Public Choice Theory and Economic Policy
General Analysis of Public Choice Theory
This theory replaces the traditional focus on societal welfare maximization in economic policy with an examination of individual utility maximization by politicians and bureaucrats. It suggests that public officials prioritize their own welfare over that of society.
Background
- Schumpeter: Individuals in elected office are driven by both public and private motivations, seeking to serve others while also using them for personal gain.
- Downs: A political market exists where votes and policies are traded. Citizens exchange their votes for policies, receiving benefits from public decision-makers.
- Peacock: The policy implementation market is crucial. Agents’ actions are influenced by political measures, leading to an adjustment process to government requirements.
Features of Public Choice Theory
- Focuses on individual and group decisions in political transactions.
- Emphasizes methodological individualism over holism.
- Assumes rational actors seeking to maximize individual welfare.
- Strong interdisciplinary component.
- Operates in positive and normative fields.
Primary Political Market
Politicians implement policies in exchange for votes, creating a “state store” where policies cater to the average voter.
Policy Implementation Market
Politicians’ actions affect economic agents, whose performance is influenced by laws, leading to the “capture of the Lawgiver.” Conversely, “capture of the legislature” occurs when pressure groups seek benefits from government actions.
Public Policy, Democratic Elections, and Cycles
Electoral Theory
Foundations
- Existence of an electoral policy cycle.
- Rational voter demand.
Main Ideas
- Voters prioritize economic growth and improvements in inflation and unemployment.
- Voters exhibit myopic behavior, focusing on short-term outcomes.
- Political parties solely aim to win elections.
- Expansionary policies are implemented before elections.
Partisan Theory
Foundations
- Partisan political-economic cycles.
- Strong ideological behavior.
- “Shortsighted” voters.
Main Ideas
- Left-wing politicians favor expansionary policies, while conservatives prefer restrictive measures.
- Left-leaning politicians prioritize unemployment and growth, while conservatives focus on price stability.
- Voters misjudge timing, focusing on the short term.
Rational Electioneering Theory
Bases
- Asymmetric information and rational voters.
- Budget cycles.
Main Ideas
- Voters are rational but have delayed learning about government inflation.
- Political-economic cycles are fiscal or monetary.
- The government seeks efficiency and impact in pre-election policies.
Rational Partisan Theory
Bases
- Rational voters maximizing utility.
- Policy impact depends on the ability to surprise and unanticipated government changes.
Main Ideas
- Contingencies have real effects on growth and employment.
- Traders are rational, leading to temporary policy effects until adjustment occurs.
- Combines economic policy uncertainty with rational expectations theories.
- Political parties develop policies according to their ideologies, but effects are temporary.
Bureaucracy and Regulation
Individuals involved in public policy include politicians and bureaucrats. This theory is based on methodological individualism and self-oriented behavior. Bureaucracy plays a role in economic policy-making by providing information and implementing measures. A domestic market exists between bureaucrats and politicians, where bureaucrats provide information to help politicians win or stay in power, and politicians create or enhance jobs for bureaucrats.
Types of Bureaucrats
- Climbers: Seek personal gain (power, money, prestige), leading to increased public spending.
- Zealots: Pursue their understanding of public interest, also increasing public spending.
- Civil Service Defenders: Aim to expand public sector functions, particularly prevalent in France and Nordic countries, leading to increased public spending.
- Conservatives: Seek security and maintain the status quo, resisting change and exhibiting low efficiency.
- Statesmen: Professionals subject to the chain of command, loyal but with little incentive for creativity, maintaining the system.
Rent-Seekers and Corruption
These individuals seek to benefit from the state, with corrupt individuals exploiting the public system. Tullock and Krueger pioneered research on this topic in the 1980s.
Rent-Seeking
- Pure Public Goods: 100% tax-financed.
- Public Goods with Private Outlets: Generate public goods with outlets in the private market.
Corruption
The unauthorized transfer of money or goods to induce an operator to prioritize personal interests over organizational goals. In economic policy, it involves abusing public office for private gain.
Factors
- Information asymmetry favoring the agent.
- Stronger incentives for corruption than against it.
- Public administration discretion.
- Favors black markets.
- The level of corruption in a country is crucial.
Financial Implications
- Privatization of the state.
- Rent-seeking becomes more profitable than productive activities.
- Increased income inequality.
- Reduced competition.
- Corruption with theft involves a transfer from a specific operator to the corrupt individual.
- Corruption without theft involves a transfer for obtaining a service.
- Technical inefficiency due to lack of incentives for efficient work.
- Increased verification costs, reduced tax revenues, and higher deficits.
- Development of the “shadow economy.”
Empirical Evidence
- Kliegard: C = M + DT (Monopoly + Discretion – Transparency)
- Mauro: Measures the relationship between economic growth and bureaucratic efficiency, considering judicial efficiency, bureaucracy, and corruption.
Constitutional Issues
These issues connect theories of justice and societal agreements within a regulatory context.
Rawls
- Principle of Equal Liberty of Citizenship: Each person is entitled to the most extensive system of basic freedoms.
- Difference Principle: Inequalities should benefit the most disadvantaged and be linked to equal opportunities.
Dworkin
- Principle of Justice: All citizens deserve equal treatment in wealth and opportunity distribution.
- Compensation Principle (Theory of Citizenship): Constant repair of harm and insecurity experienced by certain members of society is necessary.
Lobbying
Organizations or groups sharing interests and seeking to influence economic policy development and implementation for their benefit.
Features
- Exclusivity: Large groups often create entry barriers.
- Exchange of Support: Among various interest groups.
- Selective Information: Possess specialized information used for their interests.
- Indivisibility: Claims are often not well-known to others.
- Submissions: From individuals needing their services.
Forms of Action
- Participate in elections and take positions on specific policies.
- Involvement in everyday political life.
- Influencing public opinion through media and advertising.
- Using corruption to achieve their goals.