James Buchanan was an American economist who was awarded Nobel Prize in Economics in 1986. He is known for his pioneering work in public choice theory.
He had an important contribution to public finance and unlike others, he believed in “bottom-up” Public Finance. He wasn’t much in favor of a deficit budget (which is followed in India). He questioned that if the government is building, say a park for which it requires a heavy amount, and if they choose to borrow the funds from an investor then who is paying for the dam? The investors aren’t paying because they will decide to sacrifice their present money only if they see their benefit i.e. the extra return they receive and therefore the investors aren’t at all paying for it. The present taxpayers also didn’t pay for it as the tax rate was kept the same by the government. So, the question arises, who is paying for the park?! Buchanan answered that it is the future generation that will have to bear the cost. Buchanan showed how the current economic subject dominance ignores sustainable development.
In this, there are many problems, first, if the debt keeps increasing then the load on future generations will be bigger and therefore will have to sacrifice their consumption or wealth to a greater extent. Second, the investors could have invested the same money in something more productive. Third, if the money spent is unproductive then the future won’t benefit but still have to pay, in a way the present taxpayers, in this case, consume at the expense of their children or grandchildren.
Buchanan wasn’t completely against debt financing like for those spending that will benefit the future generation and taxing the present generation completely for the present spending would put a load on them completely. Debt financing would be helpful in this case for Buchanan. Otherwise, taxation would do similar harm to the present generation like debt financing to the future. While learning this insight, it is also important to understand that Government doesn’t earn money, and hence the same government wouldn’t experience any monetary cost in this process. To build the park as per the example, the government would have options on how to get the funds, either by increasing tax revenue or issuing bonds, or even printing more money.
So, no matter whether the option is chosen by the state whether either one of them or a share of all, it is the people that have to bear the cost whether in the present or in the future generation. Buchanan had an individualistic approach to fiscal policy. Any fiscal policy taken by the state should be such that it benefits everyone. Or to make it simple, if anyone is paying tax then the taxpayers should get the benefit of it and therefore tax should of the price of goods and services enjoyed by taxpayers and not a penalty to them for earning more. The benefit of government’s spending shouldn’t be to a group or collective citizens but to each individual and Buchanan didn’t say that it should be based on majority decisions as with it the majority would start dominating minorities. Buchanan’s Public Finance theory in a way reduced the role of government because it isn’t possible for every individual to agree on something often and this theory also eradicated the concept of one paying the cost for another’s benefits.
One of the very important concepts proposed by Buchanan was Clubs and Externalities. Buchanan said that when we classify public and private goods then only a few can be classified as pure public goods. One of them is surely the military. If there are more people collectively paying for a club good, then the per-member price reduces. The theory of Clubs provides an optimal role of centralization and collectivization maintaining the values of individual liberty. Externalities are costs imposed on one person for the deeds of others, this can be possible in private property too. A person listening to high-volume music on their private property will disturb others. In a situation like this, there is generally a call for government intervention but Buchanan acknowledged that there are possibilities that the two parties solve their problem too. If person A is disturbed by the music volume of person B then he will go to him to tell the issue he is facing because of the music, the problem could be solved if person B invites A to join him and chill. These possibilities aren’t considered by experts.
Buchanan pushes the government further back with the Public Choice theory for which he was awarded the Nobel Prize but he also doesn’t believe in a stateless society. It wouldn’t probably be wrong but a big claim that James M. Buchanan is the most individualist scholar. His works would make one think on whether India needs a change in Constitution?