Primer Parcial - Public Choice
Public Choice: Definition and Methodology
Public Choice (PC) applies the methods of economics to analyze political decision-making.
PC examines how individuals (voters, elected officials, or government bureaucrats) make their own individual decisions within the political process.
PC analyzes how these individual decisions are aggregated to produce public policy outcomes.
The PC approach focuses on how political decision-making actually takes place.
This contrasts with traditional public policy analysis, which often describes the way an ideal political decision-making process might work.
PC vs. Traditional Economic Analysis
Traditional economic analysis typically identifies market failures (e.g., externalities, public goods, monopolies, informational asymmetries).
It then derives optimal policies that would result in a theoretical ideal outcome.
PC argues that comparing the real-world economy to a theoretical ideal is misleading.
The theoretical optimum is rarely met in reality because of two major problems: information and incentives.
Government intervention often fails to match the theoretical ideal, potentially doing more harm than good.
Public Choice looks at what real-world governments do in practice, using the same economic methods applied to evaluate market activity.
It replaces the wishful thinking that government could implement optimal policies with an economic analysis of how government actually operates.
Core Elements of the Public Choice Perspective
Wicksell as the Precursor
Knut Wicksell is considered the most important precursor of modern public-choice theory.
Wicksell's message was that economists should stop giving policy advice as if employed by a benevolent despot.
Instead, economists should examine the structure (the rules or constitution) within which political decisions are made.
Wicksell established three constitutive elements that form the foundations of PC:
Methodological individualism.
Homo economicus.
Politics-as-exchange.
Methodological Individualism
Individuals are the fundamental evaluating, choosing, and acting units.
Economists focus on individual choices and how they are translated into a complex outcome pattern.
The interest of a group of people is nothing more than the individual interests of everyone in the group.
PC sets aside the notion of a public interest because it is misleading and often implies that benefits to some offset costs imposed on others.
Individuals engage in collective action to satisfy their own individual wants or further their individual interests.
Homo Economicus
The Homo Economicus postulate models individuals as seeking to further their own self-interest.
The person choosing political candidates is the same person choosing goods in a market.
Differences in predicted results between markets and politics stem from differences in institutional structures (rules), not from a change in individual motives.
Politics as Exchange (Contractarianism)
Politics is viewed as a complex exchange structure among individuals.
In this structure, persons seek to secure collectively their own privately defined objectives that cannot be efficiently secured through simple market exchanges.
This view counters the emphasis on politics as pure power.
The political process operates on an ultimately voluntary basis for agreement.
Individuals acquiesce in the coercion of the state (taxes and regulations) only if the ultimate constitutional "exchange" furthers their interests.
Catallaxy (Economics as Exchange)
The Catallaxy approach emphasizes the process of exchange and voluntary agreement among persons, rather than focusing solely on value maximization or efficiency.
It promotes the principle of spontaneous order.
Complex exchange goes beyond two-person barter and includes all processes of voluntary agreement among persons.
Market vs. Government (Collective) Choice
Differences in Resource Allocation
Governments allocate a substantial share of resources (e.g., over a third of economic activity in the U.S.).
Market allocation:
Individuals choose for themselves how to allocate their consumption dollars.
Transactions are voluntary, occurring only if both buyer and seller agree.
All consumers get what they, individually, choose.
Government (Collective) allocation:
A single choice is made for all individuals.
Nobody gets exactly what he or she wants.
Taxes and regulations are imposed on citizens by force (coercion).
The threat of force stands behind government activity, even for citizens who like government services.
Government activities are the result of collective choices by individuals (as voters, lobbyists, and officials).
Many activities (e.g., roads, law and order, water supplies) would be difficult to undertake through individual markets or transactions.
Rules, Institutions, and Constitutional Political Economy (CPE)
The Necessity and Function of Rules
Rules are fundamentally required because without them, we would surely fight.
Without rules, life would be the Hobbesian jungle: "solitary, poore, nasty, brutish, and short".
Rules define the private spaces within which each person can carry on their activities.
The same individuals, motivations, and capacities will generate quite different aggregate outcomes under differing sets of rules.
If rules influence outcomes, the study and analysis of comparative rules and institutions becomes the proper object of attention.
Constitutional Political Economy (CPE)
CPE is the area of inquiry focused on examining rules, institutions, and how individuals interact.
It addresses the constitutional challenge of designing a government strong enough to protect people's rights but constrained to prevent it from becoming a Leviathan that violates those rights.
Constitutional analysis examines the way groups collectively choose their institutional constraints.
Rules and Outcomes
Rules constrain the set of feasible social outcomes.
It is analytically misleading to select an ideal outcome without considering the institutional constraints required to achieve it.
The process by which outcomes are generated is intrinsically relevant for normative evaluation.
Adherence to rules provides information about the normative status of the outcome.
Example: An allocation resulting from free exchange is presumed efficient (satisfies the Pareto test).
Distinctions in Rules
There is a crucial distinction between the rules of the game (the framework) and the plays of the game (actions taken within those rules).
Two levels of choice must be separated:
Choice of strategy (play) within defined rules (e.g., a legislator voting on a policy).
Choice of the rules themselves (constitutional level).
In the sociopolitical context, the relevant object for reform is the constitution of policy (the rules) rather than the policy itself (strategies of play).
Rules of the Road (Coordination and Information)
Rules of the road allow persons to pursue separate and independent courses without conflict.
They provide predictability about the behavior of others, acting as informational boundaries.
In a coordination game (like choosing which side of the road to drive on), adopting any rule provides information and resolves conflict.
The temptation to defect from the rule is not as omnipresent as in the general Prisoners' Dilemma.
Stability is required for rules to function; continual change destroys the information they provide.
This suggests a natural predilection toward conservatism in the constitutional perspective.
In constitutional reform, the high transitional costs of changing stable rules must be recognized.
Rules of the Market Order
Market processes require foundational rules (e.g., property rights and contract enforcement).
The Tragedy of the Common is a failure of rules (the absence of property rights), not a failure of the market process itself.
Reform of inefficient outcomes occurs through the reform of the rules (e.g., establishing private ownership), not by direct manipulation of outcomes.
Market rules mobilize mutual gains from cooperation through the division of labor (Smithian vision).
The choice of market rules is nonteleological because the precise nature and magnitude of the resulting beneficial outcomes are discovered only as they emerge (ex ante unknown).
Democratic Competition and Voter Aggregation
The Political Spectrum and the Median Voter
Political views are often represented on a left-to-right continuum.
Left (Democrats): Favor less government control on personal issues, but bigger government with higher taxes, more economic regulation, and more redistribution.
Right (Republicans): Tend to favor more fiscally conservative government, but one that prefers more government control over lifestyle choices.
Most voter preferences tend toward the center (approximating a normal distribution).
The median voter (M) is the voter located exactly in the middle of the distribution, with just as many voters to the left as to the right.
The historical reference to the "silent majority" refers to the median voter.
Electoral Competition and Convergence
Under majority rule voting, the candidate who wins the median voter's vote will win the election.
Political competition causes candidates' platforms to converge toward the median.
As one candidate moves closer to M, the other must follow to avoid losing the median vote.
This process tends to make candidate platforms look more alike.
Extreme candidates cannot win general elections because their platforms are too far from the median voter.
Examples: Barry Goldwater (1964) and George McGovern (1972) lost by large margins.
Primaries and General Elections
Candidates must first win primary elections within their own parties.
The distribution of voters in primaries is substantially different from the general election.
The median voter in the Democratic primary is much more to the left.
The median voter in the Republican primary is much more to the right.
Once nominated, candidates must adjust their platforms and move toward the median voter of the general election to avoid losing by a landslide.
Viability of Third Parties
Electoral systems where the candidate with the most votes wins typically result in a two-party country.
Third parties are not viable because they split votes primarily from one of the two existing major parties.
This splitting of votes often causes the major party on that side of the spectrum to lose.
Example: Ross Perot (1992) split the right-wing vote with George H.W. Bush, allowing Bill Clinton to win the presidency.
Government Failure, Incentives, and Rent Seeking
Incentives and Policy Implementation
In practice, policymakers may lack sufficient information to identify optimal policies.
Even if optimal policies were known, policymakers often do not have the incentive to implement them.
Example: Incumbents have an incentive to implement overly stimulatory policy prior to elections to boost reelection chances, potentially leading to inflation or excessive budget deficits (the Political Business Cycle).
Concentrated Interests and Rent Seeking
Government failure arises because concentrated interests tend to have a disproportionate influence over public policy.
Interest groups and businesses hire lobbyists to appeal directly to elected officials.
It is easier to organize a small group (concentrated benefits) than a large group (dispersed costs).
Rent seeking is the competition among interest groups for government benefits.
This activity involves expending real resources (e.g., lobbyists, attorneys, offices) to obtain government-created wealth transfers.
These expended resources add nothing to economic output and represent a welfare cost.
Regulatory capture occurs when regulatory agencies, created to benefit the public, end up furthering the concentrated interests of the firms they regulate.
Bureaucratic Incentives
Government bureaucracies have incentives that differ from private firms.
Bureaucrats are often characterized as budget maximizers.
A growing budget can provide job security, promotions, pay increases, power, and prestige.
Unlike private firms, government agencies have no incentive to solve the problems they were created to address, as doing so would eliminate the need for the agency.
If government agencies fail, they may receive a larger budget to "try harder," whereas private firms would go out of business.
Constitutional Reform and Liberal Order
The Constitutional Mandate
Constitutional constraints (written, judicial, or conventional) form the framework for elections and public policy formation.
The ultimate goal of constitutionalism is equality before the law, greatest possible liberty, economic well-being, and peaceful cooperation of all people.
Choice among rules is predicted to be based on generalizable criteria of fairness because the rules operate over a long sequence of plays where individual fortunes are uncertain.
Constitutional Design vs. Policy Reform
The focus for improvement must be on reform in the rules (institutional change), not improvement in strategies of play within existing rules (policy itself).
Wicksell’s ideal of unanimity (or near-unanimity) for collective choice serves as the political analogue to freedom of exchange in markets.
The unanimity criterion can be applied to the selection of constitutional rules themselves, rather than to every specific policy decision.
Reforms must be practical, designed to be workable within the politics inhabited by ordinary people, not just appropriate for idealized, omniscient, and benevolent beings.
Protecting the Market Order
The market operates through spontaneous order (order without design).
The failure of socialism was primarily a scientific mistake, stemming from a misunderstanding of how markets create value using decentralized, local knowledge.
Markets require a pro-competition legal framework (not laissez-faire without rules) including strong property rights, contract enforcement, and rules against monopoly.
The Danger of Unconstrained Democracy
Unconstrained democracy can be dangerous because voters and interest groups demand special favors, potentially leading to the state violating individual rights.
Distributional politics leads to rent-seeking and a churning state (constant fighting over redistribution), which can damage markets.
Constitutional safeguards are necessary to limit rent-seeking and protect markets from political encroachment.
Liberal democracy is only sustainable if reined in by constitutional limits.