Michael Fry: Sound economic advice from James Buchanan

A meeting of the Council of Economic Advisers in Abderdeen last year. Picture: Kenny Smith
A meeting of the Council of Economic Advisers in Abderdeen last year. Picture: Kenny Smith
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Alex Salmond would do well to heed the warnings of Nobel prizewinner James Buchanan on public spending and the subsidy industry, writes Michael Fry

Alex Salmond likes to hobnob with Nobel prizewinners in economics, and has a couple of them as members of his council of advisers. Might this give us a clue to the future policies of an independent Scotland?

There is James Mirrlees, who actually hails from Newton Stewart, took his first degree at Edinburgh University but has spent the rest of his career elsewhere – at the moment Hong Kong. His Nobel citation is for “fundamental contributions to the economic theory of incentives under asymmetric information”. Hmm, not much clue there as to what he whispers in the First Minister’s ear.

And then there is Joseph Stiglitz of Columbia University in New York, who seems to be much more Salmond’s cup of tea. Stiglitz is thought to have been responsible, as an adviser to US president Bill Clinton, for the policy of sub-prime lending, which lies at the root of the great economic crisis of our time. He has also been an adviser to the Greek government and to the Spanish government, which should at least give him enough experience for the worst that might happen to Scotland. He told the rioters on the streets of Madrid that he supported them.

It is a pity the Nobel prizewinner in economics that I would have wished on the Scottish Government died a few days ago. Jim Buchanan, who came from Tennessee and spent his career in Virginia (I don’t think he liked Yankees much) was a descendant of the great Scottish diaspora in the southern states of the US. His own family arrived near Nashville in 1795. Other ancestors fought as Confederates in the American civil war, and one was afterwards governor of Tennessee.

I met Buchanan when he came to Edinburgh for the Adam Smith Bicentenary in 1990. He was a perfect southern gentleman, quiet, unassuming and I think genuinely modest. He had the gift of simple exposition, but the mind was a steel trap.

The advice he might have given to Salmond would have been more comprehensible than Mirrlees’s and more sensible than Stiglitz’s. This is because Buchanan focused his thinking on public expenditure, why we do it and what effect it brings. And public expenditure lies at the heart of the political debates we have in a devolved Scotland. In an independent Scotland they would become wider, but the debates in the first would influence the debates in the second: hence their importance to us.

If the way we think about public spending in Scotland can be dignified by the name of theory, then the theory is an extremely simple one: the government identifies the problems; the government spends money on the problems and the problems are solved.

On such a line of argument, if we could only rid Scotland of the relics of Thatcherite malice and prejudice against action by the state, as represented by the present British government, all would be for the best in this the best of all possible worlds.

But Buchanan noted that the outcomes in programmes of public spending were not always so ideal in fact, and wondered why this should be. Was it just a matter that not enough had been spent, so that the answer lay in spending even more? Or could there be some flaw in the motivations behind the whole process?

Often, Buchanan then noted, increases in public spending arise from the demands of particular interest or pressure groups, rather than from any objective assessment of need (though such assessments can always be supplied to order in retrospect). When he first started working on his analyses, agriculture was the biggest interest group, in the US as in Europe. The supposed need of security for farmers to this day assures lavish subsidies in every part of the First World – while farmers in the Third World, who could supply us more cheaply, starve.

Having dunned us for our food, the farmers are now turning to our energy. They get even bigger subsidies for the wind farms so close to the Scottish Government’s heart, even though these will put up the bills for consumers, rich and poor alike. But let nobody think I have any special prejudice against farmers, they are merely a fine example. And they have been an example, too, to all the other pressure groups – from arts to zoos – that have climbed on the subsidy bandwagon, each claiming money from the government for their own unique contribution to the public good.

Buchanan asked why governments fall for all this guff, and why they could not see through the obviously self-interested stratagems of supplicants for subsidies. His answer was that there is a corresponding self-interest among the politicians and civil servants who hand out the money. In handing it out, they boost their own power and self-esteem, and secure themselves in elected or non-elected office. In the end, you get a cosy exchange between pressure groups and political insiders, an exchange of money for power. It benefits both parties to the exchange, but excludes the wider public.

And this, to take Buchanan’s argument one stage further, is why policies often fail, in the sense that we get vast programmes of expenditure that do not actually achieve their aims. In Scotland, we know this only too well. We spend enormous and increasing amounts on health, yet the health of the Scottish population remains among the worst in Europe. We are now set to spend money on getting more working-class kids to university, in a system free to the consumer which has been colonised by the middle-class. I would be willing to bet this will make Scottish universities more bourgeois than ever.

Whatever the answer to inequality in health or education may be, we have not found it. Perhaps this is because we are asking the wrong people.

Buchanan sought to tell us that the state is not the omniscient, omnipotent, omnicompetent organ that naïve collectivist thinking assumes it to be. This is a useful message to a small country which, now and in the future, seems set to have such a very big state.

Nobel thoughts

Professor James McGill Buchanan, of George Mason University, Virginia, in the United States, was awarded the Nobel Prize for economics in 1986 for his work on “A synthesis of the theories of political and economic decision-making (public choice)”.

Buchanan, below, was awarded the honour “for his development of the contractual and constitutional bases for the theory of economic and political decision-making”.

The citation added: “Buchanan’s contribution is that he has transferred the concept of gain derived from mutual exchange between individuals to the realm of political decision-making.

“The political process thus becomes a means of co-operation aimed at achieving reciprocal advantages. But the result of this process depends on ‘rules of the game’, ie, the constitution in a broad sense.

“According to Buchanan, it is often futile to advise politicians or influence the outcome of specific issues.

“In a given system of rules, the outcome is to a large extent determined by established political constellations.”