Fundamentals of Public Choice

Created by James Caton |

Does a politician become more benevolent upon election? As humans, do we change our behaviors upon being endowed with the responsibility of the public’s trust?

These are the questions confronted by Nobel Laureate James Buchanan’s public choice theory. His fundamental proposition: treat humans as self-interested actors, whether they operate in the marketplace or in the sphere of public policy.

Just as it is fair to treat decisions at firms as aimed at maximizing revenues, so too is it fair to treat politicians as attempting to maximize their chances of reelection each year. Politicians may attempt to accomplish other goals, but if these other goals threaten reelection, they have an incentive to forgo their accomplishment to ensure their careers survive into the next election cycle.

In his summary work, Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications, Buchanan describes public choice theory as “the economic theory of politics.”[1] But public choice theory is more than just the application of incentives to analyze politics. James Buchanan notes, “As we depart from the conceptualized ideal [of participants whose power is equal] . . . elements of power and potential coercion arise, and behavior becomes amenable to analysis by something other than catallaxy [i.e., market exchange].”[2]

Public choice considers politics by understanding economic incentives and political structure. As political actors accumulate power in hierarchical structures of governance, whether as representatives in national politics or as leaders in business or non-profit organizations, the incentives faced by themselves and those around them change.

You may recall Lord Acton’s maxim that “power tends to corrupt and absolute power corrupts absolutely.” Public choice affirms that institutional incentives may promote such nefarious results. It makes no claim concerning the disposition of particular actors, allowing “for saints as well as sinners,” but noting that action of the former sort is not well incentivized to the degree that power accumulates in an institution and its offices.[3]

Political leaders will find that they can use the resources made available by their position to advance certain goals at the expense of others that they do not favor. They may build a faction – a group consisting of colleagues and associates they manage – in order to increase support for political action that appears to benefit the faction and to further secure their own power. It is even possible for their actions to damage the very institutions from which they draw power.

There exists a distinction between markets governed by private property and systems where control of resources is dependent on one’s position and the positions of political allies within the system of governance. In the first system, individuals are afforded equality of legal stature. The decision of actors in this system are guided by signals from profit and loss. If an entrepreneur fails to accumulate a greater value of resources in the course of doing business, the market signals to that person that he or she is not, on net, creating value for others in the system. The profit and loss mechanism signals to entrepreneurs whether or not they are creating value for consumers.

In reference to the work of Vilfredo Pareto, Richard Wagner, a student of Buchanan, notes that markets promote logical action as they systematically coordinate social activity in service of consumers.[4] In distinction, political systems, which are defined by legal hierarchy, tend to promote non-logical action. They tend to promote action that is not guided by some consistent criterion.

Action from a political system does not serve any clear category of actor other than the faction or set of factions who gain its favor through deliberation and political lobbying. In the market, winners are defined by an actor’s ability to efficiently serve the demands of consumers. In politics, success is defined by the ability to curry favor with decision-makers and parties that can reify one’s power within the system.

Public choice empowers us to consider two systems of organization that describe the world in which we live. Typically, a mixture of these systems is at play, as Buchanan reflects:

There are no lines to be drawn at the edges of ‘the economy’ and ‘the polity,’ or between ‘markets’ and ‘governments,’ between ‘the private sector’ and ‘the public sector.’ Economists need not restrict their inquiry to the behavior of persons within markets (to buying and selling activities as such). By a more-or-less natural extension on the catallactic approach, economists can look on politics, and on political processes, in terms of the exchange paradigm.[5]

Buchanan’s system indicates that market exchange represents an ideal to strive for if “coercion is valued negatively. . . This implication provides the normative thrust for the proclivity of the public choice economist to favor market-like arrangements where these seem feasible.”[6]

Buchanan did not envision a utopia. The political realm and the realm of economic incentives are inherently entangled. Buchanan recognized that we are not left with a discrete choice between markets and government. Rather, we are left to straddle a path Between Anarchy and Leviathan.[7]

Meet the Author

James Caton is a fellow at the Center for the Study of Public Choice and Private Enterprise (PCPE) and an assistant professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.

[1] James Buchanan, “Politics without Romance” in The Logical Foundations of Constitutional Liberty, 1999, p. 45

[2] James Buchanan, “The Public Choice Perspective” in Politics as Public Choice, 2000a, p. 18

[3] Buchanan, “Politics without Romance”, p. 49

[4] Richard Wagner, Politics as a Peculiar Business”, 2016.

[5] Buchanan, “The Public Choice Perspective”, 2000a, p. 17

[6] Ibid., p.19

[7] James Buchanan, The Limits of Liberty: Between Anarchy and Leviathan, 2000b)

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