What is public choice theory?

Public choice theory is a branch of economics that developed through the study of taxation and public spending. It emerged in the 1950s and gained widespread public attention in 1986, when James Buchanan was awarded the Nobel Prize in Economics. Buchanan founded the Center for Public Choice Studies at George Mason University, which remains the most prominent place for the study of this branch of economics to this day. Other centers have been established at the University of Florida, Washington University in St. Louis, the University of Montana, the California Institute of Technology, and the University of Rochester.

What does public choice theory deal with?

Public choice theory takes the principles inherent in economics for analyzing human action in the market and applies them to human action in collective decision-making. Economists who study private market behavior assume that people are motivated primarily by self-interest. Although most people base some of their actions (at least ostensibly) on concern for others, the dominant motive in their actions in the market, whether as employers, employees, or consumers, is self-interest.

Public choice economists make the same assumption—that while people in the political arena may display some concern for others in their rhetoric, their overriding motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest. In Buchanan’s words, the theory “replaces romantic and illusory notions of how governments work with notions that embody a greater degree of skepticism.” In the past, many economists have thought that the way to control “market failures” is through government intervention. But public choice economists point out that there is also such a thing as “state failure.” The existence of such failures of state institutions means that government intervention will not have the desired effect.

The theory of rational ignorance of voters

One of the most important findings of public choice theory is that voters do not actually have an incentive to closely monitor government. Anthony Downes, in his “An Economic Theory of Democracy,” argues that voters are largely ignorant of political issues, and that this is rational. Although the outcome of an election is important, it almost never depends on the vote of a single voter. Thus, a well-informed vote is of almost zero value—the individual voter has almost no chance of influencing the outcome of the election. It follows that there is no personal benefit to the voter in spending time following election campaigns and debates.

Public choice theorists, however, believe that such an “incentive to ignorance” is rare in the private sector. For example, when someone buys a car, they want to be well-informed about what they are choosing. This is because the buyer’s choice is crucial to them. If the choice is good, the buyer will benefit directly; if it is not, they will suffer directly. Voting lacks this direct outcome. That is why most voters are largely ignorant of the positions of the people they vote for. Except on a few issues that are in the public domain, they do not pay much attention to the actions of the legislature.

Politicians have a strong incentive to serve lobbying interests

Public choice theorists also study the actions of legislators. Although legislators are expected to act in the public interest, they still make decisions about how to use other people’s resources, not their own. These resources are provided by taxpayers. Politicians may intend to spend taxpayers’ money wisely, but effective and wise decisions will not directly affect their personal wealth. There is no direct reward for fighting powerful lobby groups that protect special interests. In fact, even if a politician governs wisely, voters may not be aware of it because of their rational ignorance.

Thus, the incentives for good governance for the benefit of society are weak. On the other hand, special interest groups consist of people who would benefit directly from a particular government intervention and are willing to directly benefit those policies that enact such intervention. Legislators have the power to tax and extract resources in other coercive ways, and voters are largely unaware of their actions. It follows that legislators have a stronger incentive to behave in ways that are costly to citizens and to serve particular special interests rather than society as a whole.

What are the interests of the state bureaucracy?

In addition to voters and politicians, public choice theory also examines the role of bureaucracy in government. It provides a good example of why many regulatory agencies appear to be driven by special interests. The reason for this is that bureaucrats do not have a specific purpose that guides their behavior—the purpose of their operations changes with government policy. Bureaucrats rely on legislators for their budgets, and often the people who can influence legislators to provide more funds for this or that government agency are lobbyists representing special interests. These groups thus become important to bureaucrats, which can lead to an alliance between the two.

Although public choice theory focuses primarily on government failures, it also suggests ways to address them. For example, if government action is needed, it should be done at the local level. To streamline bureaucracies, Gordon Tullock and William Niskanen recommend that several departments provide the same service, thus simulating competition in the public sector.

The political bias of public choice theory

Public choice economists have also attempted to devise reform that would reduce legislation that serves special interests and leads to ever-increasing government spending. Because of its skepticism about the supposedly benign nature of government, public choice theory is sometimes seen as a conservative or libertarian branch of economics, as opposed to the more “liberal” (i.e. interventionist) Keynesian. This is partly true. The emergence of the theory reflects skepticism about the implicit assumption that government effectively corrects market failures.

But not all economists in this field are conservatives or libertarians. Manser Olson, for example, is not. He is best known for his book The Logic of Collective Action (1965), which examines the influence that special interest groups can have on the political process. In 1982, Olson published The Rise and Decline of Nations, in which he concluded that Germany and Japan prospered after World War II because the war removed the opportunity for special interest groups to benefit from entrepreneurship and economic exchange. Despite all this, Olson supports strong government intervention in the economy.

The different approaches to public choice theory

Many economists in the field of public choice have no political or ideological stance. Some create mathematical models of voting strategies and apply game theory to understand how political conflicts are resolved. Others have developed a separate discipline known as social choice theory. We can trace the roots of this theory to Nobel laureate Kenneth Arrow. In his book “Social Choice and Individual Values” (1951), he attempted to logically understand whether people with different goals can, through voting, make a collective decision that satisfies everyone. In his “impossibility theorem,” he concluded that they cannot.

In addition to providing information about how public decisions are made today, public choice theory also analyzes the rules that govern the collective decision-making process itself. These are the constitutional decisions that precede political action. The analysis of these decisions is the main topic of James Buchanan and Gordon Tullock’s “The Calculus of Consent,” one of the classic texts of the public choice school. The book begins with the assumption that a collective decision that is truly just, that is, a decision in the interest of society as a whole, will be one that all voters would support unanimously. But unanimity is largely impossible in practice, and the book effectively challenges the widespread assumption that majority decisions are inherently just. This leads to a further subdiscipline of public choice, constitutional economics.

Originally published on the author's blog.

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