for his pain
caused by his sour attitude toward the system of government to which so many
elsewhere have sought to migrate from abroad; one sympathizes with his, and
Musgraves, identi cation of its warts.
Buchanans contributions may be more stimulating and Musgraves more
prosaic but both scholars are too involved with either current events, selectively
perceived developments, and/or partisan issues. Neither gives enough attention
to what I consider empirical legal-economic fundamentals and what public
nance and public choice as social control are, at bottom, all about. Each is too
involved with policy congruent with their respective visions of the world. For
example, some elaborate unbiased attention should be given to a set of problems,
pertaining to the welfare state, raised in the discussion: pressure on its cost
during periods of unemployment, when the needs increase; the greater dif culty
of raising money from mobile factors in a global economy, when the needs also
increase; and so on (pp. 237, 242).
Both men, therefore, are activist and directed to reform. That their respective
orientations (ideologies, visions), general agendas, and substantive proposals
vary does not obviate this fundamental point. For each man positive analysis
is subordinate and instrumental to being the power behind the throne, to enjoying
the social role of the expert, the man of knowledge. So much for doing away
with, or limiting, the power of the throne, even in the form of representative
democracy. But that is what the history of public- nanceand public choice
thought is largely all about, in a world in which experts participate in but do not
substitute for the process of working things out.
Accordingly, this book provides splendid history of and insight into contemporary economic thought. It is especially valuable when the ideas of the two
contestants are held at arms lengthas dif cult as that may be.

REFERENCES
Burkhead, Jesse and Jerry Miner. 1971. Public Expenditures. Chicago: Aldine, Atherton.
Isserman, Maurice and Michael Kazin. 1999. America Divided: The Civil War of the 1960s.
New York: Oxford University Press.
Musgrave, Richard A. and Peggy Musgrave. 1973. Public Finance in Theory and Practice.
New York: McGraw-Hill.
Sowell, Thomas. 1999. The Quest for Cosmic Justice. New York: Free Press.
Staples, Brent. 2000. Blaming Nixon. New York Times Book Review, January 20, p. 10.

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