Jane S. Shaw
The Concise Encyclopedia of Economics

Public Choice Theory

by Jane S. Shaw
About the Author
Public choice theory is a branch of economics that developed from the study of taxation and public spending. It emerged in the fifties and received widespread public attention in 1986, when James Buchanan, one of its two leading architects (the other was his colleague Gordon Tullock), was awarded the Nobel Prize in economics. Buchanan started the Center for Study of Public Choice at George Mason University, and it remains the best-known locus of public choice research. Others include Florida State University, Washington University (St. Louis), Montana State University, the California Institute of Technology, and the University of Rochester.

Public choice takes the same principles that economists use to analyze people's actions in the marketplace and applies them to people's actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest. Although most people base some of their actions on their concern for others, the dominant motive in people's actions in the marketplace—whether they are employers, employees, or consumers—is a concern for themselves. Public choice economists make the same assumption—that although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest. In Buchanan's words the theory "replaces... romantic and illusory... notions about the workings of governments [with]... notions that embody more skepticism."

In the past many economists have argued that the way to rein in "market failures" such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as "government failure." That is, there are reasons why government intervention does not achieve the desired effect. For example, the Justice Department has responsibility for reducing monopoly power in noncompetitive industries. But a 1973 study by William F. Long, Richard Schramm, and Robert Tollison concluded that actual anti-competitive behavior played only a minor role in decisions by the Justice Department to bring antimonopoly suits. Instead, they found, the larger the industry, the more likely were firms in it to be sued. Similarly, Congress has frequently passed laws that are supposed to protect people against environmental pollution. But Robert Crandall has shown that congressional representatives from northern industrial states used the 1977 Clean Air Act amendments to reduce competition by curbing economic growth in the Sunbelt. The amendments required tighter emissions standards in undeveloped areas than in the more developed and more polluted areas, which tend to be in the East and Midwest.

One of the chief underpinnings of public choice theory is the lack of incentives for voters to monitor government effectively. Anthony Downs, in one of the earliest public choice books, An Economic Theory of Democracy, pointed out that the voter is largely ignorant of political issues and that this ignorance is rational. Even though the result of an election may be very important, an individual's vote rarely decides an election. Thus, the direct impact of casting a well-informed vote is almost nil; the voter has virtually no chance to determine the outcome of the election. So spending time following the issues is not personally worthwhile for the voter. Evidence for this claim is found in the fact that public opinion polls consistently find that less than half of all voting-age Americans can name their own congressional representative.

Public choice economists point out that this incentive to be ignorant is rare in the private sector. Someone who buys a car typically wants to be well informed about the car he or she selects. That is because the car buyer's choice is decisive—he or she pays only for the one chosen. If the choice is wise, the buyer will benefit; if it is unwise, the buyer will suffer directly. Voting lacks that kind of direct result. Therefore, most voters are largely ignorant about the positions of the people for whom they vote. Except for a few highly publicized issues, they do not pay a lot of attention to what legislative bodies do, and even when they do pay attention, they have little incentive to gain the background knowledge and analytic skill needed to understand the issues.

Public choice economists also examine the actions of legislators. Although legislators are expected to pursue the "public interest," they make decisions on how to use other people's resources, not their own. Furthermore, these resources must be provided by taxpayers and by those hurt by regulations whether they want to provide them or not. Politicians may intend to spend taxpayer money wisely. Efficient decisions, however, will neither save their own money nor give them any proportion of the wealth they save for citizens. There is no direct reward for fighting powerful interest groups in order to confer benefits on a public that is not even aware of the benefits or of who conferred them. Thus, the incentives for good management in the public interest are weak. In contrast, interest groups are organized by people with very strong gains to be made from governmental action. They provide politicians with campaign funds and campaign workers. In return they receive at least the "ear" of the politician and often gain support for their goals.

In other words, because legislators have the power to tax and to extract resources in other coercive ways, and because voters monitor their behavior poorly, legislators behave in ways that are costly to citizens. One technique analyzed by public choice is log rolling, or vote trading. An urban legislator votes to subsidize a rural water project in order to win another legislator's vote for a city housing subsidy. The two projects may be part of a single spending bill. Through such log rolling both legislators get what they want. And even though neither project uses resources efficiently, local voters know that their representative got something for them. They may not know that they are paying a pro-rata share of a bundle of inefficient projects! And the total expenditures may well be more than individual taxpayers would be willing to authorize if they were fully aware of what is going on.

In addition to voters and politicians, public choice analyzes the role of bureaucrats in government. Their incentives explain why many regulatory agencies appear to be "captured" by special interests. (The "capture" theory was introduced by the late George Stigler, a Nobel Laureate who did not work mainly in the public choice field.) Capture occurs because bureaucrats do not have a profit goal to guide their behavior. Instead, they usually are in government because they have a goal or mission. They rely on Congress for their budgets, and often the people who will benefit from their mission can influence Congress to provide more funds. Thus interest groups—who may be as diverse as lobbyists for regulated industries or leaders of environmental groups—become important to them. Such interrelationships can lead to bureaucrats being captured by interest groups.

Although public choice economists have focused mostly on analyzing government failure, they also have suggested ways to correct problems. For example, they argue that if government action is required, it should take place at the local level whenever possible. Because there are many local governments, and because people "vote with their feet," there is competition among local governments, as well as some experimentation. To streamline bureaucracies, Gordon Tullock and William Niskanen have recommended allowing several bureaus to supply the same service on the grounds that the resulting competition will improve efficiency. Forest economist Randal O'Toole recommends that the Forest Service charge hikers and backpackers more than token fees to use the forests. This, he argues, will lead Forest Service personnel to pay more attention to recreation and reduce logging in areas that are attractive to nature lovers. And Rodney Fort and John Baden have suggested the creation of a "predatory bureau" whose mission is to reduce the budgets of other agencies, with its income depending on its success.

Public choice economists have also tried to develop rule changes that will reduce legislation that caters to special interests and leads to ever-expanding government expenditures. In the late eighties James C. Miller, a public choice scholar who headed the Office of Management and Budget during the Reagan Administration, helped pass the Gramm-Rudman law, which set a limit on annual spending and backed it with automatic cuts if the ceiling was not met. The law had at least a temporary effect in slowing spending. Support for term limits and for a line-item veto also reflects the public choice view that additional legislative rules are needed to limit logrolling and the power of special interests. Public choice scholars, however, do not necessarily agree on the potential effectiveness of specific rules.

Because of its skepticism about the supposedly benign nature of government, public choice is sometimes viewed as a conservative or libertarian branch of economics, as opposed to more "liberal" (that is, interventionist) wings such as Keynesian economics. This is partly correct. The emergence of public choice economics reflects dissatisfaction with the implicit assumption, held by Keynesians, among others, that government effectively corrects market failures.

But not all public choice economists are conservatives or libertarians. Mancur Olson is an important counterexample. Olson is known in public choice for his path-breaking book The Logic of Collective Action, in which he pointed out that large interest groups have trouble gaining and maintaining the support of those who benefit from their lobbying. That is because it is easy for individuals to "free-ride" on the efforts of others if they benefit automatically from those efforts. That is why, Olson explained, nineteenth-century farmers' groups, which were organized to be political lobbying groups, also sold insurance and other services. These provided a direct incentive for the individual farmer to stay involved. (As the number of farmers has declined in recent decades, they have become more politically powerful, an observation that supports Olson's contention.)

More recently, Olson wrote The Rise and Decline of Nations, which concludes that Germany and Japan thrived after World War II because the war destroyed the power of special interests to stifle entrepreneurship and economic exchange. But Olson still favors a strong government.

Many public choice economists take no political or ideological position. Some build formal mathematical models of voting strategies and apply game theory to understand how political conflicts are resolved. Economists at the California Institute of Technology, for example, have pointed out that "agenda-setting"—that is, identifying the options that voters choose from, and even specifying the order of voting on the options—can influence political outcomes. This explains the role of initiatives and referenda as ways for voters to set agendas, opening up options that legislatures otherwise would ignore or vote down.

Some of these economists have developed a separate and quite mathematical discipline known as "social choice." Social choice traces its roots to early work by Nobel Prize-winning economist Kenneth Arrow. Arrow's 1951 book, Social Choice and Individual Values, attempted to figure out through logic whether people who have different goals can use voting to make collective decisions that please everyone. He concluded that they cannot, and thus his argument is called the "impossibility theorem."

In addition to providing insight into how public decision making occurs today, public choice analyzes the rules that guide the collective decision-making process itself. These are the constitutional rules that are made before political activity gets underway. Consideration of these rules was the heart of The Calculus of Consent, by James Buchanan and Gordon Tullock, one of the classics of public choice.

Buchanan and Tullock began with the view that a collective decision that is truly just—that is, a decision in the public interest—would be one that all voters would support unanimously. While unanimity is largely unworkable in practice, the book effectively challenged the widespread assumption that majority decisions are inherently fair. The approach reflected in The Calculus of Consent has led to a further subdiscipline of public choice, "constitutional economics," which focuses exclusively on the rules that precede parliamentary or legislative decision making and limit the domain of government.

About the Author

Jane S. Shaw is a senior associate at the Political Economy Research Center in Bozeman, Montana. She was formerly associate economics editor with Business Week.

Further Reading

Buchanan, James M., and Gordon Tullock. The Calculus of Consent. 1962.

Downs, Anthony. An Economic Theory of Democracy. 1957.

Gwartney, James D., and Richard L. Stroup. Economics: Private and Public Choice, 6th ed. Especially chaps. 4, 30. 1992.

Gwartney, James D., and Richard E. Wagner, eds. Public Choice and Constitutional Economics. 1988.

Henderson, David R. "James Buchanan and Company." Reason (November 1987): 37-43.

Growing Skepticism

One sure sign of the impact of a school of thought is whether and how it shows up in popular textbooks. By that criterion public choice thinking has had a big impact. Consider the famous textbook by noted MIT economist and Nobel Prize winner Paul Samuelson. In the book's early editions, starting in 1948, Samuelson showed little skepticism about the efficacy of government solutions. But by 1985 Samuelson's text, coauthored with Yale University's William Nordhaus, had become more critical of government. Their skepticism was explicitly based on public choice reasoning. Indeed, in "Public Choice," an eleven-page section of the 1985 text, they explain some of the points made in this article. "Often," they write, "a logrolling process may end up as a redistributive scheme, where the winning coalition takes a bad initial proposal, and loads it with enough provisions that appeal to special-interest groups, until a solid majority has been obtained for a legislative dog." Samuelson and Nordhaus conclude: "Before we race off to our federal, state, or local legislature, we should pause to recognize that there are government failures as well as market failures." [Italics theirs.]


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