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Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science".Its content 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.
The Journal of Economic Literature 's classification code regards public choice as a subarea of microeconomics, under JEL: D7: "Analysis of Collective Decision-Making" (specifically, JEL: D72: "Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior").
Public choice analysis has roots in positive analysis ("what is") but is often used for normative purposes ("what ought to be") in order to identify a problem or to suggest improvements to constitutional rules (i.e., constitutional economics).
Public choice theory is also closely related to social choice theory, a mathematical approach to aggregation of individual interests, welfares, or votes.Much early work had aspects of both, and both fields use the tools of economics and game theory. Since voter behavior influences the behavior of public officials, public-choice theory often uses results from social-choice theory. General treatments of public choice may also be classified under public economics.
An early precursor of modern public choice theory was the work of Swedish economist Knut Wicksell (1896),which treated government as political exchange, a quid pro quo , in formulating a benefit principle linking taxes and expenditures.
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 economic agents, such as those in business.In contrast, public choice theory modeled government as made up of officials who, besides pursuing the public interest, might act to benefit themselves, for example in the budget-maximizing model of bureaucracy, possibly at the cost of efficiency.
Modern public-choice theory has been dated from the work of Duncan Black, sometimes called "the founding father of public choice".In a series of papers from 1948, which culminated in The Theory of Committees and Elections (1958), and later, Black outlined a program of unification toward a more general "Theory of Economic and Political Choices" based on common formal methods, developed underlying concepts of what would become median voter theory, and rediscovered earlier works on voting theory.
Kenneth J. Arrow's Social Choice and Individual Values (1951) influenced formulation of the theory. Among other important works are Anthony Downs (1957) An Economic Theory of Democracy and Mancur Olson (1965) The Logic of Collective Action .
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. In particular, the preface describes the book as "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" (1962, p. v). The book focuses on positive-economic analysis as to the development of constitutional democracy but 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, the probabilistic voting theory started to displace the median voter theory in showing how to find Nash equilibria in multidimensional space. The theory was later formalized further by Peter Coughlin.
One way to organize the subject matter studied by public choice theorists is to begin with the foundations of the state itself. 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, 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.
Another major sub-field is the study of bureaucracy. 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 or her. The latter have the power to hire and fire him or her more or less at will. The bulk of the bureaucrats, however, 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 in an ideal system hire and fire employees at will.William Niskanen is generally considered the founder of public choice literature on the bureaucracy.
Geoffrey Brennan and Loren Lomasky claim that democratic policy is biased to favor "expressive interests" and neglect practical and utilitarian considerations. Brennan and Lomasky differentiate between instrumental interests (any kind of practical benefit, both monetary and non-monetary) and expressive interests (forms of expression like applause). According to Brennan and Lomasky, the paradox of voting can be resolved by differentiating between expressive and instrumental interests.
This argument has led some public choice scholars to claim that politics is plagued by irrationality. In articles published in the Econ Journal Watch , economist Bryan Caplan contended that voter choices and government economic decisions are inherently irrational.Caplan's ideas are more fully developed in his book The Myth of the Rational Voter (Princeton University Press 2007). 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. Were people to bear 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, pointing out that mainstream economists tend to 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. However, Caplan does have 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.
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 preferences of the general public. For example, many advocacy group and pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects. It may make them feel powerful and important. It 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 to gain these benefits, as he is spending public money. Special-interest lobbyists are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments. They face a risk of losing out to their competitors if they don't seek these favors. The taxpayer is also behaving rationally. The cost of defeating any one government give-away is very high, while the benefits to the individual 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 desire of the general constituency is opposite. 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.However the notion that groups with concentrated interests will 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 identified this countervailing force as being the deadweight loss from predation. His views capped what has come to be known as the Chicago school of political economy and it has come in sharp conflict with the so-called Virginia faction of public choice due to its assertion that politics will tend towards efficiency due to nonlinear deadweight losses and due to its claim that political efficiency renders policy advice irrelevant.
While good government tends to be a pure public good for the mass of voters, there may be many advocacy groups that have strong incentives for lobbying the government to implement specific policies that would benefit them, potentially at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either directly or by protectionist measures. The costs of such inefficient policies are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by 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 will be unaware of the effort; in fact, although voters may be aware of special-interest lobbying efforts, this may merely select for policies which are even harder to evaluate by the general public, rather than improving their overall efficiency. Even if the public were able to evaluate policy proposals effectively, they would find it infeasible to engage in collective action in order to defend their diffuse interest. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies. In public choice theory, such scenarios of inefficient government policies are referred to as government failure – a term akin to market failure from earlier theoretical welfare economics.
A field that is closely related to public choice is the study of rent-seeking. This field combines the study of a market economy with that of government. Thus, one might regard it as a new political economy. Its basic thesis is that when both a market economy and government are present, government agents provide numerous special market privileges. Both the government agents and self-interested market participants seek these privileges in order to partake in the resulting monopoly rent. Rentiers gain benefits above what the market would have offered, but in the process allocate resources in sub-optimal fashion from a societal point of view.
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. However, the obvious pressures it exerts on legislators, executives, bureaucrats, and even judges are factors that public choice theory must account for in its analysis of collective decision-making rules and institutions. Moreover, the members of a collective who are planning a government would be wise to take prospective rent-seeking into account.
Another major claim is that much of political activity is a form of rent-seeking which wastes resources. Gordon Tullock, Jagdish Bhagwati, and Anne Osborn Krueger have argued that rent-seeking has caused considerable waste. [ citation needed ]In a parallel line of research Fred McChesney claims that rent extraction causes considerable waste, especially in the developing world. As the term implies, rent extraction happens when officials use threats to extort payments from private parties.
From such results it is sometimes asserted that public choice theory has an anti-state tilt. But there is ideological diversity among public choice theorists. Mancur Olson for example was an advocate of a strong state and instead opposed political interest group lobbying.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.
The British journalist, Alistair Cooke, commenting on the Nobel 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."
Several notable public choice scholars have been awarded the Nobel Prize in Economics, including James M. Buchanan (1986), George Stigler (1982), Gary Becker (1992), Vernon Smith (2002) and Elinor Ostrom (2009). In addition, James Buchanan, Vernon Smith, and Elinor Ostrom were former presidents of the Public Choice Society.
Buchanan and Tullock themselves outline methodological qualifications of the approach developed in their work The Calculus of Consent (1962), p. 30:
Further, Steven Pressman (economist) offers a critique of the public choice approach, arguing that public choice actually fails to explain political behaviour in a number of central areas including politicians behaviour as well as voting behaviour.Take politician's behaviour as an example, the public choice assumption that states politician's utility function is driven by greater political and economic power cannot account for various political phenomena. These include: why politicians vote against their constituent's interests, why they would advocate for higher taxation, fewer benefits, and smaller government, or why wealthy individuals would seek office.
As for critiques concerning voter behaviour, it is argued that public choice is unable to explain why people vote due to limitations in rational choice theory.For example, from the viewpoint of rational choice theory, the expected gains of voting depend on (1) the benefit to the individual if their candidate wins, and (2) the probability that the individual's vote will determine the election's outcome. However, even in a tight election the probability that an individual's vote makes the difference is estimated to be effectively zero. This would suggest that even if an individual expects gains from their candidate's success, the expected gains from voting would also logically be near zero. When this is considered in combination with the multiple recognized costs of voting such as the opportunity cost of foregone wages, transportation costs, and more, the self-interested individual is, therefore, unlikely to vote at all (at least theoretically). Pressman is not alone in his critique, other prominent public choice economists also recognize that theorizing voting behaviour is a major issue for the public choice approach. This includes critiques by Anthony Downs in An Economic Theory of Democracy , Morris P. Fiorina , and Gordon Tullock .
Logrolling is the trading of favors, or quid pro quo, such as vote trading by legislative members to obtain passage of actions of interest to each legislative member. In organizational analysis, it refers to a practice in which different organizations promote each other's agendas, each in the expectation that the other will reciprocate. In an academic context, the Nuttall Encyclopedia describes logrolling as "mutual praise by authors of each other's work".
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. The basic premise of rational choice theory is that aggregate social behavior results from the behavior of individual actors, each of whom is making their individual decisions. The theory also focuses on the determinants of the individual choices. Rational choice theory then assumes that an individual has preferences among the available choice alternatives that allow them to state which option they prefer. These preferences are assumed to be complete and transitive. The rational agent is assumed to take account of available information, probabilities of events, and potential costs and benefits in determining preferences, and to act consistently in choosing the self-determined best choice of action. In simpler terms, this theory dictates that every person, even when carrying out the most mundane of tasks, perform their own personal cost and benefit analysis in order to determine whether the action is worth pursuing for the best possible outcome. And following this, a person will choose the optimum venture in every case. This could culminate in a student deciding on whether to attend a lecture or stay in bed, a shopper deciding to provide their own bag to avoid the five pence charge or even a voter deciding which candidate or party based on who will fulfill their needs the best on issues that have an impact on themselves especially.
Political economy is the study of production and trade and their relations with law, custom and government; and with the distribution of national income and wealth. As a discipline, political economy originated in moral philosophy, in the 18th century, to explore the administration of states' wealth, with "political" signifying the Greek word polity and "economy" signifying the Greek word "okonomie". The earliest works of political economy are usually attributed to the British scholars Adam Smith, Thomas Malthus, and David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).
In economics, industrial organization or industrial economy is a field that builds on the theory of the firm by examining the structure of firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior as between competition and monopoly, including from government actions.
James McGill Buchanan Jr. was an American economist known for his work on public choice theory, for which he received the Nobel Memorial Prize in Economic Sciences in 1986. Buchanan's work initiated research on how politicians' and bureaucrats' self-interest, utility maximization, and other non-wealth-maximizing considerations affect their decision-making. He was a member of the Board of Advisors of The Independent Institute as well as of the Institute of Economic Affairs, a member of the Mont Pelerin Society, a Distinguished Senior Fellow of the Cato Institute, and professor at George Mason University.
Bryan Douglas Caplan is an American economist and author. Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and frequent contributor to Freakonomics as well as publishing his own blog, EconLog. He is a self-described economic libertarian. The bulk of Caplan's academic work is in behavioral economics and public economics, especially public choice theory.
In public choice theory, as well as in economics, rent-seeking means seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through misallocation of resources, reduced wealth-creation, lost government revenue, heightened income inequality, and potential national decline.
The Calculus of Consent: Logical Foundations of Constitutional Democracy is a book published by economists James M. Buchanan and Gordon Tullock in 1962. It is considered to be one of the classic works from the discipline of public choice in economics and political science. This work presents the basic principles of public choice theory.
Anthony Downs is an American economist specializing in public policy and public administration. He has been a senior fellow at the Brookings Institution in Washington, D.C., since 1977.
Gordon Tullock was an economist and professor of law and Economics at the George Mason University School of Law. He is best known for his work on public choice theory, the application of economic thinking to political issues. He was one of the founding figures in his field.
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. It can be viewed in contrast to a market failure, which is an economic inefficiency that results from the free market itself, and can potentially be corrected through government regulation. The idea of government failure is associated with the policy argument that, even if particular markets may not meet the standard conditions of perfect competition required to ensure social optimality, government intervention may make matters worse rather than better.
Social choice theory or social choice is a theoretical framework for analysis of combining individual opinions, preferences, interests, or welfares to reach a collective decision or social welfare in some sense. A non-theoretical example of a collective decision is enacting a law or set of laws under a constitution. Social choice theory dates from Condorcet's formulation of the voting paradox. Kenneth Arrow's Social Choice and Individual Values (1951) and Arrow's impossibility theorem in it are generally acknowledged as the basis of the modern social choice theory. In addition to Arrow's theorem and the voting paradox, the Gibbard–Satterthwaite theorem, the Condorcet jury theorem, the median voter theorem, and May's theorem are among the more well known results from social choice theory.
Kenneth Arrow's monograph Social Choice and Individual Values and a theorem within it created modern social choice theory, a rigorous melding of social ethics and voting theory with an economic flavor. Somewhat formally, the "social choice" in the title refers to Arrow's representation of how social values from the set of individual orderings would be implemented under the constitution. Less formally, each social choice corresponds to the feasible set of laws passed by a "vote" under the constitution even if not every individual voted in favor of all the laws.
The Virginia School of political economy is a school of economic thought originating in universities of Virginia in the 1950s and 1960s, mainly focusing on public choice theory, constitutional economics, and law and economics.
The Myth of the Rational Voter: Why Democracies Choose Bad Policies is a 2007 book by the economist Bryan Caplan, in which the author challenges the idea that voters are reasonable people whom society can trust to make laws. Rather, Caplan contends that voters are irrational in the political sphere and have systematically biased ideas concerning economics.
Public economics is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare.
The concept known as rational irrationality was popularized by economist Bryan Caplan in 2001 to reconcile the widespread existence of irrational behavior with the assumption of rationality made by mainstream economics and game theory. The theory, along with its implications for democracy, was expanded upon by Caplan in his book The Myth of the Rational Voter.
Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents". This extends beyond the definition of "the economic analysis of constitutional law" and is distinct from explaining the choices of economic and political agents within those rules, a subject of orthodox economics. Instead, constitutional economics takes into account the impacts of political economic decisions as opposed to limiting its analysis to economic relationships as functions of the dynamics of distribution of marketable goods and services.
The altruism theory of voting is a model of voter behavior which states that if citizens in a democracy have “social” preferences for the welfare of others, the extremely low probability of a single vote determining an election will be outweighed by the large cumulative benefits society will receive from the voter’s preferred policy being enacted, such that it is rational for an “altruistic” citizen, who receives utility from helping others, to vote. Altruistic voting has been compared to purchasing a lottery ticket, in which the probability of winning is extremely low but the payoff is large enough that the expected benefit outweighs the cost.
The benefit principle is a concept in the theory of taxation from public finance. It bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received. The principle is sometimes likened to the function of prices in allocating private goods. In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a just income distribution. The approach was extended in the work of Paul Samuelson, Richard Musgrave, and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or wealth. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of constitutional economics in the work of James Buchanan.
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