Summary of JOIE article (First View, 26 December 2019) by Alain Marciano, Professeur d’Économie, Directeur Scientifique de Montpellier Recherche en Économie. The full article is available on the JOIE website

James Buchanan was a longstanding advocate of federalism. Contrary to some accounts, he did not first defend federalism in the 1950s, in response to the desegregation debates occurring in Virginia; rather, he first defended this specific form of democracy in the 1940s, at the very beginning of his career. As Marianne Johnson (2014, 2018a, 2018b) has shown, federalism was at the core of his 1948 dissertation, Fiscal Equity in a Federal State (1948). But even this was not Buchanan’s first work on federalism. The first and earliest form of Buchanan’s views on federalism can be found in two term papers he wrote while he was a graduate student at the University of Chicago—“‘Federalism’: One Barrier to Labor Mobility” (1946b) and “A Theory of Financial Balance in a Federal State” (1947). These essays are shorter, thus less detailed and, in some respects , less rich than the dissertation they predate. There is nothing on the voluntary exchange theory, the Italian public finance economists, Lindahl or Wicksell. There is nothing on the neo-Jeffersonians or neo-Hamiltonians, or the possible tyranny of the majority on a minority, or even the “rules of the social game”. Yet, most of the ideas Buchanan would develop in his dissertation – and in academic articles published later – on federalism are there. This is why these essays are important. The primary objective of this paper is to discuss and analyze them and to enrich our understanding of Buchanan’s views on federalism.

Using these two essays, we show that Buchanan had already identified the inequality that exists among states in a federation, an inequality that arises because different regions have different economic resources and therefore different fiscal capacities. He had already noted that centralization would remove but not solve the problem. The solution would consist in using a principle of justice – an equal treatment of equals –, equalizing unconditional grants and interarea transfers. In addition, Buchanan had made some claims that are not in his dissertation, but to which he returned later, even using them against Charles Tiebout and inter-jurisdictions competition (see Buchanan, 1957 and Boettke and Marciano, 2016) . One set of claims involved labor mobility. Buchanan argued against mobility, because it would generate more inequality and injustice in an institutional framework in which already existed inequality and justice. In a federation with rich and poor regions, migration would impoverish poor regions and the impoverished migrants would find themselves poorer in the rich regions. Mobility could play a positive economic role only if policies mandating an equal treatment of equals had been implemented.

After dating and discussing Buchanan’s earliest views on federalism, we shed light on how he came to them. This is the second, and complementary, objective of this paper. We derive these lessons by studying the two essays in the context in which Buchanan wrote them. Let us recall that by the time he enrolled at Chicago at the end of WWII, Buchanan had studied with Carlton C. Sims at Middle Tennessee State Teachers College and with Charles P. White at the University of Tennessee, in Knoxville. With Sims, he became acquainted with the question of the optimal size of counties, in particular in Tennessee. With White, a specialist in taxation and federalism (see e. g. 1931), and under his supervision, Buchanan had written a thesis for his M.A. degree on how to allocate the product of a tax among counties in Tennessee. These questions had to do with institutions, public finance, and vertical relationships in a state, and they could be raised also at the federal level. But neither Sims nor White was of great help when it came to economics. Sims was a political scientist and, in Buchanan’s own words, he “learned little or no ‘economics’ in [his] preferred definition during that Knoxville year.” (2007, 69). Buchanan “learned economics” from his “Chicago teachers” (2007, 216). Who were they and what was their influence? We try to answer to this question, complementing the what Buchanan wrote in his autobiography. We show how important were Theodore Schultz, D. Gale Johnson, Roy Blough and Henry Simons. This allows us to show why Blough became Buchanan’s Ph. D. supervisor. Also, it seems that Simons’s influence on these essays was greater than Knight’s. This would (at least partly) change. When he would write his dissertation, Buchanan would analyze more deeply the theoretical foundations of his ideas. He would read Wicksell, adopt a benefit theory of taxation and depart from Simons. In the long term, Knight – and Wicksell – were important to Buchanan’s intellectual development. Not then, 1946 and 1947.
Even the importance of ethics seems to owe more to Simons than to Knight – at least, the evidence points more at Simons than at Knight. Buchanan was interested in ethics from the perspective of fiscal justice, more specific than Knight’s views on ethics. This is particularly interesting because it helps us to understand that Buchanan did not promote a vision of unrestricted competitive federalism. To him, a federal regime without an ethical rule that would allow an equal treatment for equals would be unjust. He would repeat this idea later, not only demonstrating the importance of ethics for Buchanan but also the broader impossibility of achieving efficiency in the absence of ethical rules. To Buchanan, as for Simons and Knight, a free market economy was indeed a system with rules.