The Public Choice Revolution: Public Choice Has Demystified and Undeified the State
Lemieux, Pierre, Regulation
HALF-CENTURY AGO, AN ORTHODOX economist would approach the analysis of public policy with the following reasoning: Markets are efficient, or "Pareto-optimal," when perfect competition prevails. Pareto optimality means that there is no way to reallocate inputs or outputs to benefit some individual without harming another individual or, thought of another way, all gains from exchange have been realized. In many cases, such results are precluded by different types of "market failure" like macroeconomic imbalances, natural monopoly, or externalities (positive or negative). Positive externalities can be generated by "public goods," which provide benefits to everybody as long as the goods are produced and consumed by somebody. Government must intervene to correct market failures and maximize social welfare.
That was policy analysis before the public choice revolution. Today, the view is much different and begins with a simple question: How are collective decisions made? The answer, of course, is that the decisions are made by policymakers--politicians and bureaucrats--and by voters. The starting idea of public choice theory is disarmingly simple: Individuals, when acting as voters, politicians, or bureaucrats, continue to be self-interested and try to maximize their utility.
Excluding immediate precursors like Anthony Downs' 1957 book An Economic Theory of Democracy and Duncan Black's 1958 book The Theory of Committees and Elections, the foundation of the public choice school can probably be dated to the 1962 publication of James Buchanan and Gordon Tullock's The Calculus of Consent. Many well-known public choice economists were congregating around Buchanan and Tullock at Virginia Tech at that time: Geoffrey Brennan, Robert D. Tollison, Richard E. Wagner, Winston Bush, and others. For his seminal work in public choice, Buchanan was awarded the 1986 Nobel Prize.
In a narrow sense, public choice analysis is concerned with "state failures." Manned by self-interested actors on a "political market," the state is often incapable of correcting market failures--or, at least, of correcting them at a lower price than the cost of the original market failures themselves. In a wider sense, public choice is, as Dennis Mueller writes in his book Public Choice III, "the economic analysis of political institutions." In this broad sense, virtually all economists who study government intervention have now become public choice economists.
Why do we need the state to provide certain goods and services? Why not just have anarchy and let everyone fend for himself either individually or as a member of a private group? The subtitle of James Buchanan's seminal 1975 book The Limits of Liberty summarizes where the individuals presumably want to be: "Between Anarchy and Leviathan." In the mainstream public choice perspective, the state is necessary to stop the Hobbesian "war of all against all." As Mancur Olson puts it, a "sedentary bandit," the state, generates more prosperity than the "roving bandits" it puts out of business.
Once it is admitted that the state is necessary, positive public choice analyzes how it assumes its missions of allocative efficiency and redistribution. Normative public choice tries to identify institutions conducive to individuals getting from the state what they want without being exploited by it.
The contractarian approach defended by many public choice theorists is part of the normative leg of public choice theory. It distinguishes a "constitutional stage" in which, conceptually, individuals unanimously accept the rules of the political game, and a "post-constitutional stage" in which the rules of day-to-day politics apply. This latter stage typically involves decisions based on majority approval, not unanimous agreement.
CYCLING Why would individuals agree to have collective choices made by majority rule? There is only one way an individual can be sure not to be exploited by a majority: have veto power over any collective choice or, in other words, require that all decisions be approved unanimously. …