James M. Buchanan on the Ethics of Public Debt and Default

By Alvey, James E. | Journal of Markets & Morality, Spring 2011 | Go to article overview

James M. Buchanan on the Ethics of Public Debt and Default


Alvey, James E., Journal of Markets & Morality


James M. Buchanan (1) won the Nobel Prize in Economic Sciences in 1986. He began work in the 1940s as a Public Finance economist. Buchanan enthusiastically adopted the prevailing positivistic methodology (i.e., Logical Positivism). In a number of areas over the following forty years, Buchanan developed normative aspects of economics. (2) While readers could speculate that this reflected his contributions to two distinct projects, the reality is that there was also some blurring of the boundaries between normative and positive analysis. This article focuses on two related areas in Buchanan's analysis (public debt and default) where positive and normative issues merge.

In his work on public debt, Buchanan began from an engineering perspective, but over time he gradually shifted ground. Buchanan's attachment to positivism weakened and in his work on public debt, he gradually added an ethical dimension. Buchanan extended his work on ethical aspects of debt to public default.

Buchanan builds up a series of ethical arguments on public debt that are scattered throughout various works. In this article, I will reconstruct his ethical framework on debt. Much of Buchanan's constitutional economics is designed to show why the Victorian ethical norm opposing public deficits collapsed and to advocate a legal replacement.

The remainder of this article comprises four sections. The first section presents some background on Buchanan and his work. The second section sketches his foundational assumptions. The third section discusses Buchanan's view of the ethics of public debt and default. Finally, the fourth section provides some concluding remarks.

Background on Buchanan and His Work

Buchanan's work has covered a wide range of areas in economics, starting with public finance. He helped to create the new subdisciplines of Public Choice, (3) and Constitutional Political Economy, and to some extent New Institutional Economics. The foundations of Buchanan's approach to economics I have presented elsewhere (Alvey 2009a). In the current article, I build on that work.

As early as the 1950s, we can see the outlines of Buchanan's contractarian approach to economics. He began to advocate understanding markets in a gains-from-trade framework; potential gains, of course, had to be secured by contracts that are legally enforced (1959, 129; 1975b, 229). Within a few years, Buchanan was calling for economics to focus on catallactics, or exchange (1964a, 214). (4) The next step was to take the contractarian approach and apply it to politics; politics was also viewed as a type of exchange. Thus, his gains-from-trade/contracting approach was foundational for his constitutional political economy research program. Buchanan's approach (in markets and in politics) was to start from the status quo and look for Pareto gains.

Consistent with the dominance of positivism in the early post-World War II period, much of Buchanan's work is positive analysis. Buchanan was a methodologist and tried to consistently apply positivistic doctrines to his own work. Buchanan was also quite happy to criticize others for failing to adhere to the prevailing positivistic strictures. Thus, in the 1960s, he claimed that public goods theory "can be, and should be, wholly wertfei [value free] in an explicit sense" (1967, 197). (5) I will show below that Buchanan's positivism softened over time.

Buchanan's Nobel Prize was awarded "for his development of the contractual and constitutional bases for the theory of economic and political decision-making." In his Nobel lecture, Buchanan makes it clear that economic policy must be considered within the context of the political decision-making framework and that a model of the state and politics is needed before considering the effects of different policy choices (1987a). Given his earlier, enthusiastic adoption of positivism, it is astonishing that Buchanan admitted frankly that in investigating the relation of the individual to the state, his goal was "ultimately normative"; Buchanan added that economists investigating this central topic must place their discussion within the "more comprehensive realm of discourse" of political philosophy (Buchanan 1987a, 335; see also 1991, 4).

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