Schools of Thought in Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 28: Public choice
In the Wealth of Nations published in 1776, Adam Smith convincingly explains the fundamental importance of freedom for the prosperity of a nation. Incidentally, the year of the publication of the Wealth of Nations coincides with the year of the Declaration of Independence of the United States of America. Not incidentally, however, Smith’s book has enormously inspired the US Constitution framers in writing the Federalist Papers in the years 1787–88. In Britain, Smith’s home country, the echo of the Wealth was more mixed. Smith has been praised as an anti-mercantilist. However, his commitment to liberty has become less acknowledged. Smith had to convince his compatriot readers against the theories of competing writers. In 1780, only a few years after the publication of the Wealth, Jeremy Bentham published his Introduction to the Principles of Morals and Legislation in which he proposed utilitarianism as a leading doctrine for the British public. Bentham fought for a moral society against phenomena such as usury and prodigality. His follower John Stuart Mill saw utilitarianism as a principle to obtain a better society. He has adopted the ideas of an equal sacrifice of taxation first proposed by Horace and Jean-Baptiste Say (Faccarello 2006). Mill, too, thought that the rich and poor citizens should both contribute to the state, but as utility of income and wealth was assumed to decline with higher income, Mill’s equal sacrifice principle implied a higher taxation of the rich compared with the taxation of the poor. The amount of the total sacrifice, in fact the amount of money to be raised has not been questioned. The expenditure side of the budget was not explicitly considered. Therefore public choice has remained outside economic analysis. Bentham and Mill both had a large influence in Britain. It is due to their publications that utilitarianism became a leading philosophy in nineteenthup to twentieth-century Britain. As utility was regarded as cardinally measurable, welfare maximization became a policy goal for governments. Welfare maximization had its own justification. It was imposed and hence independent of individuals’ choices. So the spirit of liberty of Adam Smith has been crowded out of public policy. The utilitarian view was contested by three neoclassical economists: Carl Menger of Vienna, Stanley Jevons of London and Léon Walras of Lausanne who succeeded in explaining prices in a market economy as a result of consistent individual market evaluations of private goods around 1870. However, individual market evaluations were alien to the British utilitarians who neglected to notice that the great neoclassical triad has opened a new research programme from private to public goods. The study of the economics of public goods has been exiled to the Continent to Germany, Italy and Sweden.
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