20.1.07

ANOTHER GIANT PASSES. Richard A. Musgrave, 1910-2007.

Mr. Musgrave took about 20 years to conceive, write and publish the 1959 work for which he is best known, “The Theory of Public Finance,” an analysis of how governments allocate resources and respond to social needs.

“It still stands unchallenged,” the economic historian Mark Blaug wrote decades later. “Anyone with a question in the theory of public finance can be told even now, ‘it’s all in Musgrave.’ ”

Before Mr. Musgrave’s research, most theoretical work by British and American economists was geared toward understanding the behavior of prices, supply and demand as they interacted with other market forces. Governments played a secondary role, stepping in mainly to fill gaps when the markets failed.

Mr. Musgrave had a different view, his wife said. He saw the government as having an important economic role and developed a theory on the way taxes and other factors interact in areas where goods and services — roads, schools, courts and national defense, for example — were best provided by the government.

I still refer to my well-thumbed Public Finance in Theory and Practice, the undergraduate version by Richard and Peggy Musgrave.

He and Paul Samuelson benefitted by trading ideas.

A case in point: a three-page paper by Samuelson that appeared in a symposium in the Review of Economics and Statistics in 1954 titled "The Pure Theory of Public Expenditure." It began, "Except for Sax, Wicksell, Lindahl, Musgrave and Bowen, economists have rather neglected the theory of optimal public expenditure, spending most of their energy on the theory of taxation."

Whereupon Samuelson proceeded to restate Musgrave's argument as a mathematical model of the overall interdependence between public and private goods – with immediate and explosive results. Overnight, the language of public finance, at least cutting edge public finance, became mathematics.

"Never have three pages had so great an impact on the theory of public finance," Musgrave wrote thirty years later. They spawned a large volume of literature, with many variations on the theme, but the basic model had been set. The conditions of Pareto optimality had been expanded to include public goods and the optimum optimorum based on a social welfare function had been restated accordingly.

"The excitement lay in the moment Samuelson chose to write his paper. It was a little like Babe Ruth pointing deliberately to the wall before his next home run. In the early 1950s, resistance to increasing formalization was widespread.

Resistance was futile. I may not have a copy of The Theory of Public Finance, but I do have several ring-binders full of works from Journal of Economic Theory, Journal of Political Economy, Quarterly Journal of Economics and the like full of the mathematical conditions. (Or as I was teasing our job candidates, "public finance is general equilibrium theory with funny first-order conditions.")

But the proof of the pudding was the mathematical restatement of "The Voluntary Exchange theory of Public Economy" that Samuelson concocted on short notice, based on his "dim remembrance" of a diagram in Musgrave's paper. So obviously superior was the treatment, at least to the mathematically well-versed, that it was a devastating response to Novick's charges.

Musgrave, for his part, was delighted – at least for the most part. He and Samuelson had been close friends for 20 years, ever since they had been graduate students together. Musgrave frequently expressed pleasure in later years at having led Samuelson to the problem that he so successfully solved. Samuelson in turn occasionally mused that perhaps he had cost Musgrave -- or Abram Bergson or John Rawls or some combination – a Nobel Prize.

Then again, Musgrave did periodically permit himself a demurrer.

In Samuelson's famous model, Musgrave would sometimes observe, rather than become bogged down in a morass of intractable game theory, he had simply set aside for some later date the problem of how an efficient solution of the public goods problem might actually be achieved in practice. For the purposes of model-building, Samuelson conveniently assumed the existence of a beneficent social planner who knew everyone's inner-most thoughts. No need for voting mechanisms when you've got a friend like that!

But then there's D. McCloskey's American Question: if you're so smart, why aren't you rich?

Civil servants became bureaucrats. The ways in which interest groups manipulate democratic processes to serve their own ends took center stage.

Which leads directly (and finally!) to Musgrave's second remarkable contribution to 20th century economics. In 1998, Hans-Werner Sinn, the leading economist at the University of Munich, invited Musgrave and his arch-rival in the study of political economy, James Buchanan, father of the relentlessly skeptical study of "public choice," to a carefully organized five-day debate.

The scholars took turns stating their positions. They responded to one another. They took questions from the floor. Then they restated their views more narrowly. The results were published in 1999 as Public Finance and Public Choice: Two Contrasting Visions of the State. [Emphasis and link added - SHK] Their debate was a textbook example of what psychologist Daniel Kahneman recently called "adversarial collaboration." So useful are both lenses for different purposes that it is not easy to form an opinion about who "won."

Marginal Revolution links to excerpts of that debate. I am considering buying the book.

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