Government By The Market?

The Politics Of Public Choice

Peter Self

• Publisher: Routledge
• Year: 2021
• eBook ISBN: 9780429720277
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Political Economy
• Index: Politics & International Relations

Recent decades have seen the study of politics invaded by economic theories, methods and techniques. This book gives a concise, non- technical account of these 'public choice' theories and examines their influence upon government policies in English-speaking countries. Issues covered include slimming the state, privatising welfare and re- structuring government. Final chapters offer an alternative view of the basis of good government. This book offers a unique survey and critique of the ideas and influence of an important branch of political thought and it links with market theories. It is vital reading for students of both politics and economics.

1 Economic Interpretations of Politics

In the last thirty-five years a powerful new body of political thinkers has emerged, collectively known as the 'public choice' school. These thinkers model the study of politics upon the methods and assumptions of neo-classical market economics. Their writings have not only introduced a new intellectual view of the nature of politics but have had a considerable influence upon the conduct of politics and public policy, as this book will demonstrate.

The origins of the public choice school he in the study of public finance and public goods by such writers as Wicksell and Lindhal. For some time the interest of economists was focused upon the question of what governments should do to remedy various forms of market failure, and upon the provision and financing of those 'pure public goods' which only governments can supply. Subsequently this concern was widened and reversed as economists started to compare the methods and problems of collective decision-making with those of competitive markets providing private goods. The rapid growth of governments after World War Two was an obvious stimulus to this field of study and contributed towards a radically different and more critical approach to the workings of government than traditional political science provided.

Public choice developed primarily in the USA and is still heavily concentrated there, although its influence has spread, especially to other English-speaking countries. It has produced a prolific volume of work which reflects the somewhat different approaches of the Virginia School led by James Buchanan and Gordon Tullock, who founded the Public Choice Society in 1963, and the Chicago School, represented by such writers as Mancur Olson and George Stigler. Earlier, in 1957, Anthony Downs had written his path-breaking Economic Theory of Democracy. The founding fathers, such as Buchanan, Tullock, Olson, William Riker and Anthony Downs, wrote some original works which advanced bold theories in fairly non-technical language. Later American writers have concentrated more upon testing hypotheses about specific issues of American politics. More broadly, and especially outside America, the economic approach has influenced the growth of 'rational actor' models of politics, which share a similar economic methodology but reach different conclusions.

This chapter provides a brief introduction to the basic assumptions of public choice thought and considers some of the critical issues which they raise. Its aim is to lay the ground for the review in Chapter 2 of the positive theories of public choice, and in Chapter 3 of its normative theories, which taken together have produced a body of beliefs or ideology with a potent influence upon political life.

Comparing economic and political systems

A well-known text-book gives the following definition of public choice:

Public choice can be defined as the economic study of non-market decision-making, or simply the application of economics to political science. The subject matter of public choice is the same as that of political science: the theory of the state, voting rules, voting behaviour, party politics, the bureaucracy and so on. The methodology of public choice is that of economics, however. The basic behavioural postulate of public choice, as for economics, is that man is an egoistic, rational utility maximiser.

(Mueller, Public Choice, Cambridge University Press, 1989, pp. 1-2)

Mueller notes that traditionally 'political man' (or woman) is supposed to be concerned with the public interest and 'economic man' with his private interest, but public choice rejects this dichotomy. Buchanan and Tullock (1962, pp. 20-3) ask why we should assume that an individual 'changes gear' when he moves from the private to the public sphere. He is still the same person, and it is reasonable to assume that his basic motives and interests will remain the same. What will change are the constraints and rules under which he operates, which will be critical for the rational calculation and pursuit of his private interest.

This leads to the other element in Mueller's definition - the special conditions of collective action or 'non-market decision-making'. What is the relationship between the economic and political systems? Many writers, such as Schumpeter (1943), have stressed the close cultural and institutional linkages between market capitalism and parliamentary democracy. Marxist theorists have made precisely the same point from the opposite viewpoint of arguing the dependence of liberal democracy upon capitalist interests (MacPherson, 1962). Before Marx the great classical economists such as Smith, Ricardo and Malthus stressed the significance for political behaviour of the conflicts of interest between different economic classes.

However the economic model used by mainstream public choice is the neo-classical one of perfectly competitive markets. Markets are assumed to work through voluntary exchanges between free individuals, each pursuing his or her private self-interest. Markets move towards an equilibrium point where no individual would profit from buying or selling a different product, or from changing his or her occupation. However this equilibrium point is continually moving with changes in individual tastes, costs of production, or the arrival of new products. If, in the homely example, individuals start demanding more coffee and less tea, the production of these commodities will shift until the marginal revenue that can be earned from either product equals the marginal cost of its production. By such continual marginal adjustments markets are said to respond spontaneously to consumer demands, thereby achieving 'allocative efficiency'.

Actual market systems do not satisfy the strong requirements of this ideal model, for example over perfect competition, full information or in other respects. However public choice theorists can still utilise this model to map certain features of political life. Following this approach, voters can be likened to consumers; political parties become entrepreneurs who offer competing packages of services and taxes in exchange for votes; political propaganda equates with commercial advertising; government agencies are public firms dependent upon receiving or drumming up adequate political support to cover their costs; and interest groups are co-operative associations of consumers or producers of public goods. Moreover the whole political system can be viewed as a gigantic market for the demand and supply of 'public goods', meaning all outputs supplied through a political instead of a market process (and including regulations and transfer payments as well as goods and services).

The 'political market' is cruder and harder to study than the market system. Market transactions can be measured and analysed in the common unit of money. Political transactions involve voting, which can be counted like money but which covers only a part of politics. Political action involves the exercise of authority, power and influence. Laws and government decisions can be known but influence is often elusive or secretly exercised. Nonetheless power or influence is in some ways the analogue of money, because it is the means through which political actors pursue their goals.

Moreover the individual citizen has much less scope for expressing her preferences through voting than the consumer has in the market-place. In theory all resources flow and adjust to the changing demands of market consumers; public choice theory suggests many ways in which the political process does not respond to the demands of citizens. In addition government action involves coercion which supposedly does not apply in market exchanges. Because collective decisions involve coercion and cannot satisfy all individual preferences equally, most public choice writers regard government as being intrinsically a less desirable means for satisfying individual wants than the market place, except for essential public goods. This conclusion is disputed by those who look to government to correct the inequalities and instabilities of the market place. This basic issue will recur later.

Basic assumptions: self-interest and rationality

A basic assumption of public choice thought is that individuals act as 'rational egoists' who pursue their private interests in both economic and political life. This is an arguable and slippery starting-point requiring elucidation. It will be convenient to deal with the two ideas of 'egoism' and 'rationality' separately.

The concept of self-interest

Ever since Adam Smith argued that it was the self-interest of butchers and bakers which (in a competitive market) promoted the general prosperity, it has been widely accepted that the market system works through the private pursuit of economic gain. This statement can be questioned. Other motives play a necessary part in economic life (see Chapter 7) and it can also be argued that the dominant role of self-interest is not so much the cause as the consequence of competitive markets. If full competition truly existed, as the theorists propose, an individual trader would need to act purely self-interestedly in order to survive. Ironically 'rational economic man' then becomes not the freely choosing individual which public choice theorists celebrate but a mechanistic figure controlled by external forces (Hollis and Nell, 1975).

Even so the pursuit of private gain is generally pursued and (subject to some moral as well as legal constraints) legitimised within the market system. The ultimate motive need not be a selfish one; I may want to make a lot of money in order to give to charity or an ailing friend. However public choice writers stress that the market relationship itself is instrumental and impersonal in its nature. Market consumers look for the best buy and while a few individuals may (for example) boycott South African oranges, even a socialist will usually buy a hi-fi set on purely personal preference without regard to the labour policies or other practices of the company making it.

Do these same instrumental and self-regarding motivations apply also in politics? In the past even neo-classical economists have doubted the comparison. Edgeworth, one of the founders of this school, believed that self-interest was the first principle of economics but thought also that trade (like war) involved 'the lower elements of human nature' which need not apply elsewhere (Sen, 1982, pp. 84-8). No less a market advocate than Mrs Thatcher seemed to hold much the same view when she told the Church of Scotland (rather smugly) that, while the worthy clergy and she herself did not need the spur of large economic incentives, businessmen needed them if they were to generate wealth (Raban, 1989).

Public choice theorists reject this line of thought as mistaken and hypocritical. Why should private, personal interest cease to be relevant when a voter votes, an interest group campaigns, or a politician seeks office? Although they made reservations, for example conceding the existence of altruism, the early public choice writers took self-interest to be the most realistic assumption about political behaviour (Downs, 1957, pp. 27-8; Buchanan and Tullock, 1962, p. 30). A more recent study stays with the hypothesis that 'private interest will dominate decision making in a large number of cases' (Crain and Tollison, 1990, p. 3).

These contentions do not accord with popular ideas of how politics should be conducted. For example, Robert Lane's survey of American attitudes found that self-interest was viewed as fruitful and beneficial within a market context, but as harmful and in need of constraint in a political one (Lane, 1986). On the other hand, public opinion tends also to be highly sceptical of the actual motivations and behaviour of politicians, bureaucrats, and so on. It is this 'credibility gap' to which public choice theory draws attention. The public's expectations of politics are held to be unrealistic. Public choice writers may have performed a service in seeking to expose some of the cant and self-interest which surrounds politicians' frequent appeal to the 'public interest', but their opposite assumptions may not be valid either.

Conflicting motives in politics

Altruism appears to be a much more widespread factor in political than in market behaviour. Certainly this is true of voting behaviour (see Chapter 2). In economic terms this means that an individual's own 'utility' is increased by contributing to the 'utility' of others, whether particular groups or the whole community. Public choice theorists explain this factor as a sort of 'psychic income', but this rather cumbrous explanation still weakens the concept of self-interest as a workable assumption. Self-interest can have little explanatory force unless it can be contrasted with altruistic behaviour.

Faced with much contrary evidence about political behaviour, Howard Margolis reverts to a dual explanation. Politics (he argues) exhibits both selfish and altruistic tendencies. However he retains economic methodology by suggesting that an individual will seek a balance between these tendencies and will experience diminishing utility if he or she becomes either too selfish or too altruistic (Margolis, 1982). There is some similarity here to Hirschman's suggestion of a public-private cycle, whereby individuals go into public life with altruistic motives or ideals, experience disillusionment, revert to the world of private interests and gain, find that in turn unsatisfying, and repeat the cycle (Hirschman, 1982). However, while Hirschman's account is at least suggestive about the existence of broad social cycles of political engagement and disillusion, Margolis' account offers a weak basis for predicting how individuals will behave in particular political situations.

Another important factor in political life, which does not have any parallel in the market-place, is the influence of ideology. Even if (very implausibly) ideology is defined or written off as simply a rationalisation of private self-interest, it dearly has the capacity to stimulate and energise political action, as subsequent chapters will demonstrate. Moral rules or standards also play an important part in political life. As Etzioni (1988, pp. 41-3) points out, moral norms differ basically from personal preferences, being generalised in rules, symmetrical in application and expressing commitments which often run counter to personal inclination. Thus they are not the same as a personal taste for altruism. Moral rules are relevant in all walks of life, including market behaviour. Their greater relevance to politics may reflect the fact that politics offers more opportunities for deviant behaviour (for example, behaviour which contradicts the intended function of some office) than does a properly policed market-place. In their critique of public choice theory, March and Olsen (1984, p. 21) stress the significance of 'normatively appropriate behaviour', meaning the rules and standards which guide political life. These rules and standards may be lax or firm. The laxer they are, the greater the scope for seeking private advantage by opportunistic behaviour.

Public choice theorists can offer two defences against these criticisms. One is to stress the instrumental character of much political behaviour. For example, whatever a politician's motives or ultimate goals, he needs to get elected to pursue them. Similarly, whether a bureau chief seeks only a bigger salary for himself or believes in the social value of his bureau's function, he will still want to maximise his bureau's budget and output (Niskanen, 1971). These arguments are not watertight, but they do draw attention to the importance of personal incentives and constraints in particular political or bureaucratic situations. The second defence is to claim that the self-interest assumption, while not always true, is prevalent enough to serve as a useful hypothesis for political analysis. Thus Brennan and Buchanan (1985) argue that the concept of 'homo economicus', while perhaps 'descriptively less relevant in the political setting than in economic markets' is still a 'useful fiction' for 'reasoned speculation' (1985, pp. 51; 65-6). The value of the public choice approach 'lies in its ability to generate testable hypotheses and predictions about political behaviour' which 'have been found to hold in a variety of cases' (Crain and Tollison, 1990, p. 4). Thus public choice defends its assumptions by their ability to yield significant and testable predictions about political behaviour. This test will be examined in the next chapter.

The rationality assumption

Public choice theory assumes that individuals are rational actors and choosers. It also assumes, as in the earlier quotation from Mueller, that a rational individual will be a utility maximiser. This concept is elusive. It is used as a basis for economic 'laws' of supply and demand; for example, if the price of some product increases because of higher costs, less of it will be demanded since consumers now find it relatively more expensive. This is not always true, however; for example, a higher price for some luxury article can occasionally stimulate more sales because of its snob value as conspicuous consumption. Snob value can be incorporated into the individual's 'utility function', but this concept becomes circular if it covers every choice which a consumer makes.

Equally the concept of maximisation is dubious. It is open to Herbert Simon's contention that most individuals and organisations are content to 'satisfice', that is to take the first course of action which seems good enough rather than to go on to find the best possible option (Simon, 1957). Simon reached this conclusion from discovering that organisations usually respond to a new situation or challenge by adapting an existing programme, not developing a new one. However 'satisficing' may also be rational when the costs of innovation are included. Public choice theorists use the costs of acquiring information as a rational explanation for some aspects of voting behaviour (see Chapter 2).

These considerations need not undermine the concept of economic rationality. The rationality of the market system depends upon the opportunities which it provides for rational choice, not upon the assumption that these will always be fully taken. There will always be individuals who are too lazy or o...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• 1 Economic Interpretations of Politics
• 2 Theories of Political Behaviour
• 3 The Creation of a New Ideology
• 4 Slimming the State
• 5 Privatising Welfare
• 6 Restructuring Government
• 7 Market Ideology and Public Policy
• 8 Public Choice and the Public Interest
• 9 Towards Better Government
• Bibliography
• Index of Names
• Index of Subjects