Public choice theory

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Public choice theory is the use of modern economic tools to study problems of constitutional democracy, traditionally the province of political science. (A more general term is 'political economy', an earlier name for 'economics' that evokes its interdisciplinary origins but should not be mistaken for the Marxian use of the same term.) It studies the behavior of voters, politicians, and government officials as (mostly) self-interested agents and their interactions in the social system either as such or under alternative constitutional rules. Such individual behavior, or that of respective (sub)aggregates, may be characterized with whatever tools fit the problem, including standard constrained utility maximization, game theory, or decision theory. Public choice analysis has a strong root in positive analysis ("what is") but is used for normative purposes ("what ought to be") to identify a problem or suggest how the performance of the system could be improved by changes in constitutional rules (Tullock, 1987, pp. 1040-41). A key formulation of public choice theory is in terms of rational choice, the agent-based proportioning of means to given ends. An overlapping formulation with a different focus is positive political theory. A neighboring field, which has engendered fruitful interchange, is social choice theory (scrolled to at JEL D71 vs. public choice at JEL D72 in the JEL classification codes).

1 Origins and formation
2 Theory
3 Perspective
4 Claims
5 Applications and wider recognition
6 Criticism
7 See also
8 References
9 External links

[edit] Origins and formation

The modern literature in Public Choice began with Duncan Black, who in 1948 identified the underlying concepts of what would become median voter theory. He also wrote The Theory of Committees and Elections (1958). Gordon Tullock (1987, p. 1040) refers to him as the "father of public choice theory."

James M. Buchanan and Tullock coauthored the The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), considered one of the landmark works that founded the discipline of public choice theory. In particular (1962, p. v), the book is about the political organization of a free society. But its method, conceptual apparatus, and analytics "are derived, essentially, from the discipline that has as its subject the economic organization of such a society." The book has a marked positive-economics flavor but in a ethical context of consent in the sense of compensation for making a policy change.

Kenneth Arrow's Social Choice and Individual Values (1951) influenced formulation of the theory. Among other important works are Anthony Downs's An Economic Theory of Democracy (1957) and Mancur Olson's The Logic of Collective Action (1965).

Public choice theory is commonly associated with universities in Virginia, most notably George Mason University, Virginia Tech, and the University of Virginia, where Tullock and Buchanan first worked in developing the theory, hence the Virginia school of political economy.

Development of public choice theory accelerated with the formation of the Public Choice Society in the United States in 1969. It was in part a reaction to government policies recommended by economists during the fifty or so years that preceded it. Policy-oriented microeconomists had used Pigovian welfare economics as a basis for improving market behavior, and post-war macroeconomists used Keynesian models to give policy advice to the government and central bank. These policy economists implicitly assumed that the government was both a benevolent and, to some degree, an omnipotent despot. The founders of the Public Choice Society focused on the assumption of benevolence. Recognizing the complexity of political decision-making in a democracy, they sought to explain how decisions are actually made by governments. They hoped that an improved understanding of democratic decision-making would show why sound economic advice was often not followed and why, when it was followed, it often had effects that were contrary to those predicted by economic models. In addition to studying how laws and policies in a democracy are actually made and implemented, the early theorists also examined procedural rules and constitutions.

The loci of the Society became its journal Public Choice and its annual meetings. The journal and meetings mainly attracted economists and political scientists. The economists brought their choice-based, model-building skill. The political scientists brought their broad knowledge of different political systems and detailed knowledge of institutions and political interaction. Scholars in related fields, such as philosophy, public administration, and sociology, also contributed. The result was an eclectic group that, in general, conformed to the single definition that public choice is the study of collective decision-making on the basis of the assumption that actors are self-interested.

[edit] Theory

Public choice theory is often referenced when discussing how individual political decision-making results in policy that conflicts with the overall desires of the general public. For example, many special interest and pork barrel projects are not the desire of the overall democracy. However, It makes sense for politicians to support these projects. It may benefit them psychologically as they feel powerful and important. It can also benefit them financially as it may open the door to future wealth as lobbyists (after they retire). The project may be of interest to the politician's local constituency, increasing district votes or campaign contributions. The politician pays little to no cost to gain these benefits, as they are spending federal public tax dollars. Special interest lobbyists are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments. They face a risk of losing out to their competitors if they don't seek these favors. The taxpayer is also behaving rationally. The cost of defeating any one government give-away is very high, while the benefits to the individual taxpayer are very small. Each citizen pays only a few pennies or a few dollars for any given government favor, while the costs of ending that favor would be many times higher. Everyone involved has rational incentives to do exactly what they're doing, even though the desire of the general constituency is opposite.

One way to organize the subject matter studied by Public Choice theorists is to begin with the foundations of government itself. According to this procedure, the most fundamental subject is the origin of government. Although some work has been done on anarchy, autocracy, revolution, and even war; the bulk of the study in this area has concerned the fundamental problem of collectively choosing constitutional rules. This work assumes a group of individuals who aim to form a government. Then it focuses on the problem of hiring the agents required to carry out government functions agreed upon by the members.

The main questions are: (1) how to hire competent and trustworthy individuals to whom day-to-day decision-making can be delegated and (2) how to set up an effective system of oversight and sanctions for such individuals. To answer these questions it is necessary to assess the effects of creating different loci of power and decision-making within a government; to examine voting and the various means of selecting candidates and choosing winners in elections; to assess various behavioral rules that might be established to influence the behavior of elected and appointed government officials; and to evaluate alternative constitutional and legal rights that could be reserved for citizens, especially rights relating to citizen oversight and the avoidance of harm due to the coercive power of government agents.

These are difficult assessments to make. In practice, most work in the field of Public Choice has dealt with more limited issues. Extensive work has been done on different voting systems and, more generally, on how to transform what voters are assumed to want into a coherent "collective preference." Of some interest has been the discovery that a general collective preference function cannot be derived from even seemingly mild conditions. This is often called Arrow's impossibility theorem. The theorem, an economic generalization of the voting paradox, suggests that voters have no reason to expect that, short of dictatorship, even the best rules for making collective decisions will lead the same kind of consistency attributed to individual choice.

Much work has been done on the loose connection between decisions that we can imagine being made by a full contingent of citizens with zero collective decision-making costs and those made by legislators representing different voting constituencies. Of special concern has been logrolling and other negotiations carried out by legislators in exercising their law-making powers. Important factors in such legislative decisions are political parties and pressure groups. Accordingly, Public Choicers have studied these institutions extensively. The study of how legislatures make decisions and how various constitutional rules can constrain legislative decisions is a major sub-field in Public Choice.

Another major sub-field is the study of bureaucracy. The usual model depicts the top bureaucrats as being chosen by the chief executive and legislature, depending on whether the democratic system is presidential or parliamentary. (See also presidential system and parliamentary system.) The typical image of a bureau chief is a person on a fixed salary who is concerned with pleasing those who appointed him. The latter have the power to hire and fire him more or less at will. The bulk of the bureaucrats, however, are civil servants whose jobs and pay are protected by a civil service system against major changes by their appointed bureau chiefs. This image is often compared with that of a business owner whose profit varies with the success of production and sales, who aims to maximize profit, and who can hire and fire employees at will.

A field that is closely related to public choice is "rent-seeking." This field combines the study of a market economy with that of government. Thus, one might regard it as a "new political economy." Its basic thesis is that when both a market economy and government are present, government agents are a source of numerous special market privileges. Both the government agents and self-interested market participants seek these privileges in order to partake in the monopoly rent that they provide. When such privileges are granted, they reduce the efficiency of the economic system. In addition, the rent-seekers use resources that could otherwise be used to produce goods that are valued by consumers.

Rent-seeking is broader than Public Choice in that it applies to autocracies as well as democracies and, therefore, is not directly concerned with collective decision-making. However, the obvious pressures it exerts on legislators, executives, bureaucrats, and even judges are factors that Public Choicers must account for in their effort to understand and assess collective decision-making rules and institutions. Moreover, the members of a collective who are planning a government would be wise to take prospective rent-seeking into account.

[edit] Perspective

Prior to the emergence of public choice theory, many economists tended to consider the government as an agent outside the scope of economic theory, whose actions depend on different considerations than those driving economic agents. (The many other economists who did place the state and its agents within such theory would include Vilfredo Pareto.)

Public choice theory attempts to look at governments from the perspective of the bureaucrats and politicians who compose them, and makes the assumption that they act in a self-interested way for the purpose of maximizing their own economic benefits (e.g. their personal wealth). The theory aims to apply economic analysis (usually decision theory and game theory) to the political decision-making process in order to reveal certain systematic trends towards inefficient government policies. There are also Austrian variants of public choice theory (suggested by Mises, Hayek, Kirzner, and Boettke) in which it is assumed that bureaucrats and politicians are benevolent but have access to limited information. The assumption that such benevolent political agents possess limited information for making decisions often results in conclusions similar to those generated separately by means of the rational self-interest assumptions.

Positive public choice theory focuses on the question of what government policies are likely to be implemented in a given political setting, while normative public choice theory considers what policies would produce a desirable outcome if they were implemented.

[edit] Claims

One of the basic claims that results from public choice theory is that good government policies in a democracy are an underprovided public good, because of the rational ignorance of the voters. Each voter is faced with an infinitesimally small probability that his vote will change the result of the elections, while gathering the relevant information necessary for a well-informed voting decision requires substantial time and effort. Therefore, the rational decision for each voter is to be generally ignorant of politics and perhaps even abstain from voting. Rational choice theorists claim that this explains the gross ignorance of most citizens in modern democracies as well as low voter turnout.

While the good government tends to be a pure public good for the mass of voters, there exists a plethora of various interest groups that have strong incentives for lobbying the government to implement specific inefficient policies that would benefit them at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures. The costs of such inefficient policy are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a very small special interest group, who has very strong incentives to perpetuate the policy by further lobbying. The vast majority of voters will be completely unaware of the whole affair due to the phenomenon of rational ignorance. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies.

In the public choice theory, such scenarios of inefficient government policies are referred to as government failure — a term akin to the market failure scenarios familiar from the traditional economic theory.

Public Choice economics often results in conclusions that would suggest preference for small-government economic policies. Still, this is not always the case. Mancur Olson was an advocate of strong government and instead opposed political interest group lobbying.

[edit] Applications and wider recognition

Public choice's application to government regulation was developed by George Stigler (1971) and Sam Peltzman (1976). William Niskanen is generally considered the founder of Public Choice literature on the bureaucracy.

Several notable Public Choice scholars have been awarded the Bank of Sweden Prize in Economic Sciences, including James Buchanan (1986), Stigler (1982), and Gary Becker (1992). In addition, Vernon Smith (2002) was President of Public Choice Society from 1988 to 1990.

[edit] Criticism

In their 1994 book Pathologies of Rational Choice Theory, political scientists Donald P. Green and Ian Shapiro argue that public choice theory has contributed less to the field than its popularity suggests. They write:

The discrepancy between the faith that practitioners place in rational choice theory and its failure to deliver empirically warrants closer inspection of rational choice [aka public choice] theorizing as a scientific enterprise. (pg 6)

The 1996 book The Rational Choice Controversy: Economic Models of Politics Reconsidered, edited by Jeffrey Friedman, is a collection of essays that respond to (both supporting and opposing) Pathologies of Rational Choice Theory.

Linda McQuaig writes in All You Can Eat:

The absurdity of public-choice theory is captured by Nobel Prize-winning economist Amartya Sen in the following little scenario: "Can you direct me to the railway station?" asks the stranger. "Certainly," says the local, pointing in the opposite direction, towards the post office, "and would you post this letter for me on your way?" "Certainly," says the stranger, resolving to open it to see if it contains anything worth stealing.

[edit] See also

[edit] References

Arrow, Kenneth J. (1951, 2nd ed., 1963), Social Choice and Individual Values
Black, Duncan (1958), The Theory of Committees and Elections. Cambridge: Cambridge University Press.
Buchanan, James M. and Gordon Tullock. (1962), The Calculus of Consent. Ann Arbor: University of Michigan Press.
Downs, Anthony. (1957), An Economic Theory of Democracy. Cambridge: York: Cambridge University Press.
Mueller, Dennis C. (1989), Public Choice II. Cambridge: Cambridge University Press.
Niskanen, W. A. (1987) “Bureaucracy." In Charles K. Rowley (Ed. ). Democracy and Public Choice. Oxford: Basil Blackwell.
Olson, Mancur, Jr. (1965) The Logic of Collective Action. Cambridge: Harvard University Press.
Ostrom, Vincent (1986), The Theory of the Compound Republic. Lincoln, Nebraska: University of Nebraska Press. Second edition.
Riker, William H. (1962), The Theory of Political Coalitions. New Haven and London: Yale University Press.
Tullock, Gordon (1987), “public choice," The New Palgrave: A Dictionary of Economics, v. 3, pp. 1040-44.
_____ (1989), The Economics of Special Privilege and Rent-Seeking]]. Boston & Dordrecht, Netherlands: Kluwer Academic Publishers.