Public Principles of Public Debt is one of James M. Buchanan’s most important and influential books. The radical idea he conceived was that: our reliance on public debt has amassed a sort of orthodoxy that is commonly—and needlessly—assumed by taxpayers, by politicians, and by economists themselves.
Buchanan dismisses the nearly universal belief (which continues to this day) that the burden of debt is borne by the current generation, and he argues persuasively that public debt is shouldered in large part by generations still to come.
Written in 1958, this book represents Buchanan’s first published monograph, and its publication met with much controversy, confusion, and speculation in the economic community. But the book also added to Buchanan’s rising stature in the early part of his career as a brilliant and original thinker.
The arguments Buchanan lays out in this book had a considerable impact on much of his later work. Buchanan’s object here is to establish a set of analytical claims about debt incidence. Current anxieties over implicit Social Security debt are clear indications of the rightness of Buchanan’s then-revolutionary theory.
The Methodology of Debt Theory
Before any meaningful analysis of the public debt can take place, it is necessary to examine the methodology within which analysis may properly be conducted. Put more directly, and more correctly, this means that we must know precisely what the problem is before we start trying to reach conclusions concerning its solution. We must be clear as to what we are talking about.
First of all, some classification is required. “Public debt” is far too generic a term to be subjected to incisive analysis without prior classification and specification. A government may borrow for many reasons; the operation may involve large or small sums; the effect can be real or monetary. Before any analysis is complete, all possible cases must be catalogued and each case considered separately if essential differences appear.
There are listed below the specific types of public debt, by characteristic, which shall be discussed. It is noted that the separate types are not mutually exclusive.
1. Public debt issued during periods of substantially full employment of economic resources for the purpose of providing government with funds with which to secure command over real resources.
2. Public debt issued during periods of less than full employment.
3. Public debt issued during periods of threatening inflation and designed only to neutralize monetary resources.
4. “Marginal” issues of public debt which are small enough relative to the whole economy and to the financial market to allow the influences of debt issue upon the interest rate, the absolute price level, and the structure of relative prices to be neglected.
5. “Supra-marginal” issues of public debt for which effects upon the structure of interest rates and prices cannot be neglected, and which must, therefore, be included as a part of the analysis.
6. Public debt issued during war periods and purchased largely by the banking system.
7. Public debt, the proceeds of which are devoted to collective investment in long-term capital projects, which are calculated to yield social income.
8. Public debt, the proceeds of which are invested in self-liquidating public projects which produce monetary revenues.
9. Public debt, the proceeds of which are used wastefully.
James M. Buchanan
In 1986 James M. Buchanan (1919-2012) was awarded the Alfred Nobel Memorial Prize in Economic Sciences. Universally respected as one of the founders of the “public choice” school of economics, he is the author of numerous books and hundreds of articles in the areas of public finance, public choice, constitutional economics and economic philosophy. He is best known for such works as The Calculus of Consent, The Limits of Liberty, The Power to Tax, and The Reason of Rules. Buchanan has devoted himself to the study of the contractual and constitutional basis for the theory of economic and political decision making.
See also at Econlib: the Concise Encyclopedia of Economics entry on Buchanan