Public Choice Theory

1. Public Choice Theory • James M. Buchanan,  • Alfred Nobel Memorial Prize winner in Economic Sciences in 1986. • Professor Emeritus of Economics at George Mason University and Philosophy at Virginia Polytechnic Institute and State University.

2. Public Choice Theory • He is best known for developing the “public choice theory” of economics, which changed the way economists analyze economic and political decision-making.

3. Public Choice Theory • Nations emerging from World War II, including the Western democracies, were allocating between one-third and one-half of their total product through political institutions rather than through markets.

4. Public Choice Theory • Initially, the work of economists in this area raised serious doubts about the political process. • Kenneth Arrow and Duncan Black proved that democratic state by majority rule, could not work to promote any general or public interest.

5. Public Choice Theory • The famous “impossibility theorem,” as published in Arrow’s book Social Choice and Individual Values (1951), stimulated an extended discussion. • The suggestion of this analysis was that majoritarian democracy is inherently unstable.

6. Public Choice Theory • He entered the discussion with a generalized critique of the analysis generated by the Arrow- Duncan Black approach. • Aren’t “majority cycles” the most desirable outcome of a democratic process? • Any attainment of political equilibrium via majority rule would amount to the permanent burden on the outvoted minority.

7. Public Choice Theory • His concern, then and later, was the prevention of discrimination against minorities rather than stability of political outcomes. • The question, from an economist’s perspective, was how to obtain a combination of efficiency and justice under majority rule.

8. Public Choice Theory Meaning: • Application of economics to the analysis of non-market decision-making involving public goods, externalities and income distribution. • Application of economics to political science. • Economic analysis of politics.

9. Public Choice Theory • Economics that studies the way that government makes decisions viz., level of taxes, public consumption and the size of transfer payments • It focuses on the problem of aggregating individual preferences to maximize a social welfare function. • Joseph Schumpeter was the pioneer in this area.

10. Public Choice Theory • Followed by Antony Downs advanced this theory in the private sector, consumers tend to maximize utility and producers maximize profit. • Like that politicians tend towards or set economic policies in order to be re-elected. • This theory was further advanced by J.M. Buchanan. • Leader of the new institutional economists in applying the economic way of thinking to the political process.

11. Public Choice Theory • In 1962 J.M. Buchanan and Gorden Tullock wrote a book on ‘The Calculus of Consent’. • In this book, traditional analysis of political choice has individuals seek not to maximize his own utility, but to find the “public interest” or “common good” and the shift of an activity from the realm of private to that of social choice involved the replacement of the motive of private gain by that of social good.

12. Public Choice Theory • In the modern politics, people do not change when they move from their own private realm to that of politics. • Individual citizens, government officials (bureaucrats) and politicians are guided by the self-interest. • Adam smith’s invisible hand is also at work in the political system. • Each individual attempts to further his or her own interests in political activities. • Parties formulate policies in order to win elections, rather than win elections in order to formulate policies. – Anthony Downs

13. Scope of public choice: The theory of public choice covers a wider range of issues such as the whole gamut of public administration, property rights, the election process, voter behaviour, the role of independent judiciary, judicial activism, behaviour of legislators and government.

14. Political Decision Making: • Decisions are made by elected representatives are based on set of rules (constitution) and voting system. Players of political decision making; i.Voters: like consumers in the market economy. They tend to vote for candidates who favour policies that will further their own individual interests. However, voters much less informed about political decisions than about their individual market decisions. The lack of information is referred to as rational ignorance.

15. Players of political decision making; • Consumers have strong incentive to gain good information about product. Exa. car or cell phone. • Voter have little incentive to gain good information about candidates. They are rationally ignorant who may be called as irrational voters. • Consumers compare prices to income and only buy those products they are able to pay for. • Voters plan on other taxpayers paying for the voters’ wants. • Thus the benefits (dams, roads) of political goods are visible but costs are usually hidden.

16. Players of Political Decision Making ii. Politicians or Elected Representatives like the firm in market economy; they are the entrepreneur who interpret the public’s demand for collective goods and also find ways of supplying them. • Politicians seeks to maximize chance of reelection. They are vote maximizers, just as firms are profit maximizers.

17. Players of Political Decision Making iii. Bureaucrats: (Administrative officers) • Bureaucrats are the government agencies that carryout the policies enacted by government. • Earn salary, promotions, and benefits • Gain support from colleagues • Influence decisions • Maintain power

18. Players of Political Decision Making iv. Special- Interest Groups: • Between voters and politicians are interest group. They are organized to lobby for a specific set of interests or issues. These pressure groups or organized lobbies seek to elect politicians who support their cause.

19. Players of Political Decision Making • Tariffs on steel • Rent controls in some cities • Sugar quotas • Milk prices • Farm Subsidies • In India, the farmer’s lobby having great influence over Member of Parliament.

20. Public Choice Theory • “Like the game of markets, the game of politics must match up people’s demands for collective goods with the economy’s capability to supply them.” • The major difference is that the central players of politics – politicians – are primarily concerned with winning elections, while the major players in markets – business firms – aim to earn profits.

21. Mechanism for Public Choice: • Political system of a country makes collective decision. • In a democratic country, decision process is based on voting system. • Public choice is the process by which preference of individuals are combined into collective decisions. • In democratic societies the individualistic importance of democracy is expressed in ‘one person, one vote’ system. • But the real problem in public choice is to aggregate millions of opinions into a single decision.

22. Mechanism for Public Choice: • In India there are about a billion views about any issue. For example, about automic weaponisation. • Since, political choice is indivisible, these millions of opinions have to be expressed in only one collective decision – to weaponise or not to weaponise. • There is an element of coercion in such decision. • In the market economy, private choice is not coercive – my choice to eat rice does not affect your consumption decision.

23. Collective Decision Making: • Benefits of public goods for individual consumers are the crucial problem for the government. • But for small groups through mutual consultation it is possible to determine what public good to produce and what the contribution of each tax-payer consumer will be.

24. Collective Decision Making: • This is applicable in the case of services provided by village panchayats and municipalities. But less practical in the case of large groups involving millions of consumers. Another problem is the contribution of each taxpayer is very small, almost nil, to the total cost and mutual consultation among such a large group is not possible. • In such situation individual preferences are to be translated into budget determination through the political process and they are recorded as individual preferences through voting.

25. Conclusion • Let us be careful not to claim too much, however. Public choice did not emerge from some profoundly new insight, some new discovery, some social science miracle. Public choice, in its basic insights into the workings of politics, incorporates an understanding of human nature that differs little. The essential wisdom of the 18th century, of Adam Smith and classical political economy was lost through two centuries of intellectual folly. Public choice does little more than incorporate a rediscovery of this wisdom and its implications into economic analyses of modern politics.