Jason Soon links to an excellent historical summary of public choice theory by its founder James Buchanan. As one of the principal components of the group of ideas usually called “neo-liberalism” or “economic rationalism”, public choice theory remains an important influence on thinking about the respective roles of government and markets/private enterprise. Jason extracted a long passage that he regards as the “money quote” of Buchanan’s essay. I found this extract more illuminating:
Here it is necessary to appreciate the prevailing mindset of social scientists and philosophers at the midpoint of the 20th century when public choice arose. The socialist ideology was pervasive, and was supported by the allegedly neutral research programme called ‘theoretical welfare economics’, which concentrated on identifying the failures of observed markets to meet idealised standards. In sum, this branch of inquiry offered theories of market failure. But failure in comparison with what? The implicit presumption was always that politicised corrections for market failures would work perfectly. In other words, market failures were set against an idealised politics.
Public choice then came along and provided analyses of the behavior of persons acting politically, whether voters, politicians or bureaucrats. These analyses exposed the essentially false comparisons that were then informing so much of both scientific and public opinion. In a very real sense, public choice became a set of theories of governmental failures, as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or, as I put it in the title of a lecture in Vienna in 1978, public choice may be summarised by the three-word description, ‘politics without romance’.
The public choice research programme is better seen as a correction of the scientific record than as the introduction of an anti-governmental ideology. Regardless of any ideological bias, exposure to public choice analysis necessarily brings a more critical attitude toward politicised nostrums to alleged socioeconomic problems. Public choice almost literally forces the critic to be pragmatic in comparing alternative constitutional arrangements, disallowing any presumption that bureaucratic corrections for market failures will accomplish the desired objectives.
Personally, I find public choice theory a useful set of ideas: there is indeed such a thing as “government failure” as well as “market failure”. The slightly later public choice notion of demands for government intervention as “rent-seeking” behaviour is also useful, though perhaps more as a pejorative term than a serious analytical construct. Individuals or interest groups might well be engaging in “rent-seeking”, in the sense that they hope to gain some personal or group advantage from the policy reform they advocate. But so what? The real question is whether their advocated policy will deliver net benefits to the community, and labelling conduct as “rent-seeking” doesn’t assist in answering it.
However, the main problem with public choice theory arises with those neo-liberal adherents who elevate the insights of public choice theory to the status of dogma or conclusive presumption: markets good, government bad. The blogosphere’s own John Quiggin dealt with this phenomenon in a 1999 essay published at Online Opinion:
However, while those who identified themselves as opponents of economic rationalism agreed that economic rationalism involved strict opposition to government intervention and a belief in the inherent superiority of private enterprise, there was disagreement among those who regarded themselves as economic rationalists. Some ‘hard-line hawks’ agreed with the view that economic rationalism implied support for laissez-faire, but others adhered to the older definition, claiming that economic rationalism was nothing more than the application of mainstream economics to policy issues.
These ambiguities were exploited by some defenders of economic rationalism, such as James, Jones and Norton (1993), when their policy program came under attack during the 1989-90 recession. When responding to critics such as Pusey (1991), Toohey (1994) and Langmore and Quiggin (1994), they claimed that economic rationalism merely means policy formulation based on rational economic analysis, which, presumably, no-one could disagree with. The rest of the time, they assumed that economic rationalism implies support for radical free-market reform.
John Quiggin advocates an approach (and suggests a conclusion) that essentially coincides with my own position:
In philosophical terms, the opposite of rationalism is not irrationalism but empiricism, that is, a willingness to form beliefs on the basis of experience rather than from a priori deduction. Empirical evidence never yields the dogmatic certainty that accompanies logical deduction. I interpret the economic experience of the last two centuries to show that an unregulated market economy is inherently unstable and that a mixed economy, with an appropriate allocation of productive activity between the public and private sectors yields outcomes superior to those generated by either of the polar alternatives – laissez-faire capitalism and comprehensive socialism. …
Empiricism is consistent with an approach to policy-making based on willingness to adjust the role of the public sector in the light of new experience and of innovations in technology and policy design. Such an approach is more rational than economic rationalism.
Buchanan acknowledges but fails to deal convincingly with one of the main criticisms of both public choice theory and economic rationalism in general, namely that conceiving man as nothing more than homo economicus, who will generally respond predictably to economic incentives and disincentives, is a grossly inadequate, impoverished description of human behaviour and motivations. Buchanan puts it like this:
The economic model of behaviour, even if restricted to market activity, should never be taken to provide the be-all and end-all of scientific explanation. Persons act from many motives, and the economic model concentrates attention only on one of the many possible forces behind actions. Economists do, of course, presume that the ‘goods’ they employ in their models for predicting behaviour are relatively important. And in fact, the hypothesis that promised shifts in net wealth modify political behaviour in predictable ways has not been readily falsifiable empirically.
Public choice, as an inclusive research programme, 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. The public choice theorist should, of course, acknowledge that the strength and predictive power of the strict economic model of behaviour is somewhat mitigated as the shift is made from private market to collective choice. Persons in political roles may, indeed, act to a degree in terms of what they consider to be the general interest. Such acknowledgment does not, however, in any way imply that the basic explanatory model loses all of its predictive potential, or that ordinary incentives no longer matter.
It may be that more recent developments in economic theory, such as the application of game theory (which I don’t even begin to understand) to human behaviour in an economic context may have more promise than the somewhat simplistic public choice/economic rationalist conception of motivation and response. Personally, I think we should avoid privileging economics as the pre-eminent discipline in formulation of public policy. Philosophy, psychology, history, jurisprudence, and the “hard” sciences contain as many valuable insights as economics. Just as we will do better to reject automatic assumptions that either market or government-based solutions are necessarily superior, so we might well achieve more durable, and ultimately more satisfying, public policy choices by rejecting the economists’ territorial claims and allowing an equal place at the table for the full range of intellectual disciplines.