Public Choice Theory

First Principles - Public Choice Economics

The Home of American Intellectual Conservatism — First Principles

• Public choice theorists use the tools of economics to study the decision-making of collective organizations, particularly governments. 
• The objective of their analysis is to enhance our knowledge of how collective organizations really work and how alternative decision-making rules influence political outcomes.
• This subfield of economics and political science was developed between 1960 and 1990.
•  Prior to 1960, almost all social scientists conceived of government as a supra-individual pursuing policy reflecting the public interest. 
• They also generally assumed that politicians and bureaucrats faithfully followed the mandates of their superiors and served the public interest. 
• Public choice theorists challenged this view, arguing that it reflected a naïve conceptualization of reality. They developed and tested various models of political organization based on the self-interest postulate—the view that voters, politicians, bureaucrats, and lobbyists, like their market counterparts, are motivated by personal self-interest.

Leading contributors to the public choice literature include Nobel laureates 

• Kenneth Arrow and
•  James Buchanan, 
• Duncan Black, 
• Anthony Downs, 
• Mancur Olson, 
• William Niskanen,
•  Robert Tollison, 
• Gordon Tullock, 
• and Richard Wagner.

•  Disappointment with the results of government action in several areas (for example, budgetary policy, antipoverty programs, agriculture, and business regulation) during the 1960s and 1970s provided a fertile field for the development of public choice analysis. 
• Researchers began to question why the results of governmental policies were sometimes quite different than the stated objectives. 
• Public choice analysis often helped to explain why this was the case.

Several important discoveries have resulted from public choice analysis. 

  

Median Voter Theory-Anthony Downs

• First, it explains why political outcomes tend to reflect central (rather than extremist) positions. 
• When decisions are made by referendum, the outcome will tend to reflect the option preferred by the median voter. 
• To illustrate this point, assume there are three people in a bridge club, and the members want to decide how many games to play each night. Person A wants to play one game nightly; person B wants to play two games nightly; and person C wants to play three games nightly. 

• Assuming our players will vote for the option closest to their most preferred point, it can be easily seen that the option of playing two games nightly can beat either playing one game or three games. 
• Essentially, the median voter is the decisive voter.
• In his 1957 book, An Economic Theory of Democracy, Anthony Downs used the median voter analysis to explain why, in a competitive two-party setting, the platforms of the two parties will generally be quite similar.
•  Since the party offering the median voter’s most preferred platform will win the election, both parties will gravitate toward the center—the platform favored by the median voter. As a result, there will be substantial similarity between the platforms of the two parties.

Rational Ignorance Effect-Anthony Downs

• Second, public choice analysis explains why many voters will be uninformed about issues and the positions of candidates on issues. 
• This lack of voter information merely reflects the incentive structure confronting each individual voter. 
• When decisions are made collectively, the direct link between the individual voter’s choice and the outcome of the issue is broken. 
• The probability that a single vote will decide an election is virtually zero when the decision-making group is large. 
• Recognizing that the outcome will not depend on his or her vote, the individual voter has little incentive to seek information (which is costly) on issues and candidates in order to cast a more informed vote. 
• Thus, voters are likely to be uninformed (or misinformed) on many issues and candidates. Economists refer to this phenomenon as the “rational ignorance effect,” a term initially coined by Downs.

Failure of Government Forces similar to Market Forces.

• Perhaps most importantly, public choice analysis explains why even democratic representative governments will often adopt inefficient programs. 
• For decades, economists recognized that markets generally failed to allocate resources efficiently when monopoly, externalities, or public goods were present. 
• These “market failures” were often used to justify government intervention. 
• Public choice analysis, however, indicates that “government failure” is also a problem.

Political Clout of Special Interest Groups

• The political clout of special-interest groups is one source of government failure. 
• Consider an issue that provides substantial personal benefits to members of a special group, while imposing small personal costs on members of a large majority of citizens.
•  Since their personal stake is large, members of organized interest groups (and their lobbyists) have a strong incentive to inform themselves and their allies and to let legislators know how strongly they feel about the issue of special importance. 
• Many of them will vote for or against candidates strictly on the basis of whether they support their interests. 
• In addition, such interest groups are generally an attractive source of campaign resources, including financial contributions. 
• In contrast, most other voters will care little about a special-interest issue, and, as the result of the rational ignorance effect, have little incentive to acquire information on the issue. 
• For the non-special-interest voter, then, the time and energy necessary to examine the issue will generally exceed any potential personal gain from a preferred resolution.
•  Thus, most non-special-interest voters will simply ignore such issues. 
• Given this incentive structure, there will be a strong incentive for politicians to support the special interests even when their views conflict with economic efficiency.
• Political support for counterproductive government programs such as business and agricultural subsidies, tariffs, and pork-barrel spending reflect government failure due to the special-interest effect.

Rent Seeking Behaviours-Gordon Tullock

•   When government regulation and spending programs exert impact on the income of individuals, people have an incentive to invest time and energy seeking government favors.
•  Public choice theorists refer to this source of government failure as “rent-seeking.” 
• By way of illustration, suppose that government was going to issue a monopoly right to sell shoes in a specific state. Government decisions about such policies do not take place in a vacuum.
• Individuals on all sides of the issue will expend their own resources attempting to influence the outcome. 
• Indeed, individuals who want the monopoly right might be willing to spend an amount up to what the expected value of the monopoly profits will be. 
• But this rent-seeking expenditure carries with it an opportunity cost. 
• The resources used seeking the government favor will be unavailable for productive activity. As the result of wasteful rent-seeking, the size of the economic pie will be smaller. (See Gordon Tullock, The Political Economy of Rent-Seeking, 1988, for additional details on this topic.)

Constitutional Economics-

James Buchanan & Gordon Tullock-Calculus of Consent

• The failure of the government to achieve efficient economic outcomes under representative democracy and majority rule highlights the potential importance of constitutions. 
• In recent years, constitutional economics has emerged as a new subfield of public choice analysis. 
• Constitutional economics, like orthodox economics, is about how individuals make choices. 
• But unlike orthodox economics, which examines how choices are made under a given set of legal, institutional, and social constraints, constitutional economics concerns itself with the choice to be made among the various legal, institutional, and social constraints themselves. 
• The pioneering work of James Buchanan and Gordon Tullock in The Calculus of Consent(1962) provides the foundation for this area of study. 
• This book analyzes the effects of different voting systems (for example, supramajority rather than simple-majority) and the impact of bicameral legislative bodies on political outcomes.

Conclusion

• Compared to the traditional view of government as a corrective device, public choice provides a more realistic method of conceptualizing government. 
• Public choice provides a coherent theory about how the political process works that both enhances our understanding of public policy and provides a framework for the development of constitutional structures more consistent with economic efficiency.
• Important research is ongoing. Those interested in keeping abreast of current research in this area will want to consult two key professional journals, Public Choice and Constitutional Political Economy.

Further Reading

Mueller, Dennis C. Public Choice III. New York: Cambridge University Press, 2003.Tullock, Gordon, Arthur Seldon, and Gordon L. Brady. Government Failure: A Primer in Public Choice. Washington, D.C.: Cato Institute, 2002.

Intercollegiate Studies Institute • 3901 Centerville Rd. • Wilmington, Delaware 19807 • www.isi.org

Please direct all inquiries regarding First Principles to firstprinciples@isi.org.