Abstract
James M. Buchanan argued that not only the study of public choice, but also property-rights economics as well as law and economics, can be traced directly to the work of scholars associated with the Thomas Jefferson Center for Studies in Political Economy and Social Philosophy at the University of Virginia (UVA). We draw attention to that point by raising the following question: what was the common knowledge at UVA that made it uniquely suited for the development of each of those related, yet distinct subdisciplines of political economy? Fundamentally, the answer is the unique combination of Chicago price theory and London School of Economics cost theory developed at UVA, where opportunity costs were regarded not as constraints to which individuals passively respond. Rather, they are the reciprocal of the act of choice itself. That subtle distinction has significant implications not only for public policy, but, what is more important, the proper scale and of governmental responses to market failures. The unique combination of the Chicago and London schools was central to the development of a neglected branch of price theory at the University of Virginia.
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Notes
This episode also is recounted by Coase (1993).
“The Coase Theorem,” as defined by Stigler (1966, p. 113), “asserts that under perfect competition private and social costs will be equal”. The passage in “The Federal Communication Commission” that was the precursor to the Coase Theorem, which had been regarded as an error to Stigler et al., goes as follows: “It might be argued that this is by no means an unusual situation, since the rights acquired when one buys, say, a piece of land, are determined not by the forces of supply and demand but by the law of property in land. But this is by no means the whole truth. Whether a newly discovered cave belongs to the man who discovered it, the man on whose land the entrance to the cave is located, or the man who owns the surface under which the cave is situated is no doubt dependent on the law of property. But the law merely determines the person with whom it is necessary to make a contract to obtain the use of the cave. Whether the cave is used for storing bank records, as a natural gas reservoir, or for growing mushrooms depends, not on the law of property, but on whether the bank, the natural gas corporation, or the mushroom concern will pay the most in order to be able to use the cave. One of the purposes of the legal system is to establish that clear delimitation of rights on the basis of which the transfer and recombination of rights can take place through the market” (Coase 1959, p. 25).
Maricano (2013, p. 227) reinforces the point as well by illustrating that Buchanan’s displayed a consistent interest in addressing the issue of externalities, which can be traced back to the early 1950s and rooted in his work on public finance. As he states, “Individuals’ readiness to pay when they receive subjective benefits from the goods they consume and services they use is an idea that Buchanan got from Wicksell, and he used it in all his works on externalities. It started with a study in which he applied Wicksell’s voluntary exchange theory to a problem involving spillover effects, namely, the use of highways” (see Buchanan 1952). What is more important for our purposes here, Marciano also states that the “remarkable consistency and constancy of Buchanan’s views means” that Buchanan’s analyses of externalities paralleled, though developed independently, of Coase (Maricano 2013, p. 251).
Pigou refers to perfect (or pure) competition as “simple competition”.
Interestingly enough, Stigler also had also reprinted Wicksteed (1914) in the AEA’s Readings in Price Theory.
Kirzner (1973, pp. 227–228) makes the same subtle, yet important point in Competition and Entrepreneurship.
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Acknowledgements
This paper was prepared and presented originally at the James Buchanan Centennial Birthday Academic Conference, which was held October 2nd–5th, 2019 in Murfreesboro, Tennessee and organized by the Political Economy Research Institute at Middle Tennessee State University. We thank Daniel Smith for organizing the conference and for his invitation. We gratefully acknowledge the feedback and comments from Timothy Mathews as well as the other participants of the conference, particularly Ross Emmett and Dennis Mueller. We also thank Michael Giberson, Henry Thompson and Richard Wagner for their valuable feedback and comments. We thank the staff of the George Mason University Library for access to the James M. Buchanan Papers in preparation of this paper. Any remaining errors are entirely our own.
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Boettke, P.J., Candela, R.A. Where Chicago meets London: James M. Buchanan, Virginia Political Economy, and cost theory. Public Choice 183, 287–302 (2020). https://doi.org/10.1007/s11127-020-00796-4
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DOI: https://doi.org/10.1007/s11127-020-00796-4