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

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

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 . 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 . 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 . 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 . for a l l p e r s o n s . 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 . 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 . 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 . 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 . (2) H o w e v e r . 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 .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 . 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 . 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 . 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 . 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 . 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 . T h i s a p p r o a c h . 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 . 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 . 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. 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 . 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 . 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 . (4) . r e l a t i v e to h i s p r i v a t e n e e d 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. 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 . h o w e v e r . 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 . (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 . 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 . 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 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 . 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 . 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 . w i t h some p a r t i a l s u c c e s s . 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 . 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 . and the d i s t r i b u t i o n o f t a x e 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 . 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 . 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 . w a s b a s e d o n two i n d i v i d u a l s . 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 . 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. h o w e v e r . s a y s . 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 . h o w e v e r . It i s t h u s .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 . In t h e i r a n a l y s i s . 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 . Not o n l y d o e s t h i s s e e m aesthetically appealing..e v e n m a t h e m a t i c a l l y . 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 .. 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 .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 . 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 n d s o c i a l m a t t e r s .m a t e r i a l . 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 .52 DECISION PAPERS Lindahl carried this general i n d i v i d u a l i s t theory onward. dropping the p r i n c i p l e of u n a n i m i t y . 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. . Lorenz v o n S t e i n . s p i r i t u a l .. " (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 . 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 . 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 . 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 . Nevertheless. 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 .of what is o p t i m u m for the s t a t e . 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 . 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 . 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 . 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 . (6) At t h e s a m e t i m e . 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 . 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 . L i n d a h l ' s d i s c u s s i o n . "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 . 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 . 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 .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 . a n d a s S a m u e l s o n (5) r e s t a t e d . . who g i v e s t h r e e p r i n c i p l e s . .

in terms of which the State should act in public finance. neither position has produced practical fruits which could justify its proponents' claims. 3. Keynesian theory takes on the perspective of the "community. " This controVersy w a s never resolved. cir. 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 .).. find most congeniality in the individualists' position. ~ . op. 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 . 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 . in "maximizing its u t i l i t y . as a special case of the organic theorists' position: while their goal.. Although contemporary theorists of public finance (see Musgrave and Peacock's Introduction. 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 . cir. " "state. (8) This theoretical approach to a fiscal policy w a s independent of the earlier debate. Musgrave.INDIVIDUAL INTERESTS AND COLLECTIVE ACTION 53 which should govern the State in its decisions about the level and distribution of taxes: the economic principle. t a x a t i o n . o19. in fact. and are allied against the individualist position. and Arrow. w a s the general welfare of the State. the financial principl e. " or "nation" as a whole. the . By the very fact of laying out a theory for the functioning of the e c o n o m y of a nation.. cir. op. Samuelson. state-as-an-entity school. 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. 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. Yet its perspective is exactly that of the organic. in opposition to the individualist school. 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 . 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 .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 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 . 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 . l e a d i n g to m o n e t a r y . 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. cir. The Keynesian position m a y be seen. and the principle of public economy.

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. has often obscured the fact that its perspective is that of the State. 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 . 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 . 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 . 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 ) . 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 . 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 . 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 .54 D E C I S I O N PAPERS Keynesian goal is a m u c h more specific one: full employment. 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 . more g e n e r a l l y . (The fact that Keynes' goal is a benevolent one. (9) T h e r e i s . The r e a s o n f o r t h i s . Thus t o d a y . with g o a l s and i n t e r e s t s of i t s o w n . ) More r e c e n t l y . in c o n t r a s t t o p r i v a t e g o a l s . . 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 . s u c h a s f u l l e m p l o y m e n t . 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 . h o w e v e r . 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 . p r o d u c t i o n . s u c h a s a s u p r a . 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 . a s a w h o l e . 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 . of c o u r s e . 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 . 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 . 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 .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 . 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. supposedly beneficial to the people. 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 . 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 . if o n e a d o p t s t h i s p r e m i s e . 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 . As t h e o r i s t s . 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 . 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 . 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 . 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 . 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 . to be s u r e . 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 . " 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 . 4. All t h e s e .

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

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

r a t h e r t h a n by o n e a g e n c y . so that disagreements include great concerns about individual interests. s u c h a s a p a r l i a m e n t a r y f o r m . c o m b i n i n g in i t s e l f b o t h interests. Thus t h e t h e o r y of p u b l i c f i n a n c e . That i 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 .. 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 . 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 . 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 . 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 . 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 . h o w e v e r . 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 ) . quite apart from the material consequences to them as private individuals. meaning that various successes and failures of the nation as an entity will be experienced as pleasurable or painful by the citizens. of c o u r s e .I N D I V I D U A L INTERESTS A N D COLLECTIVE ACTION 57 times for a given nation. 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 . 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 . 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 . " 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 . 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 . of w h i c h s t r u c t u r e . 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 . Such i n v e s t m e n t .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 . It d o e s r a i s e t h e q u e s t i o n . 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 . The e x e c u t i v e . 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 . 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 . and t h u s p r o v i d e s . If it w e r 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 . w o u l d be w h o l l y r e l e v a n t . there" i s no s u c h d i v i s i o n . 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. if he d o e s t h e j o b w e l l . 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 . 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 . 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 . p a r l i a m e n t . 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 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 . 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 . But the investments do exist. 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 . 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 . 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 . 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 . and h o w b e s t t o a t t a i n t h e m . 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 .

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

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

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 . 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 . 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 . 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 . Conclusion In t h i s p a p e r . 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. M a y 2 1 . A. 7. M u s g r a v e . 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 .i 3 5 . NOTES 1. In d e v e l o p i n g s u c h a t h e o r y . 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 . 1959). 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 . 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 . 2. 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 . 1958). 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 . 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. M c G r a w . 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 . Thus i n t h e l a t t e r t i m e s . 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 .H i l l . R. See a l s o . s a y due to w a r . M u s g r a v e a n d A. 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 . For ments.2 5 . P e a c o c k . M o n a c o . pp. 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 . . for some of p a p e r s . 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. 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 . The T h e o r y of P u b l i c F i n a n c e . 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 . 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 . 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 . best i l l u s t r a t e d in public f i n a n c e . 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 . 6 1 . " 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 . 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 . 1964. 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 . T. On t h e o t h e r h a n d . 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 .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 . 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 . 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 .

"On T a x a t i o n . m a x i m u m growth r a t e . 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 . In f a c t . ) is a p o l i t i c a l o n e .siness C y c l e s . o_]9. op. 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 . 1955. Book I. 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 . 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 . p. 1941. Review of E c o n o m i c s a n d S t a t i s t i c 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 . 6. 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 . There is a peculiar inconsistency in the position of m a n y present-day economists. c i t . 117. . 403. c i r . pp. 7. 1954. a s w i l l be d i s c u s s e d b e l o w . " t r a n s l a t e d from the G e r m a n . 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 . 1 6 8 .n o t i c e d i n s i g h t . 3 5 0 . a n d J a m e s S. W. o R. C o l e m a n . 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 . . See A. m i m e o g r a p h e d . 36.NOTES 61 3. 7 2 . V. F i s c a l P o l i c y and Bu. 29. This was a n i m p o r t a n t but l i t t l e . w h o advocate budget policies based on Keynesian theory. V. p p . New York: W. 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 . 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 . 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. p. 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 . S a m u e l s o n . pp. . 10. 5. g .. 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. t 9 6 4 . 9. C h a p t e r III. See B u c h a n a n a n d T u l l o c k . ci__!t. Lorenz y o n S t e i n . H a n s e n . Smith. T h e Theory of Moral S e n t i m e n t s . I 9 6 2 ) . A l v i n W.t 1 8 . e t c . 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 . 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.1 7 6 . 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 . 4. 3 8 7 . Norton a n d C o m p a n y . P a u l A.3 8 9 . 37. 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 . i n M u s g r a v e a n d P e a c o c k . S e c t i o n II. 11. yet hold to the individualist theoretical position on public finance. 8. S i n c e . 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 . 214-232. f u l l e m p l o y m e n t .3 5 6 .

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

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