The Economics of Constraining Leviathan


While everyone is busy making sense of the election, I figured I would stop on by ye olde blog and talk about something completely unrelated...

A question I have thought a lot about lately is how can institutions evolve or be designed as to constrain Leviathan. For those of you who forgot your Hobbes, remember, Leviathan is the all-powerful government which people empower so that we can stop killing each other in a state of nature.

But how do we constrain Leviathan once we have given it power?

Some economists might view that question as outside of their purview (it isn't taught in "core" economics courses). I do not. This is at the core of economics, a field all about understanding constrains and the trade-offs that constraints impose.

In fact, going back to at least the work of James Buchanan this question has been seriously addressed within the technical economic literature. Buchanan argued that these questions are exactly what economists should tackle. As he wrote when starting The Thomas Jefferson Center in 1958:

The Thomas Jefferson Center strives to carry on the honorable tradition of ‘political economy’ – the study of what makes for a ‘good society.’  Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men.

One aspect of promoting peaceful cooperation requires a taming of Leviathan, a taming of the overpowerful staes. And that aspect of study seems especially relevant today.

But political economists need not start from scratch. Economists have built up a technical framework to answer these questions, much of it done by Buchanan and his colleagues.  For an overview of Buchanan's work on this topic, see Dennis Mueller (gated or ungated WP). From Buchanan directly, I'd also recommend (all free online thanks to Liberty Fund)

Outside of Buchanan's work, I'd suggest Mueller on Constitutional Democracy, Boettke and Palagashvili, and Weingast on Market Preserving Federalism (HT: Scott King). Some of these deal directly with how to constrain Leviathan. Others look more broadly at how the rules governing state action affects outcomes. All important questions that economics can help address.

So I urge my fellow economists to "strive to carry on the honorable tradition," especially as it relates to understanding which institutions will allow us to constrain Leviathan. If you have further recommendations, let me know in the comments. It is a noble topic for us to study.

Or we could keep looking for those illusive optimal tax policies to tell a "social planner."

Well Put My Friend

This comes from page 40 of the Liberty Fund edition of Cost and Choice by James Buchanan-

In one sense it might be said that the neoclassical economist has succumbed to the temptation to make his whole theory more general than its methodology warrants. This temptation has been increased by the parallel, and equally confused, logical theory of economic choice, which itself is completely general but which lacks predictive content. This purely logical theory, sharply distinct from the classical in its predictive implications, finds its origins in the subjective-value theorists, but its more explicit sources are Wicksteed, the later Austrians, and the economists associated with the London School of Economics. In full flower, this is the “subjectivist” economics espoused by Hayek and Mises to which I earlier made reference. Some reconciliation between the genuinely scientific theory of economic behavior and the pure logic of choice is required. The achievement of this reconciliation is one of the major purposes of this exploratory study in which the notion of opportunity cost becomes the analytical coupling device.

Cost and Choice is Buchanan's attempt to topple the dominant cost theory, which separates cost from choice. All textbooks start out by defining cost as forgone opportunities. However, soon they start talking about costs in an objective sense, such as the costs that a firm faces. This is completely separate from the original logic of choice.

Neoclassical (or Samuelsonian) economists make this sacrifice to have predictive power. A purely subjective theory has can predict little. However, they then make the mistake of drawing normative conclusions from this framework. Buchanan thinks this is too great of a task for this method.

Buchanan's proposal, if taken seriously, requires a renewal of much of the normative understanding of economic theory. Traditional welfare economics is impossible under Buchanan's method, which might be why so many are afraid of it.

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What I'm Reading

Beyond classwork (and MWG, Stigler, and Rothbard), I am always trying to read stuff that I want to read for its own sake. Some reading is a consumption good.


Cost and Choice by James Buchanan

I think of myself as a subjectivist and think I understand subjectivist economics. In this book, James Buchanan takes it to another level.The most important concept in economics is opportunity cost, which is a completely subjective idea in the mind of an actor. It is something we can never measure. How then can we use it in analysis? James Buchanan builds his story through the history of thought on how to apply opportunity cost to economics. It has been very interesting.

Time and Ignorance by Mario Rizzo and Gerald O'Driscoll

Somewhere between philosophy, epistemology, and economics, lies Time and Ignorance. Rizzo and O'Driscoll are trying to explain two extremely difficulty subjects in one book. Two subjects that economics does not have a good answer for. I probably won't get through this anytime soon, but it is intriguing.


The Signal and the Noise by Nate Silver

A book on prediction does not seem like something for an economist who enjoys Mises and Hayek, but this book is great. It has changed my mind on so many things about prediction. We all need to make predictions all the time in life. Why not try to do it right? To say that prediction is impossible, while a good impulse, does not get me very far. Instead, this book treats prediction like a "science." Not in the sense that we can find big T truth, but in the sense of applying a systematic approach to analysis. This book has turned me into a Bayesian.

Witness by Whittaker Chambers

This is my favorite book and I "reviewed" it before. I recommend it to everyone. The second time is just as enjoyable as the first.