|Peter Boettke|
The Greece Referendum is finishing up as I write this. Millions are voting today on whether or not to accept the terms of the international bailout of their fiscal woes. For the point I want to make, it doesn't matter if they vote YES or NO, though that may have significant repercussions for the global economy. The critical matter from the point of view of economic theory and policy discussions is to sort out the root cause of the fiscal mess -- not only in Greece, but among several EU states. And, of course, by this logic the US situation is not immune from judgement, nor anywhere else throughout the globe. Democratic fiscal policy appears to have an institutional problem with regard to sustainable public finance. How do we design our institutions of public administration and finance in a democratic society so they encourage fiscal responsibility? Lack of such fiscal responsibility entraps economies in, what Adam Smith termed, the juggling tricks of deficits, debt, debasement. This trick sucks the vibrancy out of an economy, and if left undisciplined sinks an economy altogether in a way we have been witnessing in Greece.
For most of the history of political economy, economic thinkers understood the importance of fiscal responsibility. But the 20th century saw a decisive break from the "old time fiscal religion" and the adoption throughout the democratic west -- especially after WWII -- of the idea that the democratically responsible thing to do was to use the budget as a tool for macroeconomic policy. The core idea behind functional finance was to use the budget to balance the economy, not to worry about balancing the budget in public affairs of a state. This had a significant impact on politics and on economic policy.
James Buchanan probably thought more about the inter-relationship between the structure of politics and economic policy decisions than any modern economist. In his work in public finance, he represented a fundamental challenge to the conventional wisdom mid-20th century at a methodological, analytical and practical policy level. In Public Principles of Public Debt, Buchanan defended the "classical political economists" position with respect to public finance/public debt, but what at that time was referred to as "vulgar economics" of the untrained modern neoclassical synthesis Keynesianism. In his 1949, "The Pure Theory of Government Finance," Buchanan was already challenging the methodologically collectivist/constructivist notion of the "fiscal brain" and contrasting it with the methodologically individualistic politics as exchange notion that would later provide the foundation for public choice and constitutional political economy.
Economics and Political Economy is fundamentally about exchange relations and the institutions within which they exchanges take place. Rules and strategies within rules are the two distinct areas of research exploration. With respect to fiscal policy, this means paying attention to the institutions that define the relationship between the expenditure decision and the revenue decision. If the logic of democratic politics produces a systemic tendency to concentrate benefits on the well-organized and well-informed special interest groups in the short-run and disperse the costs on the unorganized and ill-informed mass of voters in the long-run, then the budget is perhaps best seen as a fiscal commons by all politicians and special interest groups. Wrestling with the fiscal commons becomes one of the primary concerns for those economists and political economists who like Adam Smith understand that those juggling tricks are economy killers. Rather than stressing that economists should become "master jugglers", the critical point is to figure out ways that stop the juggling acts before they are required. We must always remember that even master jugglers can drop the ball, and as time passes and the level of difficulty associated with the juggling trick grows exponentially, the consequences of slight errors becomes pronounced. The current fragility in the world financial system, I would argue, is a consequence of 60+ years of juggling tricks throughout the democratic west.
Anyway, as the vote is going on in Greece, and the repercussions of either decision will be felt throughout the world, it might be worth while to step back and learn from the master public economist -- James Buchanan. Institutional problems demand institutional solutions. No juggling -- either of logic or a policy -- just hard nosed economic reasoning and an exploration of the logic of the situation and the logic of organization.
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