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

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

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 . 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 . 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 . T h i s a p p r o a c h . 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 . r e l a t i v e to h i s p r i v a t e n e e d s . (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 . 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 . (4) . 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 . 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 . In p a r t i c u l a r . 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 . (2) H o w e v e r . 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 . 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 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 . " 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 . h o w e v e r . 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 . 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 . 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 . for a l l p e r s o n s . 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. 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. 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 . 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 . 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 .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 . 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 . 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 . and the d i s t r i b u t i o n o f t a x e s . 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 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 . 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 . 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 . 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 . 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 . 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 . 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 . w i t h some p a r t i a l s u c c e s s . 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 .

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 . 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 . L i n d a h l ' s d i s c u s s i o n .of what is o p t i m u m for the 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 . 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 . a n d a s S a m u e l s o n (5) r e s t a t e d . 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 . 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 . 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. In t h e i r a n a l y s i 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 . 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 . 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 .. 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 . Not o n l y d o e s t h i s s e e m aesthetically appealing. 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 . 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 . 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 .. 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 . " (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 . h o w e v e r . .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 . 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 . As L i n d a h l s h o w e d . who g i v e s t h r e e p r i n c i p l e s . a n d s o c i a l m a t t e r s . 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 . 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.m a t e r i a l .e v e n m a t h e m a t i c a l l y .. 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 a s b a s e d o n two i n d i v i d u a l 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 . "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 . s a y 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 . It i s t h u s . 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 . s p i r i t u a l . dropping the p r i n c i p l e of u n a n i m i t y . Nevertheless. . 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 . Lorenz v o n S t e i n . . 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. 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 . h o w e v e r . 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 . (6) At t h e s a m e t i m e .

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

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

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

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

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

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

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

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

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

In m a n y respects. .62 NOTES conflicts over various images of the future held by different persons. it fits the paradigm of economic behavior. 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. 12. 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. This difference is in fact not important.

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