Classical Liberalism 101 -- Public Choice Theory

For this next installment, we have an article explaining why governmental action is almost never in the service of the whole society and is, therefore, marked for failure. Special thanks to @peter.tsukev for the translation. Edited by moi. Originally published at https://ekipbg.com/what-is-public-choice-theory/.

WHAT IS PUBLIC CHOICE THEORY?

by Daniel Angelov

Public Choice Theory is a branch of economic science dedicated to the study of taxation and public spending. Emerging in the 1950s, it gained widespread attention when James Buchanan received the Nobel Prize for Economics. Buchanan then created the Center for Study of Public Choice at George Mason University, which is the most prestigious institution researching this branch of economics to this day. Other centers opened at the University of Florida, Washington University in St. Louis, the University of Montana, Californian Technological Institute, and the University of Rochester.

What Is Public Choice Theory Concerned With?

Public Choice Theory employs purely economic principles in the analysis of human actions on the market and applies them to human action in collective decision-making. Economists who study the private market assume that people find themselves motivated primarily by personal gain. Although most people base some of their actions on concern for others (at least ostensibly), the overwhelming motive — whether they are employers, employees, or consumers — is their personal interest.

Public Choice economists operate on the same premise: although people in the political sphere might exhibit a degree of concern for others, their leading motive — whether politicians, voters, lobbyists, or bureaucrats — is their personal interest. As Buchanan writes, the theory “substitutes romantic and illusionary concepts about the way governments operate with ones that involve a greater degree of skepticism.” In the past, many economists saw government intervention as the way to control market failures. Public Choice economists, however, point out that governmental institutions also fail, and when they do, no intervention governments attempt will have the desired effect.

Theory of Voters’ Rational Ignorance

One of the most important breakthroughs of Public Choice Theory is the discovery that voters are not actually motivated to control government. Anthony Downs in his book, An Economic Theory of Democracy, points out that the voter remains largely in the dark about political matters and that it is rational behavior to do so. Although the election result is important, it practically never hinges on the vote of one particular voter. Thus, the informed vote carries almost no value -- a single voter cannot hope to influence the outcome of the election. Ergo, spending time following campaigns and debates brings no personal gain to the voter.

Public Choice theoreticians, however, believe that such a stimulus to be ignorant is rare in the private sector. For example, when buying a car, consumers wish to make an informed choice because their choice is of direct significance to them. If the choice is good, the buyers win; if not – they will be directly impacted. With voting, we do not see this direct result. It is for this reason that the majority of voters are largely ignorant of the platforms of people they elect. Apart from certain issues that the public is largely aware of, they do not spend much time learning about the inner workings of the legislative branch.

Politicians are Strongly Motivated to Cater to Lobbies

Public Choice theoreticians also research the actions of legislators. Although legislators are expected to work in the public interest, their decisions are still mainly about how to use somebody else’s resources rather than their own. It is the taxpayers that provide these resources. Politicians might well have the intention to spend public money wisely, but even effective and reasonable decisions will not directly affect taxpayers’ prosperity. There is also no obvious reward in opposing influential lobbyists that protect special interests. In reality, even if a given politician governs well, the voters may not become aware at all due to rational ignorance.

Therefore, the stimulus to govern well, in the public interest, is negligible. On the other hand, special interest groups are comprised of people who stand to benefit directly from certain actions of the government — and who are ready and willing to make it worth the politicians’ while to push for those actions. Legislators have the power to tax and extract resources through other forceful means, and voters remain largely unaware of their actions. Clearly, then, legislators are prone to catering to special interest groups and costing the public more.

What are the Interests of Government Bureaucracy?

In addition to voters and politicians, Public Choice Theory is concerned with the role of government bureaucracy. Bureaucracy serves as an apt example of why many regulatory bodies seem to be controlled by special interests. The reason is simple: administrators have no concrete aim to underpin their actions — the purpose of their functions changes depending on the policies pursued by the government. Bureaucrats rely on Members of Parliament (MPs, the European legislators) for their budgets, and often, it is the lobbyists themselves that have the most influence over parliament’s decisions as to which government institutions’ budgets get increased and by how much. Consequently, such groups become invaluable to bureaucracies, often leading to alliances between the two.

Despite the fact that Public Choice Theory often focuses on the failures of governments, it also puts forward solutions. For example, imagine that a government has to act on a local level. In order to make bureaucracies to more rational, Gordon Tullock and William Niskanen recommend having a few departments offering the same service — to stimulate competition in the public sector.

Political Deviation of Public Choice Theory

Economists in the Public Choice field have attempted to work out a reform that would decrease the legislation serving powerful lobbies that leads to ever-greater government spending. Due to its skepticism regarding the supposedly benevolent nature of government, Public Choice Theory is often viewed as a conservative or libertarian branch of economics, opposed to the more “liberal” (i.e., interventionist/statist) Keynesian one. This sentiment is partly true. The emergence of this theory does reflect skepticism towards the assumption that the government can effectively correct the shortcomings of the market.

However, not all economists in this field are conservatives or libertarians. Take Mancur Olson, for example. He is known for his book The Logic of Collective Action (1965), in which he looks into the influence of special interest groups on the political process. In 1982, Olson published The Rise and Decline of Nations, in which he reaches the conclusion that Germany and Japan thrived after WWII precisely because the war had made it impossible for lobbyist groups to take advantage of entrepreneurship and economic exchange. In spite of it all, however, Olson supports the strong interference of government in the economy.

Different Approaches to Public Choice Theory

Many economists in the field are neither politically nor ideologically affiliated. Some of them create mathematical models of voting strategy and apply game theory to understand how to solve political conflicts. Others are developing a separate discipline knows as Social Choice Theory. The roots of this theory can be traced to the Nobel Prize winner Kenneth Arrow. In his book, Social Choice and Individual Values (1951), he uses logic to try to determine whether it is possible for people with different aims to make a collective decision (via voting) that would suit everyone. His “Theorem of Impossibility” concludes that they can not.

Rather than just providing information about the way public decisions are made, nowadays, Public Choice theory analyzes the rules governing the process of collective decision-making. These are constitutional decisions, prefacing political action. James Buchanan and Gordon Tullock’s The Calculus of Consent focuses on an analysis of these decisions -- one of the classic reads in the field of Public Choice. The book opens up with the premise that voters would unanimously support fair and just collective decisions made in service of the whole society. But since unanimity is practically impossible, the book effectively argues against the widespread belief that majority decisions are intrinsically just or fair, giving rise to the following sub-discipline of Public Choice: Constitutional Economics.