The Public Choice Revolution

Randall G. Holcombe examines why the public choice revolution has been only partially successful.Around the beginning of the twentieth century, the study of political economy divided into the distinct disciplines of political science and economics. From a public policy standpoint, economists viewed their role as deriving and explaining optimal policies. The efficient allocation of resources – Pareto optimality – was the benchmark by which resource allocation was evaluated, and anything short of that was called a market failure. After economists derived optimal policies to mitigate market failures, an analysis of the implementation of those policies fell to political scientists.

The public choice revolution, which began in earnest in the 1960s, reconnects economics and political science by using economic methods to analyze political decision-making. Rather than just deriving optimal policies and assuming they can be implemented, public choice uses the same assumptions about institutions and individual behavior that economists use when analyzing market behavior to evaluate whether those optimal government policies can be implemented, or whether the political process might lead to a government failure. Just as markets can fail to allocate resources efficiently, so can governments.

Sometimes political decision-making leads to a less-than-perfectly efficient allocation of resources because the information necessary to reach an optimum is not available to decision-makers. Economists can derive, in theory, the optimal tax to correct for an externality, or the optimal quantity of a public good, but in practice, the information necessary to find these optimal outcomes is not available to policymakers.

Even if all the necessary information is available to policymakers, they may have the incentive to pursue less-than-optimal polices.

For example, the general public and the news media are well aware that sometimes elected officials will support sub-optimal policies that enhance their chances of reelection despite recognizing that those policies are not in the public interest. Public choice takes into account that political decision-makers consider their own interests when making decisions, just as people do when making decisions in the marketplace.

Public policy should not be evaluated by comparing a theoretical optimum with real-world market allocation. Rather, the real-world performance of the market should be compared with the real-world performance of the political process. Sometimes government failures will be worse than market failures, and in all cases policy recommendations should take into account the incentives of policymakers and the information available to them.

The public choice revolution which began in the second half of the twentieth century has been only partially successful. As an academic enterprise, public choice has been completely accepted within economics and political science. Several academic journals specialize in publishing public choice research, and public choice articles appear in the top mainstream journals in economics and political science. James Buchanan won the Nobel Prize in economics in 1986 for his work establishing the subdiscipline, and more recently, Elinor Ostrom, the only female Nobel Laureate in economics, shared the prize in 2009 for her work analyzing collective decision-making. The public choice revolution has succeeded in establishing public choice as a field of scholarly inquiry.

The public choice revolution has been only partially successful, however, because while work in the area is readily accepted as the appropriate way to analyze the political decision-making process, it is rarely applied to areas of economic analysis beyond just analyzing the process itself. When economists analyze actual public policies, they still (with rare exceptions) derive policy prescriptions that are in theory optimal, with no analysis of whether the recommended policies could be implemented by actual real-world political processes.

In macroeconomics, for example, stabilization policy examines how an economy can be managed to maintain full employment with low inflation. Economists develop models that derive optimal policies, but rarely consider whether policy makers have the information necessary to implement these policies, and if they do, whether they have the incentive to do so. There is a literature on political business cycles that applies public choice theory to stabilization policy, but the fact that it has had so little impact on macroeconomics illustrates that public choice has had a minimal impact in this area of public policy.

Similarly, the theory of taxation is dominated by optimal tax theories that derive policies that, in theory, can minimize the welfare loss of taxation or maximize some social welfare function without considering whether, in practice, policy makers have the information and incentives to implement those theoretically optimal policies. This is the case throughout every subfield in academic economics. The public choice revolution has been only partially successful, because while it has succeeded in establishing public choice as a legitimate field of academic inquiry, it has had a minimal impact on policy analysis beyond the narrow bounds of the field.

The tenets of public choice apply to every public policy issue.

It is insufficient, and often harmful, to recommend theoretically optimal public policies that the political process cannot implement in practice. Doing so leads policy makers toward designing programs that can create more harm than good. Those who make policy recommendations should only do so if the recommended policy goals can actually be achieved through the real-world political environment within which they will be implemented. Any academic analysis of public policy is not complete until its political feasibility is evaluated. Until this is the norm in public policy analysis, the public choice revolution can only be called a partial success.

Randall G. Holcombe is DeVoe Moore Professor of Economics, Florida State University, US.

The Advanced Introduction to Public Choice by Randall G. Holcombe is out now.

The book is also available on inspection for course instructors.