Vinod's Blog
Random musings from a libertarian, tech geek...
Friday, June 13, 2003 - 07:19 AM Permanent link for Public Choice Theory
Public Choice Theory

Well, it's not really an article by the Capitalist Chicks but I couldn't resist the plug.   The article is actually a speech from James Buchanan on the origins of Public Choice economics they put up on their website / blog.   (There are, nevertheless, many a single dude out there who'd appreciate a world with more Capitalist Chicks ;-).

Most folks pick up a decent understanding of the tools of 'market' economics through high school and college econ classes and later from their jobs.  And, as a consequence, folks tend to be relatively well versed on "market failures" such as externalities and information assymetries.

However, the world of Public Choice economics - the abstract study of how governments, in contrast to markets, allocate resources - just doesn't quite get it's day in the spotlight the same way.   And with tragic results for We the People.  Buchanan writes about his motivation for initiating study in this area:

Nations emerging from World War II, including the Western democracies, were allocating between one-third and one-half of their total product through political institutions rather than through markets. Economists, however, were devoting their efforts almost exclusively to understanding and explaining the market sector.

And herein lies one of the first disconnects between classical liberals like myself and modern day liberals - public choice economics recognizes that the basket of resources (what Buchanan refers to the "total product") allocated by political means starts with exactly the same stuff as the market basket.   Pure and simple.   Today's liberals might recognize this fact in their words but in their actions they treat government programs as a resource pool completely independent of the sea of individuals.  

A mandate that all folks purchase health insurance *feels* so different for them vs. a mandate that the government provide health insurance.  The classical economist recognizes the isomorphism between the two.   Our PostModern liberals don't think about it this way and, if pressed on the issue, believe that there's a bottomless well of rich people they can tax to fund the program - with no other systemic effects on the rest of us.

One of the most influential theories in Public Choice is "rent seeking" - a macro theory which predicts organizational behavior within the collective arena:

Many subprograms have emerged from the umbrella of public choice. One in particular deserves mention – “rent seeking,” a subprogram initiated in a paper by Tullock in 1967, and christened with this title by Anne Krueger in 1974. Its central idea emerges from the natural mindset of the economist, whose understanding and explanation of human interaction depends critically on predictable responses to measurable incentives. In essence, it extends the idea of the profit motive from the economic sphere to the sphere of collective action. It presupposes that if there is value to be gained through politics, persons will invest resources in efforts to capture this value. It also demonstrates how this investment is wasteful in an aggregate-value sense.

...Given this basic insight, much of modern politics can be understood as rent-seeking activity. Pork-barrel politics is only the most obvious example. Much of the growth of the bureaucratic or regulatory sector of government can best be explained in terms of the competition between political agents for constituency support, through the use of promises of discriminatory transfers of wealth.

And here is perhaps the heart of the matter - the initiators of a given quasi-governmental program undoubtedly *MAY* have altruistic motivations but once the bureaucracy in place, beyond the first circle of torch-bearers, laws of bureaucratic nature are inevitable.  The lady behind the counter at the welfare department won't have quite the same zeal as the person who crusaded for the department in the first place.   And she'll be at least partially motivated by more traditional economic themes like her mortgage and kid's college fund.

Public choice, as an inclusive research program, incorporates the presumption that persons do not readily become economic eunuchs as they shift from market to political participation. Those who respond predictably to ordinary incentives in the marketplace do not fail to respond at all when they act as citizens.

I argue for market solutions to problems on a purely utilitarian level not because they are perfect but rather because they are better than the alternative.  Sweetwater economists are perhaps among the most upfront about enumerating market failures.  

However, market failures (in the institutional sense) generally have the benefit of transparency -- we can eventually find an Enron via it's balance sheet/cash flow.    They are also far more easily recoverable -- if Enron fails, there are other companies which will quickly arise to fulfill its role in the market;  occasionally recycling the same assets but under new management.   "Natural" economic processes drive "creative destruction" of older, ineffective bureaucratic structures (e.g. companies) and replace them with new, alternate structures (e.g. startups).    

By contrast, failures in governance accumulate and lead you down a long messy road.   I've got some tools to tell you how far and how deeply market failures will occur;  we have piss poor tools to explain governance failures.   SDB recently had a series of articles about France's path down this road.    For example:

The political system as it now exists in France does not work. As Adrian pointed out, as a practical matter the system has built into it now a veto by certain small groups about critical policy decisions and they're using that veto to protect their narrow self interest, irrespective of what it does to the rest of the people. Their veto isn't really formally a constitutional process, though there's at least a tacit nod to it in the French Constitution via the right to strike. It derives from their willingness to engage in terrorism in support of their policies, and from the fact that no one else is equally dedicated to opposing them.

The key benefit of rapaciously market centric systems isn't their perfection (they're far from it) but rather their resilience.   They are much better able to swing with social and technological punches than non- or quasi-market structures.   In contrast to governmental structures which require active engagement from enough of the populace to sweep in mass reforms, economic structures allow most of the populace to remain passive on a given issue while profit motivations steer specialists towards solving the problem.

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