Public choice

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Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science."^[1] It includes the study of political behavior. In political science, it is the subset of positive political theory that studies self-interested agents (voters, politicians, bureaucrats) and their interactions, which can be represented in a number of ways—using (for example) standard constrained utility maximization, game theory, or decision theory.^[1] It is the origin and intellectual foundation of contemporary work in political economy.^[2]

In popular use, "public choice" is often used as a shorthand for components of modern public choice theory that focus on how elected officials, bureaucrats, and other government agents' perceived self-interest can influence their decisions. Economist James M. Buchanan received the 1986 Nobel Memorial Prize in Economic Sciences "for his development of the contractual and constitutional bases for the theory of economic and political decision-making".^[3]

Public choice analysis has roots in positive analysis ("what is") but is sometimes used for normative purposes ("what ought to be") to identify a problem or suggest improvements to constitutional rules (as in constitutional economics).^[1][4][5] But the normative economics of social decision-making is typically placed under the closely related field of social choice theory, which takes a mathematical approach to the aggregation of individual interests, welfare, or votes.^[6] Much early work had aspects of both, and both fields use the tools of economics and game theory. Since voter behavior influences public officials' behavior, public-choice theory often uses results from social-choice theory. General treatments of public choice may also be classified under public economics.^[7]

Building upon economic theory, public choice has a few core tenets. One is that no decision is made by an aggregate whole. Rather, decisions are made by combined individual choices. A second is the use of markets in the political system.^[8] A third is the self-interested nature of everyone in a political system. But as Buchanan and Tullock argue, "the ultimate defense of the economic-individualist behavioral assumption must be empirical [...] The only final test of a model lies in its ability to assist in understanding real phenomena."^[9]

A 19th-century precursor of modern public choice theory was the work of Swedish economist Knut Wicksell,^[10] which treated government as political exchange, a quid pro quo, in formulating a benefit principle linking taxes and expenditures.^[11] American statesman and political theorist John C. Calhoun is also seen as a precursor to modern public choice theory.^[12] His writings on political economy anticipate the "public choice revolution" in modern economics and political science.^[12]

Some subsequent economic analysis has been described as treating government as though it attempted "to maximize some kind sort of welfare function for society" and as distinct from characterizations of self-interested economic agents, such as those in business.^[1] This is a clear dichotomy, as one can be self-interested in one area but altruistic in another. By contrast, public choice theory models government as made up of officials who, besides pursuing the public interest, may act to benefit themselves, for example in the budget-maximizing model of bureaucracy, possibly at the cost of efficiency.^[1][13]

Modern public choice theory uses the basic assumptions, principles, and methods of microeconomics as analytical tools to study and portray the behavior of subjects in political markets and the operation of political markets. Public choice refers to the process of what public goods are provided, how they are provided and distributed, and the corresponding matching rules that are established. Public choice theory expects to study and influence people's public choice processes to maximize their social utility.

Modern public-choice theory, and especially election theory, has been dated to the work of Duncan Black, sometimes called "the founding father of public choice".^[14] In a series of papers from 1948, which culminated in The Theory of Committees and Elections (1958),^[15] Black outlined a program of unification toward a more general "Theory of Economic and Political Choices" based on common formal methods,^[16] developed underlying concepts of what became median voter theory, and rediscovered earlier work on voting theory.^[17][1][18] His work also included the possibility of entirely random outcomes in a voting structure, where the only determinant of an outcome is where a particular motion falls in a given sequence.^[17]

Kenneth J. Arrow's Social Choice and Individual Values (1951) influenced the theory of public choice and election theory. Building on Black's theory, Arrow concluded that in a non-dictatorial setting, no predictable outcome or preference order can be discerned for a set of possible distributions.^[19] Among other important works are Anthony Downs's An Economic Theory of Democracy (1957) and Mancur Olson's The Logic of Collective Action (1965),^[20] which was fundamental in beginning the study of special interests. In it, Olson raises questions about the nature of groups.^[20] Concentrated groups' (such as farmers') incentive to act in their own interest paired with a lack of organization of large groups (such as the public as a whole) often results in legislation that benefits a small group rather than the general public.^[19]

James M. Buchanan and Gordon Tullock coauthored The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), considered one of the landmarks in public choice and constitutional economics. The book's preface says it is "about the political organization" of a free society. But its methodology, conceptual apparatus, and analytics "are derived, essentially, from the discipline that has as its subject the economic organization of such a society". Buchanan and Tullock formulate a framework of constitutional decision-making and structures that divides decisions into two categories: constitutional decisions and political decisions. Constitutional decisions establish long-standing rules that rarely change and govern the political structure itself. Political decisions take place within and are governed by the structure.^[21] The book also focuses on positive-economic analysis of the development of constitutional democracy in an ethical context of consent. The consent takes the form of a compensation principle like Pareto efficiency for making a policy change and unanimity or at least no opposition as a point of departure for social choice.

Somewhat later, probabilistic voting theory began to displace median voter theory in showing how to find Nash equilibria in multidimensional space. Peter Coughlin later formalized the theory further.^[22]

Constitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of "the economic analysis of constitutional law" to explain the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents." This is distinct from explaining the choices of economic and political agents within those rules, a subject of "orthodox" economics.^[23]

Constitutional economics studies the "compatibility of effective economic decisions with the existing constitutional framework and the limitations or the favorable conditions created by that framework".^[24] It has been characterized as a practical approach to applying the tools of economics to constitutional matters.^[25] For example, a major concern of every nation is the proper allocation of available economic and financial resources. The legal solution to this problem falls within the scope of constitutional economics.

Constitutional economics takes into account the significant effects of political economic decisions as opposed to limiting analysis to economic relationships as functions of the dynamics of distribution of "marketable" goods and services. "The political economist who seeks to offer normative advice, must, of necessity, concentrate on the process or structure within which political decisions are observed to be made. Existing constitutions, or structures or rules, are the subject of critical scrutiny."^[26]

One way to organize what public choice theorists study is to begin with the state's foundations. 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, most study in this area is concerned with the fundamental problem of collectively choosing constitutional rules. Much of this is based on work by James M. Buchanan. It assumes a group of people who aim to form a government, then focuses on the problem of hiring the agents required to carry out government functions the members agree on.^[27]

Another major sub-field is the study of bureaucracy. The usual model depicts top bureaucrats as chosen by the chief executive and legislature, depending on whether the democratic system is presidential or parliamentary. The typical image of a bureau chief is someone on a fixed salary concerned with pleasing whoever appointed them. But most bureaucrats are civil servants whose jobs and pay are protected by a civil service system against major changes by their 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 in an ideal system hire and fire employees at will.^[13] William Niskanen is generally considered the founder of public choice literature on bureaucracy.^[13]

The anthropological study of bureaucracy has mostly contributed to our understanding of how various institutions of governance operate, why they achieve the outcomes they do, and what their work cultures are. In this sense, the state and its various branches, including village councils and courts of law, have gotten special consideration. A focus has also been placed on non-state welfare and humanitarian organisations, ranging in size from tiny NGOs to significant supranational institutions like the United Nations.^[28]

According to Geoffrey Brennan and Loren Lomasky, democratic policy is biased to favor "expressive interests" and neglect practical and utilitarian considerations. Brennan and Lomasky distinguish between instrumental interests (any kind of practical benefit, monetary or non-monetary) and expressive interests (forms of expression like applause). According to them, the paradox of voting can be resolved by distinguishing between expressive and instrumental interests.

This argument has led some public choice scholars to claim that politics is plagued by irrationality. In articles in Econ Journal Watch, economist Bryan Caplan contended that voter choices and government economic decisions are inherently irrational.^[29][30] Caplan's ideas are more fully developed in his 2007 book The Myth of the Rational Voter. Countering Donald Wittman's arguments in The Myth of Democratic Failure, Caplan claims that politics is biased in favor of irrational beliefs.

According to Caplan, democracy effectively subsidizes irrational beliefs. Anyone who derives utility from potentially irrational policies like protectionism can receive private benefits while imposing the costs of such beliefs on the general public. If people bore the full costs of their "irrational beliefs" they would lobby for them optimally, taking into account both their instrumental consequences and their expressive appeal. Instead, democracy oversupplies policies based on irrational beliefs. Caplan defines rationality mainly in terms of mainstream price theory, arguing that mainstream economists oppose protectionism and government regulation more than the general population, and that more educated people are closer to economists on this score, even after controlling for confounding factors such as income, wealth or political affiliation. One criticism is that many economists do not share Caplan's views on the nature of public choice. But Caplan has data to support his position. Economists have in fact often been frustrated by public opposition to economic reasoning. As Sam Peltzman puts it:

Economists know what steps would improve the efficiency of HSE [health, safety, and environmental] regulation, and they have not been bashful advocates of them. These steps include substituting markets in property rights, such as emission rights, for command and control ... The real problem lies deeper than any lack of reform proposals or failure to press them. It is our inability to understand their lack of political appeal.^[31]

Public choice's application to government regulation was developed by George Stigler (1971) and Sam Peltzman (1976).

Public choice theory is often used to explain how political decision-making results in outcomes that conflict with the general public's preferences. For example, many advocacy group and pork barrel projects are opposed by a majority of the populace, but it makes sense for politicians to support these projects. It may make them feel powerful and important, and can also benefit them financially by opening the door to future wealth as lobbyists. The project may be of interest to the politician's local constituency, increasing district votes or campaign contributions. The politician pays little or no cost for these benefits, as they are spending public money. Special-interest lobbyists are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments. They risk losing to their competitors if they don't seek these favors. The taxpayer is also behaving rationally. The cost of defeating any one government giveaway is very high, while the benefits to the 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 are doing, even though the general public desires the opposite outcome. Costs are diffused while benefits are concentrated. The voices of vocal minorities with much to gain are heard over those of indifferent majorities with little to individually lose.^[32][33] But the notion that groups with concentrated interests dominate politics is incomplete because it is only one half of political equilibrium. Something must incite those preyed upon to resist even the best-organized concentrated interests. In his article on interest groups, Gary Becker identifies this countervailing force as the deadweight loss from predation. His views cap what has come to be known as the Chicago school of political economy, which has come into conflict with the so-called Virginia faction of public choice due to the former's assertion that politics will tend toward efficiency due to nonlinear deadweight losses and its claim that political efficiency renders policy advice irrelevant.^[34]

While good government tends to be a pure public good for the mass of voters, there may be many advocacy groups with strong incentives to lobby the government to implement specific policies that would benefit them, potentially at the general public's expense. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for sugar production, either directly or by protectionist measures. The costs of such inefficient policies are dispersed over all citizens and thus unnoticeable to each. Meanwhile, the benefits go to a small special-interest group with a strong incentive to perpetuate the policy by further lobbying. Due to rational ignorance, the vast majority of voters are unaware of the effort; in fact, although voters may be aware of special-interest lobbying efforts, this may merely select for policies even harder for the general public to evaluate rather than improving their overall efficiency. Even if the public could evaluate policy proposals effectively, it would find it infeasible to engage in collective action in order to defend its diffuse interest. Therefore, theorists expect that numerous special interests will successfully lobby for various inefficient policies. In public choice theory, such inefficient government policies are called government failure – a term akin to market failure from earlier theoretical welfare economics.^[32]

A field closely related to public choice is the study of rent-seeking. This combines the study of a market economy with that of government and so could be seen as a new political economy. Its basic thesis is that when both a market economy and government are present, government agents may rent or sell their influence (i.e., vote) to those who wish to influence lawmaking. The government agent stands to benefit from support from the party seeking influence, while that party seeks to benefit by implementing public policy that benefits them. This essentially results in the capture and reallocation of benefits, wasting the benefit and any resources used from being put to productive use in society. This is because the party attempting to acquire the benefit will spend up to or more than the benefit accrued, resulting in a zero-sum or a negative sum gain. The real gain is the gain over the competition. This political action will then be used to keep competition out of the market due to lack of real or political capital.

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. But public choice theory must account for the obvious pressure rent-seeking exerts on legislators, executives, bureaucrats, and even judges when analyzing collective decision-making rules and institutions. Moreover, the members of a collective planning a government would be wise to take prospective rent-seeking into account.^[33]

Another major claim is that much political activity is a form of rent-seeking that wastes resources. Gordon Tullock, Jagdish Bhagwati, and Anne Osborn Krueger have argued that rent-seeking has caused considerable waste.^[33]

From such results it is sometimes asserted that public choice theory has an anti-state tilt. But public choice theorists are ideologically diverse. Mancur Olson, for example, advocated a strong state and opposed political interest group lobbying.^[20] More generally, James Buchanan has suggested that public choice theory be interpreted as "politics without romance", a critical approach to a pervasive earlier notion of idealized politics set against market failure.^[35]

The British journalist Alistair Cooke, commenting on the Nobel Memorial Prize awarded to James M. Buchanan in 1986, reportedly summarized the public choice view of politicians by saying, "Public choice embodies the homely but important truth that politicians are, after all, no less selfish than the rest of us."^[36]

Several notable public choice scholars have been awarded the Nobel Prize in Economics, including Kenneth Arrow (1972), James M. Buchanan (1986), George Stigler (1982), Gary Becker (1992), Amartya Sen (1998), Vernon Smith (2002), and Elinor Ostrom (2009). Buchanan, Smith, and Ostrom were former presidents of the Public Choice Society.^[37]

Buchanan and Tullock outline methodological qualifications of the approach developed in their work The Calculus of Consent:

[E]ven if the model [with its rational self-interest assumptions] proves to be useful in explaining an important element of politics, it does not imply that all individuals act in accordance with the behavioral assumption made or that any one individual acts in this way at all times ... the theory of collective choice can explain only some undetermined fraction of collective action. However, so long as some part of all individual behavior ... is, in fact, motivated by utility maximization, and so long as the identification of the individual with the group does not extend to the point of making all individual utility functions identical, an economic-individualist model of political activity should be of some positive worth.

Steven Pressman offers a critique of the public choice approach, arguing that public choice fails to explain political behavior in a number of central areas, including politicians’ behavior and voting behavior.^[38] In the case of politicians' behavior, the public choice assumption that a politician's utility function is driven by greater political and economic power cannot account for various political phenomena.^[39] These include why politicians vote against their constituents' interests, why they advocate for higher taxation, fewer benefits, and smaller government, and why wealthy people seek office.^[39]

As for critiques concerning voter behavior, it is argued that public choice cannot explain why people vote due to limitations in rational choice theory.^[38] For example, from the viewpoint of rational choice theory, the expected gains of voting depend on (1) the benefit to the voter if their candidate wins and (2) the probability that one's vote will determine the election's outcome.^[38] Even in a tight election the probability that one's vote decides the outcome is estimated at effectively zero.^[40] This suggests that even if a voter expects gains from their candidate's success, the expected gains from voting are still near zero.^[40] When this is considered in combination with the multiple recognized costs of voting, such as the opportunity cost of foregone wages and transportation costs, a self-interested person is theoretically unlikely to vote at all.^[38] Pressman is not alone in his critique; other prominent public choice economists, including Anthony Downs in An Economic Theory of Democracy,^[41] Morris P. Fiorina,^[42] and Gordon Tullock^[43] recognize that theorizing voting behavior is a major hurdle for the public choice approach.^[38]

• 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. (1967). Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, UNC Press. Description Archived 2013-06-06 at the Wayback Machine, scrollable preview, back cover
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• _____ (1986). "The Constitution of Economic Policy, Nobel Prize lecture. Republished in 1987, American Economic Review, 77(3), pp. 243–250. JSTOR 1804093
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• Downs, Anthony. (1957). An Economic Theory of Democracy. Cambridge: York: Cambridge University Press.
• Hansjürgens, Bernd – The influence of Knut Wicksell on Richard Musgrave and James Buchanan
• Holcombe, R. G. (1989). "The Median Voter Model in Public Choice Theory", Public Choice 61, 115–125
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• MacKenzie, D. W. (2008). The Use of Knowledge about Society. Journal of Economic Behavior and Organization.
• _____ (2008). Politics and Knowledge: Expectations formation in Democracy. Working paper, Presented at the Southern Economics Association Conference in 2005.
• Mueller, Dennis C. (1976). "Public Choice: A Survey," Journal of Economic Literature, 14(2), pp. 395–433.
• _____ (2003). Public Choice III. Cambridge: Cambridge University Press. Description and preview.
• Niskanen, William A. (1987). "Bureaucracy." In Charles K. Rowley, ed. Democracy and Public Choice. Oxford: Basil Blackwell.
• Olson, Mancur, Jr. (1965, 2nd ed., 1971). The Logic of Collective Action. Cambridge: Harvard University Press. Description and chapter-previews links, pp. ix–x.
• Ostrom, Elinor (1990). Governing the Commons The Evolution of Institutions for Collective Action. Cambridge University Press. Description and preview links. ISBN 9780521405997.
• _____ (2010). "Beyond Markets and States: Polycentric Governance of Complex Economic Systems," American Economic Review, 100(3), pp. 641–672.
• Ostrom, Vincent (1986). The Theory of the Compound Republic. Lincoln, Nebraska: University of Nebraska Press. Second edition.
• Palda, Filip (2016). A Better Kind of Violence: The Chicago School of Political Economy, Public Choice, and The Quest for an Ultimate Theory of Power. Cooper-Wolfling Press.
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• Wicksell, Knut ([1896] 1958). "A New Principle of Just Taxation," trans. J.M. Buchanan, in Richard A. Musgrave and Alan T. Peacock, ed., Classics in the Theory of Public Finance, Palgrave Macmillan.

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