THE SKEPTIC'S REWARD

Author: By David Warsh, Globe Staff

Date: Sunday, October 26, 1986
Page: A1
Section: BUSINESS

"They chose the cadet officers without testing, people from Harvard and Yale, and it was especially onerous in my particular case because we were allocated to platoons and companies by alphabet. I was in a platoon with As and Bs and it turned out that we had no Harvard or Yalies with an initial A or B. But they had too many down in the Rs and Ss. So they imported a Rockefeller to be the head of our company. That kind of discrimination hurts you."

Earlier this month, the Swedish Academy of Sciences took steps to salve the wound, better late than never. It awarded Buchanan the 1986 Nobel Memorial Prize in Economics. In doing so, the academy did something for which the world has been waiting 18 years, ever since the prize was established in 1968. It did something controversial. It threw a slow-ticking bomb into the domestic politics of Sweden, Europe and the United States.

Buchanan, 67, professor of economics at George Mason University in Fairfax, Va., is the patron saint of monetary constitutions, tax caps, balanced budget amendments and the like. He's been involved, directly or indirectly, in nearly every significant skirmish of the American tax revolt, from Propositions 1 and 13 in California, in 1973 and 1978, to Proposition 2 1/2 in Massachusetts, to Proposition 6 in Michigan, to the Balanced Budget Amendment. On the general desirability of these devices, professional economists are hardly united. But in acknowledging the intellectual power of the case Buchanan has made for the need to set some kind of limits on governments, the Swedes have empowered a bold voice in behalf of a class of citizens and activists who otherwise might still be leafing through the literature of the John Birch Society looking for respectable intellectual support for their intuitions. Far more than Ronald Reagan's 1980 election, Buchanan's Nobel Prize represents the ultimate triumph of the pre-analytic vision that was the 1964 presidential campaign of Sen. Barry Goldwater.

Not that Buchanan's message is altogether new to economics. The great Joseph Schumpeter, as recalled recently by Benjamin Barber, "suggested that democracy was little more than the name of a system in which elites competed via the ballot box for the support of an otherwise docile electorate, whose sole exercise of liberty was the occasional filling out of a ballot." Colin Clark, a pioneer in development economics, postulated that there was a limit of around 25 percent of GNP which could properly be spent through borrowing and taxation. Beyond that limit, he said, tax band interest burdens would become unacceptable to the citizenry, and the monetary authorities would be pressured to inflate the burden of the debt away. Clark's idea was howled out of economics.

What made Buchanan successful was his adherence to high standards of economic argument. In a stream of papers beginning in the early 1950s, Buchanan began potting away at the foundations of mainstream public finance. If we are to take economics seriously, he wrote, "we then quite naturally bring into the analysis complex as well as simple exchange, with complex exchange being defined as that contractual agreement process that goes beyond the economist's magic number 'two,' beyond the simple two-person-two-commodity barter-setting. The emphasis shifts, directly and immediately, to all processes of voluntary agreement among persons." Despite nearly continuous squabbles with establishment authorities -- Kermit Gordon of the Brookings Institution described Buchanan's intent to found a Thomas Jefferson Center at the University of Virginia to pursue his research program in the 1950s to be a ''particularly objectionable" example of ideological bias -- Buchanan made progress on the sheer clarity of his views.

"Economics when Jim Buchanan came along was dominated by the idea of all these market failures," says Paul Craig Roberts, a Georgetown University professor who was among Buchanan's Virginia students. "But those analyses just assumed that the government was always a success. Look at any of the early editions of Paul Samuelson's textbook, that's the way it was written. The basic postulate of self-interest was suspended when it came to public finance. Nobody was maximizing for himself in government; there was only the public good. It was just basically silly. What happens to this person when he moves from Wall Street to the Treasury Department? He goes from being Saul to being St. Paul? You can't just suspend your basic postulate like that. They were wide open for the public choice movement."

Just because they recognized the logic of his views didn't mean the economic mainstream had to like them, however. Buchanan attracted a second- generation following among liberal economists -- notably Harvard-trained Mancur Olson -- but relatively few converts. Instead, he and co-author Gordon Tullock (who has been only slightly less influential than Buchanan) turned out a steady stream of well-trained graduate students, first at the University of Virginia, then at the Virginia Polytechnic Institute.

The trouble was, the new PhDs didn't find jobs in mainstream institutions either. "We were all heretics who were excluded from academic life by the pure thinkers," says Paul Craig Roberts, who more than any other single player wrote the legislation that brought about the tax cuts in 1981. "We had to make our way in policy circles instead. That's why so many of Jim Buchanan's students turned up in the Reagan administration."

Current chief presidential economics adviser James Miller is the senior Virginian in the administration today; policy think-tanks such as the Heritage Foundation and the Cato Institute are full of them.

Yet public choice theorizing still hasn't really caught on in the major centers of economic learning. At the University of Chicago, George Stigler, Sam Pelzman and Gary Becker can be said to be in some sense public choice theorists, yet Chicago never hired Buchanan out of his Virginia obscurity. The unwillingness to incorporate the public choice skepticism about government failure cannot all be blamed on an unwillingness to listen; a parallel and in many ways analagous criticism of the way that mainstream economics treated human expectations, led by Chicagoan Robert Lucas, has taken the profession by storm.

The experience of his lonely 40-year campaign has only added to the sense of deprivation with which Buchanan began. He now routinely takes aim at the analytic turn which economics has taken since he was a graduate student in the days after World War II. The leaders of the profession today "seem to be ideological eunuchs," he has written. "Their interest lies in the purely intellectual properties of the models with which they work, and they seem to get their kicks from the discovery of proofs of propositions relevant only for their own fantasy lands."

Now the Swedes honored the most unreconstructed cynic in economics for his formulation of irreversible "way-of-seeing." The question of rules that economic societies adopt, the reasons that they adopt them, and the superiority of some sets of rules to others: all these are on the table in economics to stay. The implications of what is now known remain to be worked out, as much in the political arena as in the seminar room. For perhaps the first time, the news from an economic laureate's December lecture in Stockholm is going to be something approaching hot stuff.

WARSH ;10/23 NKELLY;10/27,19:54 WARSH26