Public Choice Theory-Class Notes

Meaning-

Dennis Mueller 's defintion-

• "Public choice approach is the economic study of non market decision making or its the application of economics to the political and administrative concept and seeks to explain the politico administrative process through which collective decisions are made."

• To further elucidate , the PCT examines the process of collective decision making whose politico administrative decisions are technology fuel for and on behalf of many.

• The underlined issue is to examine that collective decision making by politico administrative setup is ostensibly in public interest or not.

• And if not what can be the alternative.

• In other words , PCT examine are pubad decsions really be in public interest and if not what can be alternative.

• The alternative which ultimately emerges out of public choice approach analysis is to actually give public the choice iee to create institutional pluralism for that number of public.

Propositions:-

1.Human behavior is dominated by self interest

2.Collective Decision Making-;Govt is collection of individuals -self interest comes to picture

3.Theory of state failure like market failure



1.Human Behavior-self interest

• Human behavior is dominated by self interest and every human being is an utility maximiser
• in fact this is the concept of standard economics which is applied to politico administrative process.
• Under PCT its argued that the individual who seeks utility maximization shall remain so under all settings including the settings when he is taking a collective decision ostensibly for or on behalf of others.
• Thus, when a politician or an administrator is taking part in coming process for making public choices , he is as much an utility maxi-miser as any average individual.

2.Collective decision making-

• The government is the collection of individuals. as a result , decisions and actions of the government are likely to be determined by the same self interest which motivates people to take decisions in their individual capacities.

• In this context , James Buchannan one of the foremost proponents of PCT has noted-

• "The simple view that government's collective decision making processes solved social problems selflessly in common interest is just romanticism in politics -economic theory"

• Thus what may appear to be decision in public interest may have some hidden interest. This is because according to PCT arguments.

• COM is guided by either the self interest of powerful interest groups who can tilt the corrective decision making in their favor.

3. The theory of state failure

• The theory of state failure or govt. failure -one of the key argument given by PCT is that if markets can fail so can the govt.

• The approach challenges the idea that govt can correct anomalies caused by the market through collective decision making in public interest

• The approach also makes a distinction between the real government  and some idealised government.

• The argument is that the real government's collective decision makers may not have interest in efficiency rather than they may have interest in self service.

ex-Macd Website -1 crore expenditure per month)

• Thus the PCA makes a distinction between real public interest vs pseudo or fake public interest. Further there is a strong possibilty that decsions gets influenced by selfish or vested interests and may be characterised by any one or more of the following ...

a)vote maximisation

b)self aggrandising

c)wealth maximization

• Thus all in all PCT argues that when ostensibly public interest is persued in reality,
• there is pursuit of self interest.

• As a result , while examining the question who make public choices , how and whose interest;

• PCT recommended allowing real choices to public directly. So that every member of public is a utility maximiser that self can make personal best choice, which collectively would tantamount to public interest.

Component:

1.Rent seeking Theory -Anne kruger, Gordon Tullock, James Buchanan

2.Capture Theory-George Stigher

3.Theory of self seeking behaviour-Antony Downs

Rent Seeking Theory

• It Argues ceratin section of public or certain specific interest group have intense preferences for particular policies and government decisions and therefore they seek to earn benefits through manipulation and exploittaion of politico-economic environment.

• To elborate these powerful individual or interest groups -try to tilt or sway collective decison making in their favor by trying to have administrative and political decision makers on their side .

• The attempt is to make them take public decsions or to exercise public choice in such a way that would adavance the interest of these powerful people. 

• Such behavior on part of these individual or powerful interrst group is called Rent seeking behvior.

• In economics , Rent seeking is different from profit seeking.

• Profit seeking involves economic transaction leading to production of new wealth , rent seeking creates no additional economic wealth and it is just a politico economic manipulation or exploitation wherein the powerful private players seek self interest by seeking special concession and monopoly privileges from collective decision making process.

• The idea is to invest resources in terms of time, efforts and money in the influential person of collective decision making process so as to see special concession and monopoly privilege for ex-creating discretion among market price by awarding exclusive rights in telecom spectrum , gas spectrum, mining rights etc.

• This rent seeking was first time coined by ANNE KRUGER in 1974

•  although the central theme of capturing special monopoly priveleges by influencing collective decision making process was first idnetified by Gordon Tullock (1967) in his paper "Welfare of tarrifs, monopoly and thefts".

• Later on James Buchanan did path breaking work in rent seeking as he elaborated impact of rent seeking on govt. failure by explaining how ->because of rent seeking public interest is defeated.
•  infact he got noble prize in economics in 1986 for explaining how political self interest and non economic focus adversely affect govt. policy."

Capture Theory

• Another  explanation of possibility of collective decsion making going wrong under private influence.

• Capture Theory was given by George Stigler who also won noble prize in economics in 1982 for explaining how government regulation and regulating agency are prone to be captured by powerful interest groups.

• Capture theory is also called economic theory of regulation.

• The core proposition of this theory is powerful interest group can influence enactment of laws and regulationn in self serving manner

• 

• To elaborate there is often a pressure on government agency as these powerful interest groups tries to influence them heavily so that the particular law or regulation can be framed in particular manner suiting them.

• For example -excise law, exim policy , special economic zone etc are often caprured or influecned by these powerful people.

• Its further argues that  Capture theroy becomes practicable because of coroporate political nexus and vote maximisation behaviour of political class.

• As a result of which there are decsions which are in the favour of powerful groups and activities like constituency pleasing industrial patronage and poitical parties and sent seeking activities are natural outcomes.

Theory of Self Seeking behavior

Anthony downs has given another perspective or Act.

• Acc. to him Bureacracy acts in unrestrained self interest and is only loyal to itself.

• Acc/him it happens because of absence of market discipline.

• To elaborate the bureaucrats or public administration are not subject to market discipline becuase they don't have any personal stakes in performance and non performance of public organisation.

• As a result neither success of public organisation makes them happy nor the failure hurts them.

• As a result , there is 

a)no control over cost and spending

b)service delivery is poor mostly

c)self serving behaviour of bureaucrats may go unchallenged

d)therefore public interest often gets compromised.

• As a result bureaucrats and other public servants tend to bloom self serving , self aggrandizing and loyal only to self rather than being loyal to public organisation or public.

Elements of Public Choice Approach

1)Methodological individualism

2)Rationality of man
3)Politics as Exchange


a)Methodological individualism-

• it argues that while studying collective entities or process, an individual should be unit of Analysis.

• chief arguement of PCT is that its an individuals motivation that governs or decides even collective decision. 

• Even when we are studying government decision making or politiko administrative process, we must realise that study of government collective decsion making =study of individual motivation.

b)Rationality of Man-

• This element of PCT argues that man is utility maximiser for self so man can rank alternatives in order of priority and can pick best alternative which maximise utility for himself.

c)Politics as Exchange-

• This concept was given by James Buchanan and is a natural outcome of above two elements.

• The idea here is that politics or politico administrative decsion making is visualised by public choice approach /PCT as a self serving , quid pro quo as people on both the sides are governed by self interest.

• There is always a possibility of mutually benefecial exchange taking place, this is called politics of exchange.

• Thus because of above three elements public choice tend ti be devoid of public interest.

Solution Side of PCT

It recommends that if govt collective decsion making process fails to give the public the choices or public interests then let public take care of their interests .

In other words lets genuinely give or pursue public interest by 

a)creating institutinal pluralism

b)Dislodging government monopolies and hegemony so as to reduce the possibility and influence of rent seeking and capture activity.

As long as suggestion regarding creating mechanisms whereby public can choose for itself for better ensuring public interest are concerned, the two most prominent thinkers are 

• William Niskansen 
• Vincent Ostrom 

William Niskansen

Niskansen in his book "Bureucracy and represntative govt" argues

Bureacracy did not provide optimum public service because it hardly has any incentive for minimising cost and maximising service delivery like there private counterparts (similar to what anthony said)

Bureaucracy seeks power patronage and budgetary allocation for self service and self aggrandising motive.

As a result there is wasteful and unncessary funding and public resource .

This is also termed as budget maximisation of bureaucracy.

As a result Niskansen suggests-

1.Increases the competition by creating multiple institution so that the goods and services can also be supplied by other player thus market discipline would come and competition would be created and people will get choice to get best services at least possible cost.

2.Increase the incentives for bureacracy to be efficient. He suggested that a performe perish culture should be inculcated in bureacracy rather than simple time bound carries structure.

Vincent Ostrom-

• He is regarded as foremost exponent of public chouce theroy. He wrote an article "Public choice :A differnt approach to study of public administartion".

• He was crtical of dominant government organisation theory ie..according to him government organisation or public administration should not be unitary , dominant or having huge money powers powers , instead he argued there should be a switch from dominant administratio to democratic administartion.

• Dominant unitary rule ie...govt is single service provider->Democratic -multiple service provider-choices to people.

• This will happen only when instead of single dominating org in , government, there will be multiple competing orgnisation so that choice is available to public .

• Ostrom argued that creating multiple decision centre rather than one dominant centre of decsion making will respond better to diverse prefernces of citizen and will also cope better with different environmental organisation while suggesting democratic administration rather than blooming bureaucratic administration.

•  He noted "Bureaucracy is necessary but not sufficient for creating a productive and responsive public service economially and therefore a variety of arrangement should be used to provide an efficient public goods and services"

CRITICISM OF PCT

A)Elitist Bias

Although PCT presented a beneficial solution for guarding against danger of state failure , it itself is not free of problems

1.Elitist Bias-PCT recommends enhanced role of market as compared to state and therefore there is possibility that govt may yield too much space to pvt dominant institutional pluralism.

        Private players have their own preferences or limitation

             a)they don;t operate where immediate profit is not present. As a result certain region or territory of economic activity may be neglected which was otherwise crucial by public service view.

Ill effects like imbalance , region development, consumerism, poor priortisation od economic deveopment are distinct possibility.

              b)Moreover, private institution player always put user fee for every services they offer and as a result they end up catering to elite clients who has the capacity to pay based on user pay relationship.

2.Where is the choice?-

 Although the way theme behind PVT is that it creates choice or institutional pluralism but in reality sometimes its apparent.

              a)Choices are more apparent than real on many crucial goals -electricity, water supply , rail road.

There may not be any choice as government retains these services to itself.

Moreover even if choices are provided or multiple institutions are created , they doesn not guarantee choices.

Its because multi service providers may not get exclusive areas to operate in.

              b)Many private players don't like to invest in certain sectors even of government wants thus choices may not genuinely exist.

3.Imposition without context sensitivity-or providing poor quality of service.

4.Coordination ie various plural institution will need to be sytematically coordinated so that their action and decision are harmonious and under broader public interest.

In this context goldsmith and eggers have further noted as under 

"Involving private partners to produce public goods and services puts more rather than less responsibility on public administration officials".

  B)Challenge of Ensuring Public Interest

IT has been argued by various critics of privatization and market forces that creating too much space for market forces can hamper genuine public interest for following reasons/possibilities-

a)Elitist Bias in their provision of Goods and services

b)User pay relationship which doesn't create inclusive public service rather keep the public exclusive for affluent class.

c)Private players have their own priorities and motivation and therefore they may not operate in crucial sectors or territories and segments because it may not appear profitable to them.

Thus, all in all privatisation is no guarantee for public interest for improvement in quality of service delivery on mass scale.

In this context 

FRANZ MAND noted-

"Increasing dominance by corporate sector creates possibility of dominant control of globalizing corporate elites and as a result govt. role is overruled by these corporate elites"

 A similar concern has also been raised by NPS perspective given by DENHARDT AND DENHARDT where they hae argued that government cannot be a margin player and even if institution pluralism is being created the focus must remain on public services"

IN other words, people's trust on government cannot be allowed to be eroded on argument that government is marginal player and that's why NPS perspective argues that there should be serving rather than steering.

Thus the challenge is to create a balance wherein 

a)private capacities are made use of

b)government role is not marginalised

c)public interest is still guaranteed