Thayer Watkins

Public Choice Theory
Public Choice Theory is a body of theory developed by James Buchanan and Gordon Tullock to try to explain how public decisions are made. It involves the interaction of the voting public, the politicians, the bureaucracy and political action committees. There are several segments to this theory.

The Irrationality of Voting for the Individual

Consider a benefit-cost comparison of voting and not voting made by an individual A. The outcome of an election may make a significant difference for individual A. Let us say that R is the money value of the benefit to individual of the election coming out favorable to A. But the election outcome, favorable or unfavorable, is most likely to occur regardless of whether A votes or not. The only time it would make a difference is if the election was decided by one vote. Let P be the probability of the all the other voters besides A being equally divided. P is likely to be a very small number. The expected benefit for A of voting is then the product of the benefit of a favorable result times the probability of the vote being tied without A's vote.

On the cost side there is the time and trouble of going to the polls. Additionally in many elections there is the cost of becoming informed about the issues or candidates. Let us assumed that the total cost of voting is C.

Economic rationality then dictates that individual A votes if and only if RP>C. In elections for political office candidates are usually driven to a centrist position so there is not likely to be a great deal of difference in the consequences for any voter of one candidate being elected rather than another. In other words, B probably will not be a large amount. Since P is likely to be a very small quantity the expected gain from voting is likely to be small.

It is therefore not surprising that the voter turnout for elections is very low. Public choice theorists then interpret the voting that does occur as evidence of irrationality of the public. There is an alternate explanation.

Institutional economics holds that people generally do not make benefit cost comparison for their choices. Instead the institutionalist economists hold that people's choices about what they eat, how they dress and so forth are dictated by their culture. This also applies to their voting behavior. Our culture says that it is a good thing to vote and we therefore vote. Probably microeconomics and institutionalist economics are partially right. There is probably a tug-of-war between individual selfishness and culturally prescribed behavior.

The Logic of Elections

In elections for candidates it is often said that voters are forced to vote for the lesser evil. In a two-candidate race that would probably be accurate, but when there is more than two candidates the strategy that is forced upon many voters is more complex. In such races the voter must access which candidate seems to be the "greater evil" and then vote for the candidate that is most likely to defeat that "greater evil" candidate. When the "greater evil" candidate is not likely to win this may involve voting for a favorite candidate. However, in a close race in which the "greater evil" candidate has a good chance of winning the voter may be driven to support a candidate which is not particularly to his or her liking simply to defeat a worser evil. Perhaps "voting for the less evil of the top two candidates" properly describes the strategy of elections.

The Existence of Social Welfare Functions

It would be nice if there was a method for acertaining the social preferences of the public in some scientific way and using the results to make decisions about social issues. Kenneth Arrow examined this matter a long time ago and proved a mathematical theorem, called Arrow's Impossibility Theorem, that says that in general it is impossible by any political means to derive such a social welfare function.

There is a modification of Arrow's result to the effect that if there is sufficient agreement among the preferences of the public then it is possible to derive objectively a social welfare function. Individual preferences do not have to be identical, although that of course would guarantee the existence of a social welfare function for the group. It has to be that there is enough common perception of the alternatives that they can be aligned in a spectrum and all individual preferences have the property of single-peakedness; i.e., there is some most preferred alternative and the preferences drop away monotonically from that most preferred alternative.

Governments as Special Interest Groups

Politicians and bureaucrats are supposed to be agents of the general public and act in its interest. This is but a special case of what is called the Principal-Agent problem; i.e., that agents unless it is in their self interest may not act in the interests of their principal. The key is to find some incentive scheme for the agents so that in pursuing their self interest the interest of the principal is enhanced. In business this is achieved by such schemes as compensating corporate managers with call options for the stock in the company so that managers in maximizing the value of the options automatically have to maximize the value of the stock thus benefiting the shareholders.

It is not so easy to find solutions to the principal-agent problem for governments. For a long time economic theory presumed that if there was a task that needed to done by the government that all that was required was to set up some government organization with responsibility for achieving that task. After the development of Public Choice Theory this is seen to be the ultimate in naiveté. There is abundant evidence that governments throughout history and throughout the world do not do what they are supposed to do. In some cases the government employees do not do anything useful. In others they will not do their job unless they are paid specifically to do a task. The English language calls this payment a bribe but this is a misnomer in that the word bribe is also used to designate a payment made to a government employee to do something illegal. The payment that is mentioned above is one made to get the government employee to do something that is not only legal but is also his or her job.

Spatial Models of Political Competition

Harold Hoteling in the 1930s developed a model of spatial economic competition. The example used by Hoteling was of ice cream sellers along a linear beach. Hoteling noted that if there are two sellers the socially efficient arrangement would be to have the sellers located at the points that are a quarter of the beach length from each end of the beach. He noted that competition would drive the sellers to locate at the midpoint of the beach, contrary to social efficiency.

Anthony Downs applied Hoteling's model to the competition of political parties and politicians in the political spectrum. Downs work suggested that when the political process is working properly the political candidates take the political position of the median voter. This opened up a line of analysis in which political choices were to be based upon the position of the median voter.

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