WHAT IS PUBLIC CHOICE?

Abstract

The paper defines the concept of Public Choice and its main characteristics. We aim at identifying the Virginia School of Public Choice, the main actors involved in the analysis and the major sub-fields Public Choice is divided into. The paper ends with a sub-chapter emphasizing perspectives on Public choice involving social and state welfare. [PUBLICATION ABSTRACT]

Headnote

Abstract: The paper defines the concept of Public Choice and its main characteristics. We aim at identifying the Virginia School of Public Choice, the main actors involved in the analysis and the major sub-fields Public Choice is divided into. The paper ends with a sub-chapter emphasizing perspectives on Public choice involving social and state welfare.

Key words: voters, politicians, bureaucracy, rent-seeking.

1. Introduction

Public choice is an economic theory that uses modern economic tools and analysis to study problems that have always been linked to political science. It studies the behaviour of voters, politicians and public institutions as self-interested agents and their interactions in the social system representative for any form of government (federal state, presidential or parliament republic, monarchy).

Public choice analysis has roots in positive analysis ("what is?") but is often used for presumptions ("what ought to be?"), to identify a problem or suggest how a system could be improved by changes in constitutional rules.

Public choice originated as a distinctive field of specialization half a century ago in the works of its founding fathers: Kenneth Arrow (Social Choice and Individual Values, 1951), Duncan Black (The Theory of Comities and Elections, 1958), James Buchanan and Gordon Tullock (The Calculus of Consent, 1962), Anthony Downs (An Economic Theory of Democracy, 1957), William Niskanen, Mancur Olson (The Logic of Collective Action, 1965), and William Riker.

2. The Virginia School

Public Choice theory is commonly associated with George Mason University, Virginia, where G. Tullock and J. Buchanan are currently teaching. Their early work started at the University of Virginia and Virginia Polytechnic Institute and State University; hence the identification of a Virginia school of political economy.

The Virginia School approach to political economy focuses on comparing private and public sector institutions as imperfect alternatives.

There are several main lines of research in the Virginia School. James Buchanan and Gordon Tullock founded the economic analysis of constitutions. Tullock also founded the modern rent-seeking literature. Mancur Olson founded modern research on collective action and special interest groups. Olson was not at George Mason University, Virginia, nor Virginia tech, but Virginia scholars tend to emphasize special interest group bias in government. Coase founded the modern Law and Economics literature and the modern transaction cost theory of organization.

In his 1985 article, "The Virginia School and Public Choice", Dennis Mueller identified for the first time the term of Virginia Public Choice School and concluded the contribution to the development of this field.

The Public Choice Society and The International Society for New Institutional Economics are also very closely linked to the Virginia School. The development of Public Choice theory accelerated with the formation of the Public Choice Society in 1965. The main focus of the Society became its journal, Public Choice, and its annual meetings.

The journal and meetings attracted economists and political scientists. The economists brought their choice-based and model-building skills. The political scientists brought their knowledge of different political systems and detailed knowledge of institutions and political interaction. Scholars in related fields, such as philosophy, public administration and sociology, contributed as well.

3. The Main Actors

In a narrow sense, Public Choice analysis is concerned with "state failures"4. Driven by self-interested actors on the political market, the state is sometimes incapable of correcting market failures or of correcting them at a lower price than the cost of the original market failure itself. In a wider sense, Public Choice is, as Dennis Mueller writes in his book Public Choice III, "the economic analysis of political institutions". Hence all economists who study government intervention have now become public choice economists.

In modelling the behaviour of individuals as driven by the goal of utility maximization5, economists do not deny that people care about their families, friends and communities.

But Public Choice, like the economic model of rational behaviour on which it rests, assumes that people are guided only by their own self-interests and more important, that the motivations of people in the political process are no different from those of people in any market.

As such, voters support candidates and vote for propositions they think will make them personally better off, bureaucrats try to advance on their own careers and politicians seek election or re-election to office. Public Choice, in other words, simply transfers the rational actor model of the economic theory to the everyday reality of politics.

Two insights derive from the economists' study of collective choice. First, the individual becomes the fundamental unit of analysis. Public Choice rejects the construction of group decision-making units, such as "the people", "the community" or "the society." Groups do not make choices, only individuals do. The problem becomes how to model the ways in which the diverse and conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively.

Second, public and private choice processes differ, not because the motivations of actors are different, but because of differences in the incentives and constraints that channel the pursuit of self-interest in the two settings.

Public choice theory is often referred to when discussing how individual political decision-making results in policy that opposes to the overall desires of the general public. For example, many special interest and pork barrel6 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. The project may be of interest to the politician's local constituency, increasing county votes or campaign contributions. The politician pays little to no cost to gain these benefits, as they are spending public tax money.

Special interest lobbyists are also behaving rationally.

They can gain government favours worth millions for relatively small investments. They face a risk of losing out to their competitors if they do not seek these favours.

The taxpayer is also behaving rationally. The cost of defeating any one government is very high, while the benefits to the individual taxpayer are very small. Each citizen pays a small amount of money for any given government favour, while the costs of ending that favour would be many times higher.

4. Major Sub-Fields

One way to organize the subject matter studied by Public Choice is to begin with the foundations of the state itself. According to this, the most fundamental subject is the origin of government. 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: how to hire competent and trustworthy individuals to whom day-to-day decision-making can be delegated and 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 poles 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 behavioural rules that might be established to influence the behaviour of elected and appointed government officials; to evaluate alternative constitutional and legal rights that could be reserved for citizens, especially rights relating to citizen oversight and the avoidance of harm.

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 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 mild conditions.

This is often called Arrow's impossibility theorem. The theorem, an economic generalization of the voting paradox7, suggests that voters have no reason to expect that, excluding dictatorship, even the best rules for making collective decisions will lead to the kind of consistency attributed to individual choice.

Of special concern has been logrolling8 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 Choicer scholars have studied these institutions in great depth. 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 bureaucracy9. 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. 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, 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.

It might be regarded 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 is not directly concerned with collective decisionmaking. However, the obvious pressures it exerts on legislators, executives, bureaucrats and even judges are factors that Public Choice scholars must account for in their effort to understand and assess collective decision-making rules and institutions.

The members of a collective who are planning a government would be wise to take prospective rent-seeking into account.

5. Perspectives of Public Choice

Public Choice Theory has been developed in the context of democratic political systems, of the variety that exist in Europe and North America. A pioneering work, perhaps the only work todate of its kind, seeking to analyze collective decision-making based on rules and institutions that characterize the less developed countries (LDC's) was undertaken by Muzaffar Ali Isani at Georgetown University in 1982. It focuses largely on the assumptions of a generation of development economists who have articulated the role of the state or political action as an efficient alternative to economic market failures. Isani has suggested that once we introduce political market imperfections as generally found in these countries, we may be confronted with the possibility that far from correcting market failures, political action may prove to be a source of further distortions in the economy.

He then goes on to develop an economic paradigm of politics appropriate to many developing countries and which is consistent with the axioms of economic theory.

Prior to the emergence of public choice theory, many economists tended to consider the state as an agent outside the scope of economic theory, whose actions depend on different considerations than those driving economic agents.

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 based on budget-maximizing model10 in a self-interested way for the purpose of maximizing their own economic benefits.

The theory aims to apply economic analysis (game theory) to the political decision-making process in order to reveal certain trends towards inefficient government policies.

There are also Austrian variants of Public Choice theory (suggested by Mises, Hayek, Kirzner, Lopez, 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 selfinterest assumptions. In another Austrian variant, developed by MacKenzie (2008), voters lack information on the opportunity costs of political choice and expectation formation in politics is adaptive rather than rational. Randall Holcombe and Richard Wagner have also developed the notion of "Political Entrepreneurship".

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

6. Conclusions

Public choice came along and offered a foundation for understanding how the government works. People could understand why, once established, bureaucracies tend to grow apparently without limit and without connection to initially promised functions.

They could understand why pork-barrel politics dominated the attention of legislators, why there seems to be a direct relationship between the overall size of government and the investment in efforts to secure special concessions from government (rent seeking), why the tax system is described by the increasing number of special credits, exemptions and loopholes, why balanced budgets are so hard to secure and why strategically placed industries secure tariff protection.

Footnote

4 As opposed to market failures

5 Economics jargon for a personal sense of wellbeing

6 The term "pork barrel politics" usually refers to spending that is intended to benefit constituents of a politician in return for their political support, either in the form of campaign contributions or votes.

7 The voting paradox (also known as Condorcet's paradox) is a situation noted by the Marquis de Condorcet in the late 18th century, in which collective preferences can be cyclic (and not transitive), even if the preferences of individual voters are not. This is paradoxical, because it means that majority wishes can be in conflict with each other. When this occurs, it is because the conflicting majorities are each made up of different groups of individuals.

Footnote

8 Logrolling is the trading of favors such as vote trading by parliament members to obtain passage of actions of interest to each parliament member.

9 Bureaucracy is the structure and set of regulations in place to control activity, in large organizations and government. It is represented by standardized procedure that dictates the execution of most processes within the body, formal division of powers, hierarchy and relationships. In practice the interpretation and execution of policy can lead to informal influence. Not to be mistaken to street-level bureaucracy.

10 Budget-maximizing model is a new stream of public choice theory and rational choice analysis inaugurated by William Niskanen, in 1971. It argued that rational bureaucrats will always seek to increase their budgets in order to increase their own power, thereby contributing strongly to state growth and potentially reducing social efficiency.

References

References

1. Boettke, P. J., Lopez, E. J.: Austrian Economics and Public Choice, Kluwer Academic Publishers, The Netherlands, 2002, [Online] available at www.springerlink.com.

2. Buchanan, J. M.: Public Choice: The Origins and Development of a Research Program, Center for Study of Public Choice, George Mason University, Fairfax, Virginia, 2003, [Online] available at www.gmu.edu.

3. Dinca, G.: Doctrina Public Choice, Editura Infomarket, Brasov. 2006.

4. Mueller, D. C.: The "Virginia School" and Public Choice, Fairfax, Virginia: George Mason University press, 1985.

5. Mueller, D. C.: Public Choice III, Cambridge: Cambridge University press, 2003, [Online] available at www.ebooks.com.

6. Shugart II, W. F.: Public Choice, 2008, [Online] available at www.econlib.org.

7. Tullock, G., Seldon, A., Brady, G.: Government Failure. A primer in Public Choice, Washington D.C. CATO Institute press, 2005.