Political Economics & Public Choice

Review, Comparison and Application

Part I Review of the Public Choice Theory

Origin

• Mid 20th Century• Has a close relationship with the

background of that period• The Great Depression in 1930s• Welfare Economics and Keynes

Economics• Economists focused on the market

at that time• The requirement of explaining the

public choice

The Triangulum

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Duncan Black

James M. Buchanan

Kenneth J. Arrow

Duncan Black (1908-1991)

• Econ Prof. of North Wales University• “Father of the Public Choice Theory”• In his “The theory of committees and

election“ (1958), the notion of committee decision was brought out.

• Additionally, he delved into the research of the voting progress and create the basic framework of the election theory.

James M. Buchanan(1919 - )

• The most influential scholar in P.C.T• Got 1986’s Nobel Prize for his

contribution of Public Choice Theory• “The Calculus of Consent: Logical

Foundations of Constitutional Democracy” (1962)

• 2 gradations: choice under the rules and the choice of rules

• Ordinary Politics and Constitutional Politics

• Center for Study of Public Choice

The Center for Study of Public

Choice George Mason University

Kenneth J. Arrow(1921- )

• Econ Prof. of Stanford• Got 1972’s Noble Prize for his

contribution to the Public Choice• “Social Choice and Individual

Values”(1951) • Arrow Impossibility Theorem• Marked the formation of Public Choice

Theory

Public Choice Under the Direct Democracy

• At the very beginning, the study of public choice focused on the choice under the direct democracy.

• Arrow and Black

Arrow’s study

• Public choice is a collection of individuals’ choices (Arrow, 1951)

• The essence of this theory is the mapping between individual and public

• f:(R1, R2…..RN) R

• Arrow impossibility theorem• Development:• 1. New ways of proving• 2. By changing of assumption, new

impossibility theorem came out (Sen, 1970)

Black’s Study

• Voting rules under direct democracy• Median Voter Theorem (Black, 1958): if

voter policy preferences can be represented along one dimension, if a voter always votes for the politician that commits to a policy position closest to their own preference, and if there are only two politicians, then if the politicians want to maximize their number of votes they should both commit to the policy position preferred by the median voter.

• One-Dimension to Multi-Dimension (Davis Otto A, 1972 )

Public Choice Under the Representative Democracy

• Based on the study of public choice under the direct democracy

• Nowadays, representative democracy is prevalent all over the modern society

• 4 components:• Origin of the Government• Motivation of the government’s

expenditure• Rent Seeking• Free Rider Theory

Origin of the government

• Anthony Downs• “An Economic Theory of

Democracy”(1957)• “Instead of trying to win the election

for making policies, parties make policies to win the election.”

• Space theory for two parties• Space theory of voting for more than 3

parties (Tullock,1976)

Motivation of the government’s expenditure

• Based on the assumption of “economic man ”

• The government try to achieve its goal instead of the goal of the public (Downs, 1957)

• “Maximum Budget” and Niskanen Model (Niskanen, 1971)

• Expansion (Breton, Albert and Ronald Wintrobe, 1971)

• Criticism and new models (Downs, 1967)

Rent Seeking

• Tullock, Gorden. The Welfare Cost of Tariffs, Monopolies and Theft , 1967

• The term “rent seeking” make its debut by Krueger(1974)

• “Rent exists everywhere, thus the behavior of rent seeking is inevitable.” (Mueller, 1989)

• “The best way to eliminate the rent seeking is the reform of the system. ” (Mueller, 1989)

• Bucharnan, Toward a Theory of Rent-Seeking Society, 1987

Free Rider Theory

• Olson, Mancur. The logical of Collaborative Action: Public Goods and the Theory of Groups, 1965

• “In a big group, the “economic man” is not willing to make effort to achieve the goal of the group.” (Olson, 1965)

• “Only if the incentive exists, big groups do worse than the small groups in collective behavior.” (Olson, 1965)

• Similar with the “Prisoners’ Dilemma”.

Constitutional Political Economy

• An important field of Public Choice Theory• Buchanan, Tullock. The Calculus of

Consent: Logical Foundations of Constitutional Democracy, 1962

• Choice Under the Rules and the Choice of the Rules. (Buchanan, Tullock, 1962)

• Constitution Utilitarian Contract • “The choice of Constitution is the choice

of Social Rules. The constitution should be agreed by the public. The functions of constitution are protect the popularities’ legal rights and limit the power of the government” (Brennan, Buchanan, 1985)

Constitutional Political Economy

• Mueller(1971, 1973, 1996) delved into the Constitutional Democracy

• Analysis in Game Theory (Riley, 2001)• The Journal: Constitutional Political

Economy

Part IIPolitical Economics versus Public Choice

General Comparison

• 3 basic differences :• Point of reference• The importance they assign to

individual liberty• Attitude to modeling techniques

Different point of reference

• “Choice versus Conflict”• P.E starts its analysis within the

framework of existing representative democracy and focuses on the coercive character of the state. (Persson and Tabellini, 2000)

• P.C starts at the individual level. The yardstick for the general legitimacy of the state and its decisions is there fore the individual willingness of all citizens to join a state and accept its decisions. This is why public choice puts voluntary exchange at its core. (Buchanan, 1954)

The Importance of Individual Liberty• “Efficiency versus Liberty”• Based on different points of reference,

the two approaches derive different criteria to evaluate political decisions and political institutions.

• P.E assigns central importance to efficiency considerations of political decisions within the representative democracy (Ursprung 2003)

• P.C assigns the greatest importance to the value of individual liberty and its promotion as a criterion to evaluate political decisions and institutions. (Buchanan and Roger, 1998 )

Attitude to modeling techniques

• “Methodological Determination versus Methodological Openness”

• P.E studies “some of the classic problems in public choice”, adopting a general-equilibrium approach with explicit micro political foundations.

• P.C always reject the idea that the discipline is defined by the analytical tools or techniques it uses and focused instead on the questions it wants to answer.

Part III Application

Introduction

• How can we evaluate the “current score” of the competition between these two approaches?

• I propose to compare the results of the two with respect to their common scientific goal: to derive normative implications for institutional improvement

Institutional Improvements

• P.E contributed very successfully and derived important new suggestions for institutional improvements.

• However the success may have nourished the fallacious opinion that the only barrier for taking over P.C is the technical problem solving.

• Unfortunately, this belief has blurred the perspective of the P.E research and led to unconvincing results.

• Additionally, the newer contribution of P.E have been unable to provide any meaningful advice for institutional innovations.

Why?

• The causal factors for the decline of P.E research are as follows:

• Its inability to define a relevant point of reference outside the given institutional setting

• Its concentration on the coercive character of the state

• Its preference for efficiency considerations over concerns for individual liberty

• Nevertheless, P.C, with Wicksell as its point of reference and individual choice and liberty as its main criteria, do better in deriving for institutional improvements

Conclusion

• Hence, measured by their common scientific goal to derive normative implications for institutional improvements, we still see an edge for public choice in the economic analysis of politics

• Nonetheless, there is an ongoing competition that can only benefit both approaches of political economy. Solely looking in the “queen’s mirror” will bring neither public choice nor political economics forward

The End Thank you

Preference

• Black, Duncan. The Theory of Committees and Elections [M]. Cambridge: Cambridge University Press, 1958

• 詹姆斯 M. 布坎南， 戈登 它洛克 . 同意的计算－立宪民主的逻辑基础 [M] 北京：中国社会科学出版社， 2000

• Sen, Amartya K. Collective Choice and Social Welfare[M]. San Francisco: Holden-Day, 1970

• Tullock, Gorden. Toward a Mathematics of Politics, 1976

• Niskanen, William A, Bureaucracy and Representative Government[M]. Chicago: Aldine-Atherton, Inc, 1971

Preference

• Breton, Albert and Ronald Wintrobe. The Equilibrium Size of a Budge Maximizing Bureau[J]. Jonual of Political Economy 1975,83:183-190

• Davis, Otto A., M.H.Degroot, and Melvin J.Hinrich. Social Preference and Majority Rule[J]. Econometrica, 1972,40147-157

• Downs A.Inside Bureaucracy[M]. Boston: Little, Brown,1967

• Mueller, Public Choice II, 1989• 缪勒 公共选择理论 II [M] 北京： 中国社会科学出

版社， 1999

Preference• Olson, Mancur. The logical of Collaborative

Action: Public Goods and the Theory of Groups, 1965

• Brennan G, Buchanan J M. The Reason of Rules: Constitutional Political Economy[M]. Cambridge University Press, 1985

• Downs, Anthony An Economy Theory of Democracy[M]. New York: Hamper & Row, 1957

• Riley, Jonathan. Constitutional Democracy as a Two-Stage Game, 2001

• Mueller, Dennis C. The fiscal Federalism in a Constitutional Democracy[J]. Public Policy, Fall 1971, 19:567-593

• Mueller, Dennis C. Constitutional Democracy and Social Welfare[J]. Quarterly Jounal of Economics, February 1973, 87:60-80

Preference• Mueller, Dennis C. Constitutional

Democracy[M]. New York: Oxford University Press, 1996

• Buchanan, James M. Individual Choice in Voting and the Market[M] Journal of Political Economy, 1954, 62:334-343

• Persson, Torster and Guido Tabellini, Political Economics. Cambridge: MIT Press

• Ursprung, Heinrich W. Where do we go from here? Political Economy and Public Finance,Edward Elgar. Cheltenham, U.K., Northhampton,2003, (Mass):231-234

• Buchanan, J M. and Roger L. Faith. Secession and the Litmits of Taxation: Toward a Theory of Internal Exit, American Economic Review,1987,77:1023-31