The Encyclopedia of Libertarianism

Public Choice Economics

Public choice refers to that area of economics devoted to the study of politics using the methods supplied by economic science. As in other applications of economics, a representative individual is the basic building block of public choice analysis—in this case, a representative voter, politician, bureaucrat, regulator, or lobbyist. The individual is assumed to face a choice among alternatives, to have a preference among those alternatives, and to choose the alternative that is most consistent with his (or her) preference. Thus, the objective of public choice analysis is to explain the aggregate outcomes of individuals making choices in specific political settings.

A common criticism of public choice should be dealt with at the start: The assumption that people make political choices in pursuit of private ends has led to a charge that public choice analysis is inherently “cynical.” Maybe so. A more perceptive observation is that economics brings the same model of human behavior to analyze the choices among commercial products, jobs, neighborhoods, social relations, and political alternatives. Public choice assumes that the same person who makes those other choices is not customarily transformed to pursue some concept of the public interest when he enters the voting booth, runs for office, or contributes to a political campaign. The perspective offered in high school civics classes, for example, is that a person runs for office to pursue some policy agenda. By contrast, public choice analysis characteristically assumes that a candidate chooses some policy agenda to increase his prospects for winning the election. For that reason, James Buchanan, a leading public-choice scholar, has described public choice as “politics without romance.” Public choice should be judged by whether the hypotheses about the aggregate consequences of political behavior are more consistent with the evidence, not whether the characteristic behavioral assumptions of this analysis are cynical, realistic, or otherwise.

From the beginning, scholars from a range of disciplines made important contributions to the type of analysis now termed public choice. The first formal analyses of voting rules were offered by the French mathematicians Jean-Charles de Borda (1781) and the Marquis de Condorcet (1785), followed by the English mathematician (and fabulist) Charles Dodgson (1873). Condorcet was apparently the first to discover that majority rule may not lead to a clear choice when there are more than two alternatives. Candidate (or position) A, for example, may be preferred to B, and B to C, but C to A; this circularity may make the outcome of majority rule dependent on the order by which the alternatives are addressed and when the voting stops. The first significant insights into the theory and structure of a compound republic were made by James Madison, and the first important contributions by economists appear in the works of John Stuart Mill (1861), Knut Wicksell (1896), Harold Hotelling (1929), Joseph Schumpeter (1942), and Howard Bowen (1943). These contributions, however, had little influence on other scholars for many years.

Public choice became an independent discipline only after World War II, following several major publications by economists. Among them was Kenneth Arrow, who, in Social Choice and Individual Values (1951), studied the outcomes of various voting procedures, including majority rule, to determine whether they displayed characteristics that were consistently desirable, such as being invariant to the order of voting, efficient, and nondictatorial. Arrow’s conclusion to those inquiries was negative, which stimulated a long and generally unproductive exploration by economists and mathematicians to determine whether Arrow was correct. Arrow was later awarded the Nobel Prize largely for that work. Duncan Black, in two 1948 articles and The Theory of Committees and Elections (1958), developed his own theory of voting in committees before he discovered that it largely replicated the work of Condorcet and other mathematicians many decades ago.

Anthony Downs, in An Economic Theory of Democracy (1957), inspired by Schumpeter and using Hotelling’s spatial model of a two-candidate election, developed a rich set of hypotheses about democratic elections. Because the probability that any one individual vote determines the winner is only 1/n, where n is the expected difference in the votes for the two candidates, voters have little incentive to invest in political information. In fact, most of the information they bring to their vote is likely to be a by-product of work, social relations, and entertainment. For the same reason, potential voters have little incentive to go to the polls. Indeed, G. W. F. Hegel made a similar observation many decades ago. Turnout is likely to be high only when the election is expected to be close, or when a lot is at stake, and the weather is nice. In that sense, most potential voters are both rationally ignorant and rational abstainers. The most important of Downs’s hypotheses is that the decisive voter in a two-candidate election is the median voter because that voter must be part of any winning coalition; both candidates have an incentive to choose a policy agenda that appeals to the median voter, creating a perception that there is little difference between the two candidates. Careful analysis, creative graphics, and good writing made this the most influential of all public choice books, although several of Downs’s hypotheses have been challenged by later analyses.

James Buchanan and Gordon Tullock, in The Calculus of Consent (1962), formulated what proved to be the seminal analysis in the area of constitutional choice, building on Wicksell’s voluntary exchange model of government. The authors addressed such questions as the powers of government, the structure of government, and the voting rules that might command unanimous consent of people at the constitutional stage (or, in the powerful metaphor of John Rawls, “behind the veil of ignorance”). Their answers are much like those given by James Madison, as reflected in the U.S. Constitution. Buchanan and Tullock continued to be among the most productive public choice scholars, and Buchanan was awarded the Nobel Prize for his many contributions. Mancur Olson, in The Logic of Collective Action (1965), developed a model of comparative transaction costs to explain how small interest groups can have a disproportionate influence on political outcomes when the benefits of political action are concentrated, but the costs are diffused.

Although most of the founders of modern public choice are economists, scholars from other disciplines also made important contributions. William Riker, in The Theory of Political Coalitions (1962), explained why grand coalitions tend to devolve into minimum winning coalitions; Riker became the leading proponent of public choice among political scientists. James Coleman, a leading sociologist, made important early contributions to the questions first raised by Kenneth Arrow. By the end of the 1960s, public choice was a recognized subdiscipline of economics and political science with its own new journal and professional society. The range of questions addressed by public choice, however, was still quite narrow, and almost all the early contributions were theoretical.

Beginning in the 1970s, however, the scope of public choice expanded rapidly to address new questions, use new techniques, and include a large number of empirical studies. Most of the founders of modern public choice continued to be productive, and they trained a rapidly growing number of second-generation scholars. Many of them have continued to develop and test the theory of rent seeking, building on the seminal 1967 article by Gordon Tullock. These studies explain and document that the costs of acquiring and defending the rents created by private monopolies, economic regulation, and trade protection are much higher than the allocative costs that had previously been the focus of microeconomic analysis. Other studies developed the implications of a budget-maximizing bureau faced by a passive political sponsor, building on prior analyses by Ludwig von Mises, Gordon Tullock, and Anthony Downs. In response to criticism leveled at their conclusions, these economists have adopted a modified model based on maximization of the bureau’s discretionary budget. Contributions that have yet to have their full impact include the development of voting rules that reflect the intensity of voter preferences and the theory of expressive (as distinct from instrumental) voting. Important new techniques include the use of experimental economics to address the interaction of people in small groups and evolutionary game theory to address the development of constitutional rules. Vernon Smith, one of the founders of experimental economics, won the Nobel Prize for that work.

Despite these continuing contributions, some major puzzles remain. There is still no adequate explanation for why people vote or, if voting is only expressive, what the effects of this expressive voting are. More important, there are not yet any satisfactory explanations of the major political developments of the 20th century, among them the massive expansion of government budgets, the erosion of the economic constitution, and the progressive spread and recent collapse of communism.

Public choice has now become a recognized field of academic study. Many departments of economics and political science now contain one or more public choice scholars. Public choice articles are accepted in increasing numbers in a host of journals, and new public choice societies have been organized in Europe and Japan. Evaluating public choice, however, can best be done by investigating its effect on the larger community; on that basis, however, it is yet too early to determine its overall worth. One judgment rests on the fact that the most important contribution of public choice has been to provide a theory of government failure to counterbalance the theory of market failure put forward by welfare economics, the singularly most important rationale for continued government expansion. In evaluating proposed changes in government institutions and policies, we now have the opportunity to compare imperfect markets with imperfect government and thus avoid the biases inherent in assuming perfection in either institution. Thus, public choice often strengthens the case for a libertarian political economy, but from a different perspective. Normative public choice is better described as contractarian rather than libertarian because it seeks the potential for consent to rules, rather than concentrating on individual actions. For public choice to be a more effective counterbalance to welfare economics, however, those who work in this area must sort out its most important outstanding puzzles, undertake more thorough empirical tests of its hypotheses, and develop better ways to communicate its findings to the broader community.

 

Further Readings

Buchanan, James M., and Gordon Tullock. The Calculus of Consent: The Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press, 1962.

Downs, Anthony. An Economic Theory of Democracy. New York: Harper & Row, 1957.

Mitchell, William C., and Randy T. Simmons. Beyond Politics: Markets, and the Failure of Bureaucracy. Boulder, CO: Westview Press, 1994.

Mueller, Dennis C., ed. Perspectives on Public Choice: A Handbook. Cambridge: Cambridge University Press, 1997.

Niskanen, William. Bureaucracy and Representative Government. Chicago: Aldine, Atherton, 1971.

Olson, Mancur. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press, 1965.

Tullock, Gordon. “The Welfare Costs of Tariffs, Monopolies, and Theft.” Western Economic Journal 5 (1967): 224–232.

Originally published .