The purpose of this paper is to show that, at the very beginning of his career, Buchanan was interested in concrete issues related to the economic situation in the South rather than with abstract and philosophical works in public finance. We examine the published and unpublished articles, reviews and replies that Buchanan wrote between 1949 and 1952 on federalism. By putting what Buchanan wrote in the intellectual, academic and political context of the period, we put forward four factors which we believe are important to understand Buchanan’s ideas. First, Buchanan defended the intervention of the federal government to redistribute, in the form of equalizing grants, income from rich to poor regions. Second, as a consequence, for Buchanan, such redistribution was an ethical necessity that should precede any consideration of efficiency. Even more important, fiscal justice was a precondition without which a competitive or free market system could not function properly. Third, at least during that period, Buchanan appears to have been interested primarily in practical, concrete problems, rather than in pure and abstract questions. Finally, a fourth and crucial point is that Buchanan insisted on the need for federal government intervention to industrialize the South, a stance that stands in stark contrast to policies the Nashville Agrarians defended.
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The Agrarians—also known as the Vanderbilt, Nashville or Southern Agrarians—were a group of scholars mainly from Nashville University who did not only oppose to the industry and to industrialization in general but who criticized the growing industrialization of the South, and praised agriculture, agrarian and rural life. To them, “there was an irrepressible conflict between industrialism (representing all that was anti-traditional, immoral, and deadening) and agrarianism (representing all that was stable, moral, and uplifting to the human spirit).” (Newby 1963, pp. 144–145) One of their fears was “that liberalism and industrialization were only a Trojan horse for collectivism. The larger industry became, the more central control would be required.” (Connelly 1963, p. 27; see also Shapiro 1970, p. 793).
Buchanan to Uhr, January 22, 1952, Buchanan Papers (hereafter, BP). [C0246, Special Collections Research Center, George Mason University Libraries].
The essay is entitled Gasoline tax sharing among local units of government in Tennessee (1941). Buchanan suggested using an ethical criterion for sharing the benefits of a pay-as-you-go gasoline tax, centrally collected across counties in order to finance roads and highways, (see Marciano 2019). The issue remained topical among public finance theorists and constitutionalists (Binns 1948; Birch 1949). For instance, James Maxwell’s (1948) The Fiscal Impact of Federalism in the United States published by (Cambridge University Press,)was reviewed in the Economic Journal (Johnson 1949), the Journal of Political Economy (Blough 1948), and the American Political Science Review (Anderson 1946).
Our claim is not that Roosevelt and Truman did—or did not—allocate New Deal and Fair Deal resources to actually help the South but that helping the South was part of their political rhetoric. It nonetheless remains that, indeed, it has been shown that political motivations were crucial in the way New Deal funds were allocated to the different states, and that “other things being the same, more was allocated to states which had supported FDR most solidly in 1932 a were crucial to the president's 1936 Electoral College strategy” (Couch and Shughart 1998, p. 190).
“If the wage differential between northern and southern labor were eliminated (between laborers of some grade), the employment of labor in the south would be curtailed due to the fact that the higher wage would mean that the employer would only hire workers to the point where marginal productivity equaled the higher wage” (Buchanan 1947a, p. 3).
“if the wage differential were enforced and allowed to reach its ‘normal’ level, capital would be encouraged into the south, the workers would be hired and paid at their productivity. The labor supply in the South would be increased and in the long run the productivity of the southern worker would have a chance to equate that of the northern workers and the wage ‘“normally’ be equal (Buchanan 1947a, p. 3).
While not uncontested, the argument was not uncommon among contemporary economists (see Stigler 1946, for instance). It was and continues to be the textbook interpretation of the effects of the minimum wage, although the empirical evidenced is mixed, in magnitude, if not in sign.
The so-called “freight rate battle” (Tally, 947; Fortune October 4, 1944, p. 149).
To be more precise, the ICC set minimum tariffs but the railroad companies via rate bureaus and associations to which they belonged contribute to determine the effective tariffs.
Composed of Governors of Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee. It became known as the “Southern Governors Case.” Its official name is “The State of Alabama, et al. vs. The New York Central Railroad Company et al.”, I.C.C. Docket 27746.
In the preface of the special issue of Law and Contemporary Problems (1947) he guest-edited, Currie (1947, p. 391) reported that “it is also said that railroad rates are fashioned atmosphere of monopoly which renders administrative regulation ineffective.” The situation already was difficult by the end of the 1920s. It worsened in the 1930s because of “the virtual suspension of the antitrust laws during the first years of the New Deal” after the adoption of the National Industrial Recovery Act in I933 (Potter 1947, p. 445).
The most famous case was the complaint issued by the State of Georgia in 1945, ultimately heard by the Supreme Court of the United States, against railroad companies for having fixed “unfair and non-competitive rates, all tending to penalize … and damage her economy” (Tally 1947, p. 173; also see Berge 1947b, p. 468). The State of Georgia “charges that the defendants have conspired to fix freight rates which discriminate against the State” (https://supreme.justia.com/cases/federal/us/324/439/) Wiprud (1947, p. 573) reported that “The Court, adhering to its earlier decisions, held that regulated industries are not per se exempt from the Sherman Act; that railroads are subject to the antitrust laws; that conspiracies among carriers to fix rates are included within the broad sweep of the Sherman Act” (see also Berge 1947a, b, p. 449).
Vickrey (1948, p. 226) named that solution “Lerner’S rule”.
The policy began to be implemented in 1947.
In his “Positive Program for Laissez-Faire”, Simons (1934 , p. 58),wrote that:“governments should plan definitely on socialization of the railroads and utilities and of every other industry where competitive conditions cannot be preserved.” He (1936, p. 74) repeated later that: “In my pamphlet, I suggested early transition to government ownership for the railroads, and gradual movement in that direction with the other utilities. Candidly, I feel that our situation with respect to these industries will always be unhappy, at best; and I have no genuine enthusiasm for public ownership.”
Here, Buchanan departed from Lerner (1937, pp. 269–270) for whom socialist system would avoid the complex system of taxes that was inevitable in a capitalist economy.
One could argue that Buchanan chose to write the paper because, as a young scholar, he wanted to get high level publications and the paper had obvious potential. However, one must not forget that Buchanan had waited since 1947 before he decided to turn his term paper into an academic journal article, that he already had written two other articles before and that large parts of his dissertation remained unexploited. We claim that writing the 1950 paper represented Buchanan’s personal choice.
Buchanan introduced the concept of “fiscal residuum” in his 1947 term paper, defining (1947a, b, p. 21) it “as the differential between the economic value of the burden imposed by “government” on the one hand, and the economic value of the service rendered to the individual on the other.” In his dissertation (1948, p. 44) he gave a similar definition, the difference “between the value of contributions made and the value of services returned to the individual”. It was this concept that led Buchanan to Wicksell (see Marciano 2019).
What Buchanan said is unavailable, but we have a detailed report from a series of articles aimed at presenting the different contributors to the workshop published in Nashville’s Tennessean, on May 7, 1950.
For instance, in his dissertation, Buchanan (1948, pp. 6-7) wrote that the student in public finance "must either accept the tenets of those economists who consider that the economic problem could best be solved by a competitive free enterprise system operating within the limits of defined “rules of the game” laid down and enforced by the political unit, or he must accept the doctrines of the opposing school asserting that a freely competitive system is not the ultimate means and that Instead greater political direction of economic life is required for the optimum solution of the economic problem.”
The most recent reference being from 1947.
Market process ideas would become central to Buchanan’s scholarly work’ A later reflection on the market as a process can be found in Buchanan (1964).
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A first version of this paper was presented at the James Buchanan Centennial Birthday Conference, organized by the Political Economy Research Institute at Middle Tennessee State University. I would like to thank the organizers and the participants at the conference, especially Art Carden and Daniel J. Smith.
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Marciano, A. How Buchanan’s concern for the South shaped his first academic works. Public Choice 183, 247–271 (2020). https://doi.org/10.1007/s11127-020-00800-x
- Southern economy
- Fiscal policy