INDIVrDUAL INTERESTS AND COLLECTIVE ACTION By James S.

C o l e m a n

I. Introduction O n e of the classical problems of sociology is the dialectic between the individual and the state: on the one hand, individual freedom, and on the other, the activities of the state in the public interest. This problem has been little treated in theoretical sociology in recent years, but it continues to be a problem that is of utmost theoretical concern. For example, in a recent conference, econometricians from the Netherlands, the United States, and Poland described econometric models of the economies of these three countries. (I) The sharp difference between the models for the Polish e c o n o m y and the other two w a s in precisely this area. The relative amounts of income to go into capital investment and private consumption were determined in the Polish model by criteria such as optimum economic growth. They were predicte d in the Dutch and U. S. models, because this choice between saving and spending is a free one in these economies. Furthermore, these models were not only descriptive of the two types of economies, they expressed the ideological assumptions of the respective governments. At present, such differences must remain differences in a priori assumptions; but in a general theory of society, these assumptions should be expressible in terms of more fundamental considerations. It is toward this end that the present paper is directed. O n e of the few areas of social science in which the problem continues to plague theorists in a direct fashion is that of public finance. Here, the theorist is faced with two diametrically opposed principles for determining the extent of public expenditures and the distribution of costs for these expenditures. O n e is an individual-choice principle, based on a conception of the individual as the fundamental actor in the society. The other is the principle of public needs as divorced from the needs of the individual, having its locus in an organic theory of the state. This difference of perspective, which can lead to quite different

no conflict between one individual's welfare and that of another. 2. because the returns are independent. however.50 DECISION PAPERS policies in public finance. It will be convenient in the discussion below to discuss this general problem within the framework of public finance. he can calculate the marginal utility to him of an additional tax of $1. and h o w the costs should be distributed between present and future. Each exchanges. there stands no individualistic basis for deciding what is "optimal" in expenditures and in distribution of costs. For in the satisfaction of private wants through economic means. Thus it m a y often be to the individual's interest to withhold activity. The equilibrium position of his exchanges and his activity will be determined at the point where the marginal utility of his returns (from further exchanges or further activity) equals the marginal utility of the costs of what he must forego or give up. And each pursues that activity which will provide him with the most valuable resources. Yet it will b e c o m e evident that the results that will be stated are of general relevance for a theory of society. Through such activity. and each is benefitted by others' actions. The classical controversy in public finance The theory of public finance has addressed itself to the questions of h o w m u c h m o n e y should be spent on public expenditures. Whether the public expenditures are on military defenses or public parks or public education. or nearly so. and to enjoy the benefits of others' activity without contributing. and the aggregate welfare is increased. his initial resources for those resources which will most satisfy his wants. is not of direct applicability here. voluntarily. there has been a great deal of interest in developing . which provides such a brilliant solution to the economics of private wants. In the fulfillment of public needs. h o w t h e s e expenditures should be distributed a m o n g different public wants. Classical economic theory. As a consequence. for it addresses the fundamental question of h o w individuals can have freedom and the society not have anarchy. and a m o n g the members of the society. Nevertheless. of his costs. rt is this problem which defeats the direct application of classical economic theory to public economy. each individual gains. each man's actions benefit others. It is at the core of sociology. is not at all limited to political economy. there is.00 only after the distribution of taxes has been determined. Any calculation in terms of marginal utility of returns and costs is defeated.

and the d i s t r i b u t i o n o f t a x e s . If some w a y c o u l d b e f o u n d i n w h i c h e a c h i n d i v i d u a l c o u l d be i n d u c e d to p a y e x a c t l y t h a t a m o u n t t h a t t h e s e r v i c e w a s worth to him. (3) It p r o c e e d s from t h e g e n e r a l n o t i o n t h a t m e m b e r s of s o c i e t y b e n e f i t d i f f e r e n t i a l l y from p u b l i c s e r v i c e s .INDIVIDUAL INTERESTS AND COLLECTIVE ACTION 51 a t h e o r y of p u b l i c f i n a n c e from i n d i v i d u a l i s t i c a s s u m p t i o n s . o t h e r s c o u l d e q u a l l y w e l l u n d e r s t a t e t h e i r i n t e r e s t s . if t h e a p p r o p r i a t e d e c i s i o n r u l e were u s e d . i n d i v i d u a l s would k n o w e x a c t l y w h a t s e r v i c e t h e y w e r e b u y i n g . most f u l l y d e v e l o p e d i n t h e w o r k s of W i c k s e t l a n d L i n d a h l . h a s b e e n c a l l e d the " b e n e f i t " p r i n c i p l e b y t h e o r i s t s of p u b l i c f i n a n c e . for a l l p e r s o n s . The d e c i s i o n r u l e for W i c k s e l l w a s o n e i n which the first c o n d i t i o n was that each expenditure should be a s s o c i a t e d with a p a r t i c u l a r t a x . W i c k s e l l s u g g e s t e d t h a t i n t h i s c a s e t h e p r o c e s s of p o l i t i c a l a d j u s t m e n t w a s c o m p a r a b l e to t h e p r o c e s s of v o l u n t a r y e x c h a n g e in t h e p r i v a t e s e c t o r of t h e e c o n o m y . w i t h some p a r t i a l s u c c e s s . (4) . t h e n b o t h t h e proper l e v e l of s e r v i c e s ( r e l a t i v e t o t h e p r i v a t e n e e d s ) a n d t h e proper d i s t r i b u t i o n of s e r v i c e s w o u l d o c c u r . t h e r e c o u l d be u n a n i m i t y o n t h e t a x . a n d t h a t t h e o n l y r e a s o n a b l e b a s i s for d e t e r m i n i n g t h e l e v e l a n d d i s t r i b u t i o n of public e x p e n d i t u r e s . (2) H o w e v e r . up t o t h e p o i n t t h a t t h e m a r g i n a l r e t u r n of t h e a d d i t i o n a l s e r v i c e j u s t e q u a l l e d the m a r g i n a l c o s t s of t h e a d d i t i o n a l b u r d e n . At t h e p o i n t w h e r e no o n e w a s w i l l i n g to a s s u m e a n a d d i t i o n a l b u r d e n to i n c r e a s e t h e l e v e l of e x p e n d i t u r e . u n d e r s t a t i n g o n e ' s i n t e r e s t s i n t h e s e r v i c e i n o r d e r to r e d u c e t h e c o s t s to o n e s e l f . lies in the b e n e f i t s o n e r e c e i v e s r e l a t i v e to the c o s t s of e x p e n d i t u r e s . f o l l o w i n g t h e c l a s s i c a l p r i n c i p l e of m a r g i n a l u t i l i t y . h o w e v e r . The s e c o n d c o n d i t i o n w a s t h a t t h e t a x s h o u l d o n l y b e a s s e s s e d upon a u n a n i m o u s vote. to r e d u c e t h i s p r i n c i p l e to e x a c t l y t h a t of v o l u n t a r y e x c h a n g e . T h i s a p p r o a c h . W i c k s e l l a n d L i n d a h l a t t e m p t e d . A n o t h e r i n d i v i d u a l i s t i c b a s i s for a t h e o r y of p u b l i c e x p e n d i t u r e s did d e v e l o p . T h i s m e a n t t h a t t h e t h e o r y d e v e l o p e d o n t h e b a s i s of ad hoc p r i n c i p l e s . The p r o t e c t i o n a g a i n s t u s e of s t r a t e g y . b a s e d on the following c o n s i d e r a t i o n : both the l e v e l of t a x e s a n d t h e d i s t r i b u t i o n of t a x e s s h o u l d be a d j u s t e d u n t i l e a c h i n d i v i d u a l w a s w i l l i n g to p a y h i s p r o p o r t i o n at t h e g i v e n l e v e l . so t h a t i n the p r o c e s s of d e c i s i o n m a k i n g . l a y for %Vicksell i n t h e f a c t t h a t u n d e r u n a n i m i t y . The r e s u l t w o u l d be t h a t t h e l e v e l w o u l d be a d j u s t e d u p w a r d b y p e r s o n s w i l l i n g to a s s u m e a l a r g e r s h a r e i n o r d e r t o i n c r e a s e t h e l e v e l . In p a r t i c u l a r . the t h e o r y of t a x d i s t r i b u t i o n d e v e l o p e d o n t h e b a s i s of t h e n o t i o n of " e q u a l s a c r i f i c e s . " so t h a t t a x a t i o n s h o u l d be d i s t r i b u t e d i n a c c o r d w i t h t h e a b i l i t y of i n d i v i d u a l s t o p a y t a x e s . t h e ad h o c q u a l i t y of t h i s s o l u t i o n h a s b e c o m e a p p a r e n t i n i t s i n a b i l i t y to d e t e r m i n e w h a t i s a n e q u a l s a c r i f i c e . Thus a n i n d i v i d u a l w o u l d p a y i n t a x e s o n l y t h a t a m o u n t t h a t t h e p u b l i c s e r v i c e w a s w o r t h to h i m . s i n c e t h e t a x w a s at t h e p o i n t of m a r g i n a l c o s t e q u a l to m a r g i n a l r e t u r n . r e l a t i v e to h i s p r i v a t e n e e d s .

Not o n l y d o e s t h i s s e e m aesthetically appealing. but some p o s i t i o n d e p e n d e n t u p o n t h e r e l a t i v e b a r g a i n i n g p o w e r of the two p e r s o n s . t h e s i m u l t a n e o u s a d j u s t m e n t of l e v e l of e x p e n d i t u r e a n d d i s t r i b u t i o n of t a x e s w i l l c o n t i n u e to a p o i n t w h e r e t h e m a r g i n a l r e t u r n for e a c h p e r s o n e q u a l s t h e m a r g i n a l c o s t . a n u n d e r s t a t i n g of o n e ' s i n t e r e s t i n t h e s e r v i c e w o u l d for m a n y p e o p l e be t h e most profitable strategy. u n l e s s the i n d i v i d u a l s r e t u r n to it part of t h e i r e a r n i n g s made p o s s i b l e b y the v e r y e x i s t e n c e of t h e c o m m u n i t y . dropping the p r i n c i p l e of u n a n i m i t y . . The " c o m m u n i t y " or t h e s t a t e w a s s e e n a s a s u p r a . s p i r i t u a l . This t h e o r y ' s s t a r t i n g p o i n t w a s the s t a t e a s a n i n d i v i d u a l ..of what is o p t i m u m for the s t a t e . Thus o n e of the e a r l y t h e o r i s t s of p u b l i c f i n a n c e . any other approach truncates individual f r e e d o m of c h o i c e a t t h e v e r y o u t s e t .P e a c o c k v o l u m e ) took a d i a m e t r i c a l l y o p p o s e d p e r s p e c t i v e to t h a t of the i n d i v i d u a l i s t s c h o o l . Nevertheless. In t h e i r a n a l y s i s . The a b s e n c e of a t h e o r y of o p t i m u m p o l i t i c a l c h o i c e (in e c o n o m i s t s ' t e r m s . w h e n t h e r e is a n i n c r e a s e to a l a r g e n u m b e r of i n d i v i d u a l s . (6) At t h e s a m e t i m e . Lorenz v o n S t e i n . b u t it a p p e a r s c a p a b l e of s o l u t i o n . t h e p o i n t of v i e w w a s t h a t of t h e S t a t e . a d i a m e t r i c a l l y o p p o s e d p o s i t i o n w a s i n e x i s t e n c e . a n d the e v a l u a t i o n of p a r t i c u l a r p o l i c i e s w a s to be c a r r i e d out from the p o i n t of view.m a t e r i a l . Political t h e o r y s h o w s u s t h a t the S t a t e p e r s o n i f i e s t h i s s o c i e t y a n d e n d o w s it with t h e p o w e r of v o l i t i o n and a c t i o n .. a n d a s S a m u e l s o n (5) r e s t a t e d . but i n d i c a t i n g m a t h e m a t i c a l l y how t h e l e v e l of e x p e n d i t u r e a n d d i s t r i b u t i o n of t a x e s w o u l d a d j u s t t h e m s e l v e s for a n y g i v e n d i s t r i b u t i o n of p o l i t i c a l p o w e r . This b r i e f d i s c u s s i o n of the i n d i v i d u a l i s t t h e o r y of p u b l i c f i n a n c e is s u f f i c i e n t to s h o w t h a t t h e r e e x i s t s at l e a s t t h e b a s i s for a t h e o r y of p u b l i c f i n a n c e .e v e n m a t h e m a t i c a l l y . a n d s o c i a l m a t t e r s . L i n d a h l ' s d i s c u s s i o n . " (7) T h e s e a u t h o r s (see a l s o p a p e r s of W i e s e r a n d R i t s c h l i n t h e M u s g r a v e .52 DECISION PAPERS Lindahl carried this general i n d i v i d u a l i s t theory onward. It i s t h u s . As L i n d a h l s h o w e d . This v i e w i s w e l l r e p r e s e n t e d b y S t e i n .i n d i v i d u a l e n t i t y to w h i c h t h e i n d i v i d u a l s who are m e m b e r s of it s h o u l d g i v e up a p o r t i o n of t h e i r g o o d s . h o w e v e r . who g i v e s t h r e e p r i n c i p l e s . w a s b a s e d o n two i n d i v i d u a l s . a n d p u b l i c e n d e a v o r g e n e r a l l y . . t h a t t h i s t h e o r y w a s t a k i n g s h a p e . s a y s . . h o w e v e r .i m p o s s i b l e t h a t t h e c o m m u n i t y s h o u l d offer t h e i n d i v i d u a l s t h e c o n d i t i o n s of e c o n o m i c a c c o m p l i s h m e n t . Lindahl includes in his discussion m e n t i o n of p o l i t i c a l power a n d b a r g a i n i n g p r o c e s s e s . "The s t r e n g t h of c o m m u n i t y r e s i d e s i n what e a c h i n d i v i d u a l s u r r e n d e r s to it from h i s p e r s o n a l life . w h i c h s h o w s t h a t he r e c o g n i z e s t h e f a c t t h a t not a u n i q u e p o s i t i o n w i l l r e s u l t . a s o c i a l w e l f a r e f u n c t i o n ) i s a d i s a b i l i t y . d e r i v e d from p r e m i s e s t h a t the o n l y d e t e r m i n a n t of t h e s e e x p e n d i t u r e s s h o u l d be i n d i v i d u a l s p u r s u i n g t h e i r o w n i n t e r e s t ..

i n t h e I 9 3 0 ' s t h e r e d e veloped another position which has never been integrated with the o t h e r s . op. in "maximizing its u t i l i t y . 3. Thus n e i t h e r i n d i v i d u a l w e l f a r e n o r i n d i v i d u a l c o n s e n t i s c o n s i d e r e d . but o n l y t h e i n t e r e s t s of t h e S t a t e .INDIVIDUAL INTERESTS AND COLLECTIVE ACTION 53 which should govern the State in its decisions about the level and distribution of taxes: the economic principle. Thus there are strange bedfellows: the G e r m a n theorists of a Virulent State and the Keynesian theorists of a virulent e c o n o m y both start from the perspective of the nation as an entity. Keynesian theory takes on the perspective of the "community. in fact. Samuelson. the . in opposition to the individualist school. op. " or "nation" as a whole. and the principle of public economy. ~ . l e a d i n g to m o n e t a r y . t a x a t i o n . and Arrow.the a i m of e n s u r i n g t h e f u l l e m p l o y m e n t of the f a c t o r s of p r o d u c t i o n . the financial principl e. and are allied against the individualist position. cir. cir. By the very fact of laying out a theory for the functioning of the e c o n o m y of a nation. The Keynesian position m a y be seen. in terms of which the State should act in public finance. Yet its perspective is exactly that of the organic. v i g o r o u s l y a s s a i l e d by some and s t a u n c h l y defended by others . o19. as a special case of the organic theorists' position: while their goal. " This controVersy w a s never resolved. (8) This theoretical approach to a fiscal policy w a s independent of the earlier debate. All three principles reduce to a single consideration: h o w to tax in such a w a y that the State's n e e d s a r e e f f i c i e n t l y met w i t h o u t i m p a i r i n g t h e a b i l i t y of c a p i t a l t o p r o d u c e t a x e s i n t h e f u t u r e . neither position has produced practical fruits which could justify its proponents' claims.). a n d p u b l i c e x p e n d iture p o l i c i e s which c a n insure full employment. This i s K e y n e s i a n e c o n o m i c t h e o r y w h i c h d e v e l o p s a m a c r o e c o n o m i c t h e o r y .. H a n s e n s u g g e s t s in 1941 t h e growth of t h i s p o s i t i o n : There i s e m e r g i n g a n e w a i m of f i s c a l p o l i c y . find most congeniality in the individualists' position. and then indicating h o w goals for that econo m y as a whole could be met through compensatory finance. for it developed from a macroeconomic theory of the functioning of the economy. Although contemporary theorists of public finance (see Musgrave and Peacock's Introduction.. " "state. cir. cir. The development of Keynesian economics But s i n c e t h e t i m e of t h i s g r a n d d e b a t e . w a s the general welfare of the State.. Musgrave. state-as-an-entity school.

and that there is no microeconomic substructure through w h i c h i n d i v i d u a l p u r s u i t of t h e i r i n t e r e s t s l e a d s t o a K e y n e s i a n policy. of c o u r s e . But now l e t us c o n s i d e r t h e p o i n t a t w h i c h c l a s s i c a l i n d i v i d u a l i s t e c o n o m i c t h e o r y h a s a l w a y s b r o k e n d o w n : p u b l i c .i n d i v i d u a l e n t i t y l i k e a f a m i l y or a s t a t e . s u c h a s f u l l e m p l o y m e n t . Thus t o d a y . c a n t h e t h e o r e t i c a l q u e s t i o n of i n d i v i d u a l s o v e r e i g n t y v s . n a t i o n a l s o v e r e i g n t y be r e s o l v e d ? In t h e s e c t i o n b e l o w I w i l l s u g g e s t h o w an e x t e n s i o n of e c o n o m i c t h e o r y l e a d s q u i t e n a t u r a l l y to s u c h a r e s o l u t i o n . if o n e a d o p t s t h i s p r e m i s e . The r e a s o n f o r t h i s . supposedly beneficial to the people. h o w e v e r . in c o n t r a s t t o p r i v a t e g o a l s . b u t t h e d e v e l o p m e n t of t h e d e s c r i p t i v e t h e o r y h a s e n c o u r a g e d t h e u s e of p o l i c i e s w h i c h a r e b a s e d o n i t . is to t a k e a s g i v e n w h a t we m u s t p r o v e . more g e n e r a l l y . s u c h a s a s u p r a . . Thus we w i l l t a k e at t h e v e r y o u t s e t t h e p r e m i s e of t h e i n d i v i d u a l p o s i t i o n . t h e y do so in t e r m s of a g o a l of t h e e c o n o m y . The t h e o r y of i n d i v i d u a l i n v e s t m e n t in t h e S t a t e To b e g i n w i t h . a s a w h o l e . ) More r e c e n t l y . " in p a r t i c u l a r t h a t of m a x i m u m e c o n o m i c g r o w t h . i n s o f a r a s t h e c l a s s i c a l d e b a t e in p u b l i c f i n a n c e i s of i n t e r e s t to e c o n o m i s t s .54 D E C I S I O N PAPERS Keynesian goal is a m u c h more specific one: full employment. (The fact that Keynes' goal is a benevolent one. t h e y g e n e r a l l y a c c e p t t h e p r e m i s e s of t h e i n d i v i d u a l i s t p o s i t i o n . o u r b i o l o g i c a l r a w m a t e r i a l is i n d i v i d u a l m e n . i s t h a t to a s s u m e a n y t h i n g m o r e . r a t h e r t h a n s o m e a g g r e g a t e of i n d i v i d u a l w e l f a r e . with g o a l s and i n t e r e s t s of i t s o w n . w h i c h e v a l u a t e s p o l i c i e s in t e r m s of a n a t i o n a l g o a l . All n o r m a t i v e s t a t e m e n t s t h a t c a n be m a d e . p r o d u c t i o n . (9) T h e r e i s . has often obscured the fact that its perspective is that of the State. As long a s o n e m a n ' s a c t i o n (in e x c h a n g e . a d i f f e r e n c e b e t w e e n a t h e o r y w h i c h d e s c r i b e s t h e f u n c t i o n i n g of a m a c r o e c o n o m y and t h e a d v o c a c y of p o l i c i e s w h i c h m a x i m i z e c e r t a i n v a r i a b l e s in t h a t t h e o r y (such a s t h e r a t e of e m p l o y m e n t or t h e r a t e of e c o n o m i c g r o w t h ) . w e w i l l a d o p t a s a f i r s t p r e m i s e t h a t of c l a s s i c a l e c o n o m i c s : i n d i v i d u a l s o v e r e i g n t y . 4. H o w c a n t h i s c u r i o u s d i s c r e p a n c y be r e s o l v e d ? H o w . Yet i n s o f a r a s e c o n o m i s t s a r e a s k e d to e v a l u a t e b u d g e t a r y p o l i c i e s . All t h e s e . to be s u r e . a b o u t whom w e c a n a s s u m e o n l y t h a t t h e y w i l l a c t in t h e i r o w n interest as they perceive that interest. a s t h e o n l y o n e from w h i c h a t h e o r i s t c a n l e g i t i m a t e l y p r o c e e d . o t h e r m o d i f i c a t i o n s of s u c h a g o a l h a v e b e e n p o s e d a s " n a t i o n a l g o a l s . As t h e o r i s t s . a r e t h o s e at t h e i n d i v i d u a l l e v e l . and e v a l u a t e d in t e r m s of t h e i n d i v i d u a l ' s o w n i n t e r e s t s . a r e p a r t i c u l a r c a s e s of t h e o r g a n i c t h e o r y .

s u c h a s p a r e n t s ' g i f t s to t h e i r a d u l t c h i l d r e n . letting "his" refer to whatever entity the individual appeared to act in the interest of.e a r n e r s h o u l d k e e p it a l l h i m s e l f . Yet this is without theoretical foundation.INDIVIDUAL INTERESTS AND COLLECTIVE ACTION 55 or w h a t e v e r ) . . Yet h o w can this be reconciled with the narrow premise of individual interest taken earlier? Obviously.i n t e r e s t e d i n d i v i d u a l w i l l b e h a v e . wholly consistent with economic behavior. but of the interests of a collectivity or even of another person. even his life. t h e w a g e . as in m a n y others (e. s u c h as in t h e p u r c h a s e of a " p u b l i c g o o d " l i k e m i l i t a r y d e f e n s e . not of their o w n interests. a c c o u n t for f l u c t u a t i o n s in d e m a n d for a g o o d w i t h p r i c e . In a d d i t i o n . using h o u s e h o l d s as u n i t s . Indeed. as w h e n households are taken as the unit for income and consumption. it is to h i s i n t e r e s t not t o do s o .. Classical economic theory always a s s u m e s that the individual will "act in his interest. it is implicitly a s s u m e d that "the family" or "the household" is this entity w h o s e interest is being maximized. t h e n t h e t h e o r y of m a r g i n a l u t i l i t y s h o w s h o w t h e s e l f . they c o m e d o w n to a particular difficulty. and never disconfirmable. W h e n such problems are carefully e1(amined. and o t h e r s ' a c t i o n s a f f e c t him. e . But a s soon as his a c t i o n s a f f e c t o t h e r s . t r a n s f e r s of i n c o m e b e t w e e n h o u s e h o l d s . From other aspects of economic behavior c o m e s a clue to the w a y in which such a principle. That is. a r e p a r t i c u l a r l y t r o u b l e s o m e to e c o n o m i c t h e o r y . if they did not do so. tn m a n y o t h e r c a s e s w h e r e o n e m a n ' s a c t i o n s a f f e c t not o n l y h i m s e l f but o t h e r s . . . In this case.g. Often.but he m u s t d e v e l o p s o m e kind of s t r a t e g y w h i c h i n s u r e s t h a t t h e y w i l l in f a c t p a y f o r i t . i . But it c a n n o t a c c o u n t for t h e d i s t r i b u t i o n of e x p e n d i t u r e a m o n g m e m b e r s of t h e f a m i l y ." but it never examined carefully the entity to which "his" refers. w e could simply solve the problem by fiat. t h e t h e o r y b r e a k s d o w n . by p o s t u l a t i n g t h a t t h e p a r e n t g a i n s utility by doing so. A more adequate solution is one which states the conditions under which the entity in w h o s e interests he acts will be something or s o m e o n e other than himself. a f f e c t s o n l y h i m s e l f . c l a s s i c a l e c o n o m i c s f i n d s i t s e l f in a s i m i l a r l y d i f f i c u l t p o s i t i o n . to national defense. i n c o m e . and p r i c e s of o t h e r g o o d s . w h e n a m a n is willing to contribute much. rather than use a strategy which will push the cost onto others). the basis for society would hardly exist. T h e y c a n be r e s o l v e d o n l y t r i v i a l l y . Thus c l a s s i c a l e c o n o m i c t h e o r y c a n . f o r a c c o r d i n g t o c l a s s i c a l t h e o r y . m e n act as if the "his" referred to s o m e entity larger than themselves. So l o n g as o t h e r s w i l l p a y for d e f e n s e . they appear to act in terms. merely a convenient but slipshod device. This obviously would m a k e the theory trivially true.

have been replaced by one independent firm plus a second w h o s e interests are an a m a l g a m of those resulting from its o w n production plus those resulting from the productlon of the second. It is true that his interests in various measures of public finance will be affected by his investments in various intermediary organizations and in other persons. w e are interested only in a single investment. a m o n g different nations. I would like to suggest that a similar kind of investment. in his Theory of Moral Sentiments. These investments are made. probably matched only by the family -.m a k e its interests in part coincident with those of the second. r e p l a c e s t h e m u l t i t u d e of i n d e p e n d e n t i n t e r e s t s . The crucial point is that one supraindividual entity.. by the willingness of m a n y of a nation's young m e n to die for it. H e suggested that such investments of sympathy were more likely to bring a high psychic income. The investments of self in the nation differ a m o n g different citizens. for economic reasons: they are expected to provide a psychic income. Then two independent firms. the nation. or ideas. are happy w h e n he is happy. the investment an individual m a k e s in the nation as a whole.. but the theory of political e c o n o m y to be developed here can initially disregard such investments.56 DECISION PAPERS can be developed. but few do so with a pauper. although a psychic one. to be sure. etc. finds that it can realize most profit by investing in another firm which is expected to bring a high return on its investment. w h o s e interests were free to be opposed w h e n the occasion demanded.other individuals. Such investments are often very strong. but c o m m e n t e d on the fact that m a n y people concern themselves with the fortunes of a prince. as the investor shares in the well-being experienced by the entity he has invested in. It should be m a d e clear that this is not in any sense altruistic behavior: a girl invests part of herself in a movie star because she will experience vicariously the imagined joys of the movie star. groups. acting rationally to maximize profits. and were thus more often m a d e w h e n the recipient w a s a "good risk.as evidenced. Indeed. Such investments involve the firm in the fortunes of another firm -. such as clothes. discussed such investments as a w e b of "sympathy" which holds society together. S o m e of these entities are physical objects. competition collapses and in e f f e c t a m o n o p o l y . and a m o n g different . sad w h e n he is sad. " a m a n to w h o m more good things were likely to happen than bad. Often an individual firm. or organizations. other possessions. (I0) For present purposes. is m a d e by each individual in entities outside himself. includes the psychic investments of m a n y of its citizens. But others are themselves actors in the s y s t e m . A d a m Smith. for example. w i t h a s i n g l e i n t e r e s t . w h e n such a condition of inter-investment is widespread in a market.

is more c o m p l i c a t e d t h a n e i t h e r t h e i n d i v i d u a l i s t or t h e o r g a n i c s c h o o l s w o u l d p r o p o s e . and a m a c r o e c o n o m i c t h e o r y l i k e t h a t of K e y n e s w o u l d p r o v i d e t h e r e l e v a n t c r i t e r i a f o r b u d g e t p o l i c y . a r e t u r n on t h e i n v e s t m e n t s t h a t h a v e b e e n m a d e in t h a t b o d y . r a t h e r t h a n by o n e a g e n c y . The e x i s t e n c e of t w o d i s t i n c t i n t e r e s t s . of w h i c h s t r u c t u r e . In o t h e r f o r m s of d e m o c r a t i c g o v e r n m e n t . c o m b i n i n g in i t s e l f b o t h interests. If it w e r e . " T h e r e w o u l d be no c o n t r o v e r s y a b o u t a " f a i r " d i s t r i b u t i o n of t a x b u r d e n .I N D I V I D U A L INTERESTS A N D COLLECTIVE ACTION 57 times for a given nation. and h o w b e s t t o a t t a i n t h e m . or m o r e g e n e r a l l y of c o l l e c t i v e d e c i s i o n s . In s o m e e x i s t i n g f o r m s of d e m o c r a t i c g o v e r n m e n t . and t h u s p r o v i d e s . The o r g a n i c t h e o r y of t h e s t a t e a s p r o p o u n d e d b y t h e G e r m a n e c o n o m i s t s . there" i s no s u c h d i v i s i o n . Such i n v e s t m e n t . w o u l d be w h o l l y r e l e v a n t . That i s . The e x e c u t i v e . i s s e l d o m so g r e a t e n o u g h t o s u b m e r g e c o m p l e t e l y i n d i v i d u a l s ' i n t e r e s t s in t h e i r p r i v a t e w e l f a r e . a n d h i s i n t e r e s t s a s a n i n v e s t o r in t h e n a t i o n . h e f u r t h e r s t h e p r i v a t e i n t e r e s t s of h i s c o n s t i t u e n t s . in t h e o f f i c e o f t h e P r e s i d e n t and h i s e x e c u t i v e d e p a r t m e n t s . t h e r e w o u l d s t i l l be d i s a g r e e m e n t o v e r v a r i o u s m e a s u r e s of p u b l i c f i n a n c e . Thus t h e t h e o r y of p u b l i c f i n a n c e . in c o n f l i c t w i t h both t h e p r i v a t e i n t e r e s t s of o t h e r s and t h e i n t e r e s t s of t h e n a t i o n . s u c h a s a p a r l i a m e n t a r y f o r m . a n d t h u s i s t h e m a n a g e r of t h e p s y c h i c i n v e s t m e n t s w h i c h h a v e b e e n m a d e in t h a t b o d y . T h e r e a r e in f a c t t w o p a r t i a l l y c o n f l i c t i n g i n t e r e s t s of e a c h i n d i v i d u a l in e a c h d e c i s i o n : h i s p r i v a t e i n t e r e s t s ( i n c l u d i n g a l l h i s i n t e r e s t s d e r i v i n g from p s y c h i c i n v e s t m e n t s in i n t e r m e d i a r y o r g a n i z a t i o n s ) . if he d o e s t h e j o b w e l l . but t h e s e d i s a g r e e m e n t s w o u l d b e o v e r w h i c h n a t i o n a l g o a l s a r e m o s t i m p o r t a n t . and no o n e w o u l d be c o n c e r n e d a b o u t h i s o w n i n t e r e s t s .c o m p a r a b l e t o e c o n o m i s t s ' d i s a g r e e m e n t s a b o u t w h a t b u d g e t p o l i c i e s a r e b e s t for a " h e a l t h y e c o n o m y . a n d if a l e g i s l a t o r d o e s a g o o d j o b . s u c h a s t h a t of t h e U n i t e d S t a t e s . It d o e s r a i s e t h e q u e s t i o n . p a r l i a m e n t . of c o u r s e . But the investments do exist. and it s h o u l d i n c l u d e a n a g e n c y w h i c h r e p r e s e n t s t h e i n t e r e s t s of i n d i v i d u a l s a n d o r g a n i z a t i o n s w i t h i n i t . s e r v e s t h e i n t e r e s t s of t h e n a t i o n . of c o u r s e . meaning that various successes and failures of the nation as an entity will be experienced as pleasurable or painful by the citizens. quite apart from the material consequences to them as private individuals. h o w e v e r .. d o e s not m e a n t h a t t h e y a r e b e s t s e r v e d by t w o s e p a r a t e a g e n c i e s s u c h a s t h e l e g i s l a t i v e and t h e e x e c u t i v e b r a n c h e s of g o v e r n m e n t . t h e r e a r e t w o d i s t i n c t agencies which roughly serve those interests. so that disagreements include great concerns about individual interests. a t h e o r y of g o v e r n m e n t s h o u l d i n c l u d e a n a g e n c y w h i c h r e p r e s e n t s t h e i n t e r e s t of t h e n a t i o n . T h e s e i n t e r e s t s s h o u l d find r e p r e s e n t a t i o n in g o v e r n m e n t . The l e g i s l a t i v e b r a n c h s e r v e s t h e p r i v a t e i n t e r e s t s of i n d i v i d u a l s a n d o r g a n i z a t i o n s . But of c o u r s e t h e i n v e s t m e n t s a r e o n l y p a r t i a l .

The members themselves have three political activities to perform in order to insure that the outcome of the collective decisions realizes their interestS. is a contradiction in terms for the executive branch.and thus cause legislators to fight hard for increases in certain public expenditures. in contrast. The first is an investment activity: to decide how large a psychic investment to make in the corporate body -. negating the very interest it is designed to serve. just as it is the function of the managers of a business firm to pursue the goals they define as its interests. such as repairs to the White H o u s e or foreign economic aid. The platform of the Democratic Party. This is not to say.58 does DECISION serve the two interests best. This rationalizes the continual tendency of the executive to expand public services. and the continual tendency of Congress to serve as a watchdog on taxes and expenditures. Lindahl. of course. of course. come into a conflict of interests with their own priv a t e i n t e r e s t s . rt is. to contrast the functions of government. It suggests that a party with the historic platform of the Republican Party. and others have showed.a n d t h e n t o (a) d e c i d e w h i c h g o a l s t o s u p p o r t i n t h e . for as Wicksell. but also from the corporate perspective of the nation as a whole. that of psychic investments in objects outside oneself. But m a n y public expenditures. PAPERS Such a correspondence as has been suggested assigns to the executive and legislative branches of government functions close to those they have historically performed in the United States.. is a contradiction in terms for the legislative branch. This m e a n s that macroeconomics of the Keynesian sort has a function in informing this corporate body h o w best to accomplish certain of its goals through budgetary policy. the function of the representatives of the members to see that decisions are m a d e which pursue the individual interests of the members. W h e n that is done. do not serve private interests. and to allow an additional type of behavior in this framework.which may. with which the individualist school in public finance began. and thus would never be voted by a body acting in purely Wicksellian terms. the executive branch of government) to pursue with full vigor the implementation of those goals which it sees as its interests. for the private interests of the individual are generally best served by a reduction in public expenditures. they certainly can do so -. then it becomes possible to consider public finance not only from the separate perspectives of private individuals. W h a t has been done above is to begin with the classical postulate of self-interested economic man. (II) It is the function of that corporate body (or its managers. in contrast. that public expenditures never serve these private interests.

of course. principally interests in self-maintenance and self-aggrandizement. Conditions affecting the investment decision In order to give this theory empirical content. These are not. In particular. to suggest some conditions under which the investment will be large or small. and it m a y depend as well upon the degree of coincidence or opposition between the expected goals of the corporate body and one's private interests. This generally places the interests of this body in opposition to the private interests of individual members. This return. if one has a large amount of control over the goals that the corporate body will pursue. the expected return on the investment will be greater the greater one's control over the actions of the corporate body. and (b) push for the realization of their private interests in their representatives' activities. of course. his investment in it will be larger than if he has no control. These capital expenditures m a y be of various sorts. The interests of the corporate body as interests in the future The interests of the corporate body are. the investment should be greater in proportion to the degree that the executive's goals for the nation agree with one's o w n (not with one's private interests). Of great importance in the investment decisions of members of . (12) It is possible. though. it is necessary to indicate the conditions under which the psychic investment in the nation will be large or small. For the same reason. Thus the investment should vary in proportion to political power over the executive branch of government. As indicated above. since capital expenditures are deferrals of present consumption to the future. 6. this investment decision will be m a d e just as any other investment decision: the extent of investment depends on the marginal utility of expected return.INDIVIDUAL INTERESTS AND COLLECTIVE ACTION 59 interest of the corporate body. In general. is psychic rather than material. the amount of investment to m a k e in the corporate body m a y depend upon whether the goals one expects it to pursue accord with one's o w n goals for that body. budgetary policy in the interests of that body will be one of withholding finances from consumption and employing them in capital expenditures. 5. This means that in general. ranging from construction of parks to educational expenditures. which are frequently maximized by present consumption. but in general they are oriented to preservation and strengthening of the corporate body. like those of any individual. independent actions.

M u s g r a v e . 1959). I h a v e d e s c r i b e d t h e b e g i n n i n g s of a t h e o r y of c o l l e c t i v e d e c i s i o n s .H i l l . t h e r a t i o n a l c i t i z e n w i l l w i t h d r a w a large part of h i s i n v e s t m e n t . M u s g r a v e a n d A. Conclusion In t h i s p a p e r . Thus i n t h e l a t t e r t i m e s . 6 1 . which c o n s t i t u t e s the c e n t r a l m e c h a n i s m of t h i s p a p e r . 1964. see (New York: the c l a s s i c The T h e o r y a n e x c e l l e n t s u m m a r y of t h i s p o s i t i o n a n d of l a t e r d e v e l o p Richard A. f u n c t i o n a s a n o n g o i n g s o c i e t y . the e x p e c t e d m a r g i n a l u t i l i t y of a d o l l a r i n v e s t e d i n i t s i n t e r e s t s is v e r y high. To c o n s i d e r the l a t t e r f i r s t : if he h a s b e e n d e p r i v e d of c o n s u m p t i o n for some t i m e . P e a c o c k . s i n c e the m a r g i n a l u t i l i t y of a d d i t i o n a l u n i t s of i n v e s t m e n t i s low.2 5 . my a i m i s to f a c e the m o s t d i f f i c u l t of a l l i n t e l l e c t u a l p r o b l e m s i n t h e f u n c t i o n i n g of a s o c i e t y : how i n d i v i d u a l s . c a n n e v e r t h e l e s s make c o l l e c t i v e d e c i s i o n s . or due to p o v e r t y .i 3 5 . s a y due to w a r . M c G r a w . if t h e n a t i o n a s a w h o l e f a c e s s e v e r e p r o b l e m s of s u r v i v a l or h e a l t h . 7. A. and the e n v i r o n m e n t a l c o n d i t i o n s f a c i n g t h e i n d i v i d u a l . but t h e r e are o b v i o u s l y problems in c o l l e c t i v e d e c i s i o n s . using as a b a s i s the controversy which has o c c u r r e d i n t h e t h e o r y of p u b l i c f i n a n c e . C l a s s i c s i n of P u b l i c F i n a n c e (New York: M a c M i l l a n . T. E n t r i e t e n s s u r la S c i e n c e s H u m a i n e s . e a c h a c t i n g i n h i s o w n s e l f i n t e r e s t . t h u s r e d u c i n g h i s w i l l i n g n e s s to make a p s y c h i c i n v e s t m e n t (in t e r m s of p o l i t i c a l support) w h i c h c a n c o s t him t h a t d o l l a r . H i s p s y c h i c s e l f w i l l be c o n t r a c t e d . b e t w e e n t h e i n d i v i d u a l i s t s a n d the o r g a n i c i s t s . . 1958). R. a n d s u r v i v e t o g e t h e r w i t h o u t a "war of a l l a g a i n s t a l l . On t h e o t h e r h a n d . For ments. r e l a t i v e t o t i m e s of n a t i o n a l p r o s p e r i t y or p l e n t y . best i l l u s t r a t e d in public f i n a n c e .60 DECISION PAPERS s o c i e t y are t h e e n v i r o n m e n t a l c o n d i t i o n s f a c i n g t h a t b o d y . pp. w h i c h c a n n o t be a c c o u n t e d for w i t h o u t s u c h a m e c h a n i s m . t h u s the p s y c h i c r e t u r n o n s u c h a n i n v e s t m e n t w i l l be l a r g e . NOTES 1. The T h e o r y of P u b l i c F i n a n c e . M a y 2 1 . for some of p a p e r s . See a l s o . In d e v e l o p i n g s u c h a t h e o r y . " In a previous paper I have i n d i c a t e d c o n d i t i o n s under which this is p o s s i b l e without the p s y c h i c i n v e s t m e n t in the n a t i o n . M o n a c o . r e a l i z i n g i t s i n t e r e s t s l a r g e l y i n t e r m s of i t s p r i v a t e i n d i v i d u a l g r a t i f i c a t i o n s . 2. t h e m a r g i n a l u t i l i t y of a d o l l a r s p e n t in c o n s u m p t i o n w i l l be v e r y h i g h . s u c h a s w a r or e c o n o m i c d i s t r e s s .

w h i c h are E n g l i s h t r a n s l a t i o n s of p o r t i o n s of l a r g e r works i n G e r m a n . c i r . This was a n i m p o r t a n t but l i t t l e . p p . o_]9. V. Smith u s e s t h i s p r i n c i p l e to e x p l a i n t h e e x i s t e n c e of a s t a t u s s y s t e m . w h o advocate budget policies based on Keynesian theory. e t c . 1941. 403. The Pure T h e o r y of P u b l i c E x p e n d i t u r e . ci__!t. There is a peculiar inconsistency in the position of m a n y present-day economists. 3 8 7 . c i t . a n d J a m e s S. The P o s s i b i l i t y of a W e l f a r e F u n c t i o n . 5. C h a p t e r III. "On T a x a t i o n . The r e l e v a n t c o n t r i b u t i o n s of \A/icksetl a n d L i n d a h l . I 9 6 2 ) . 7. o R. 7 2 . w h i c h a p p e a r s more v i a b l e t h a n m a n y t h e o r i e s of s o c i a l s t r a t i f i c a t i o n e v e n t o d a y . A l v i n W. New York: W. a n d D i a g r a m m a t i c E x p o s i t i o n of a T h e o r y of P u b l i c E x p e n d i t u r e s . The q u e s t i o n of how i t s g o a l s are to be d e c i d e d ( e . 1 6 8 . 9.siness C y c l e s . m i m e o g r a p h e d . 117.t 1 8 .n o t i c e d i n s i g h t . The C a l c u l u s of C o n s e n t (Ann Arbor: U n i v e r s i t y of M i c h i g a n P r e s s . 10.3 8 9 . 3 5 0 . p. may be f o u n d i n M u s g r a v e a n d P e a c o c k . 1955. . 1954. R e v i e w of E c o n o m i c s a n d S t a t i s t i c s . T h e Theory of Moral S e n t i m e n t s . P a u l A. M u s g r a v e u s e s t h i s q u o t e to i n t r o d u c e h i s s e c t i o n o n c o m p e n s a t o r y f i n a n c e . The d e f e c t i n t h i s r e a s o n i n g is t h a t t h o s e with v e r y s m a l l i n t e r e s t s i n t h e a c t i v i t y c o u l d afford to t a k e t h i s c h a n c e of l o s s i n r e t u r n for t h e c h a n c e t h a t t h e y w i l l g e t the s e r v i c e at l i t t l e or no c o s t . g . Review of E c o n o m i c s a n d S t a t i s t i c s . 4. S e c t i o n II. . a n d t h e f a c t t h a t t h o s e with good s t a t i o n s i n s o c i e t y were accorded higher social status than others. See B u c h a n a n a n d T u l l o c k . yet hold to the individualist theoretical position on public finance. w h i l e t h o s e with much i n t e r e s t i n it c o u l d not afford s u c h strategy. See A. t 9 6 4 . S i n c e . pp.1 7 6 . p. H a n s e n . t h e p o l i t i c a l c o n f l i c t s o v e r t h e s e g o a l s are . F i s c a l P o l i c y and Bu. ) is a p o l i t i c a l o n e .NOTES 61 3. t h e i n t e r e s t s of t h e n a t i o n i n c o n t r a s t to o n e ' s p r i v a t e i n t e r e s t s are p r i n c i p a l l y i n t e r e s t s in the future in c o n t r a s t to i n t e r e s t s i n t h e p r e s e n t .. 37. 6. 11. 36. i n M u s g r a v e a n d P e a c o c k . 8. Norton a n d C o m p a n y . m a x i m u m growth r a t e . Lorenz y o n S t e i n . Book I. 29. " t r a n s l a t e d from the G e r m a n . . a s w i l l be d i s c u s s e d b e l o w . In f a c t . S a m u e l s o n . f u l l e m p l o y m e n t . op. Smith. pp. 214-232.3 5 6 . C o l e m a n . W. but not o n e d e c i d e d t h r o u g h the u s u a l i n t e r p l a y of i n t e r e s t s . p. V.

12. and material returns in terms of their psychic rewards. the occasion of the election of a president is the one occasion in which such conflicts are resolved: the candidates present various images of the future. and the voters decide a m o n g them.62 NOTES conflicts over various images of the future held by different persons. because material investments are measured by the individual in terms of their psychic costs. This difference is in fact not important. . it fits the paradigm of economic behavior. So long as the investment is of s o m e limited resource that can be employed in alternative ways. In m a n y respects.

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