Saving government failure theory from itself: recasting political economy from an Austrian perspective

Constit Polit Econ (2007) 18:127143

DOI 10.1007/s10602-007-9017-1

ORIGINAL ARTICLE

Saving government failure theory from itself: recasting political economy from an Austrian perspective

Peter J. Boettke Christopher J. Coyne Peter T. Leeson

Published online: 29 March 2007 Springer Science+Business Media, LLC 2007

Abstract The economic approach to politics revolutionized the way scholars in economics and political science approached the study of political decision-making by introducing the possibility of government failure. However, the persistent and consistent application of neoclassical models of economics also seemed to suggest that once the full costs were accounted for, this failure was an illusion. This paper counters these arguments, typically associated with George Stigler, Gary Becker and Donald Wittman, by focusing on the underlying economic theory. We develop an alternative model of political economy grounded in the Austrian conception of the dynamic market process.

Keywords Entrepreneurship Government failure Market failure Market process Public choice

JEL Classication B52 B53 H11

1 Introduction

The development of the economic theory of politics by Anthony Downs, Duncan Black, James Buchanan, Gordon Tullock, and Mancur Olson revolutionized the way scholars in economics and political science thought about non-market decision-making. The traditional theory of public economics (the economic role of the state) was best summarized by Baumols (1952) Welfare Economics and the Theory of the

P. J. BoettkeDepartment of Economics, George Mason University, Fairfax, USA

C. J. Coyne (&)

Department of Economics, Hampden-Sydney College, Hampden-Sydney, VA 23493, USA e-mail: [email protected]

P. T. LeesonDepartment of Economics, West Virginia University, Morgantown, USA

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State. According to this theory, market failures, such as positive or negative externalities, would be identied and government ofcials would create the appropriate tax and subsidy scheme to bring social marginal cost and private marginal cost into alignment. In short, government was the corrective to market failures identied by the economist.

Keynesian macroeconomics argued along similar lines. As aggregate demand failure was identied, appropriate scal policy would be followed to ensure that aggregate demand would meet aggregate supply at the full employment level of output. Again, government circa 1950 economics was seen as the corrective to the shortcomings of the private market economy.

Prior to the public choice revolution, economists viewed deliberations over public policy as if public-spirited autocrats were carrying...