THEORY Public Choice has demystified and undeified the state. The Public Choice Revolution BY PIERRE LEMIEUX Université du Québec en Outaouais half-century ago, an ortho- Tech at that time: Geoffrey Brennan, Robert D. Tollison, dox economist would approach the Richard E. Wagner, Winston Bush, and others. For his semi- analysis of public policy with the fol- nal work in public choice, Buchanan was awarded the 1986 lowing reasoning: Markets are efficient, Nobel Prize. or “Pareto-optimal,” when perfect com- In a narrow sense, public choice analysis is concerned petition prevails. Pareto optimality with “state failures.” Manned by self-interested actors on a means that there is no way to reallocate “political market,” the state is often incapable of correcting inputs or outputs to benefit some individual without harming market failures — or, at least, of correcting them at a lower Aanother individual or, thought of another way, all gains from price than the cost of the original market failures themselves. exchange have been realized. In many cases, such results are In a wider sense, public choice is, as Dennis Mueller writes precluded by different types of “market failure” like macro- in his book Public Choice III, “the economic analysis of polit- economic imbalances, natural monopoly, or externalities (pos- ical institutions.” In this broad sense, virtually all economists itive or negative). Positive externalities can be generated by who study government intervention have now become pub- “public goods,” which provide benefits to everybody as long as lic choice economists. the goods are produced and consumed by somebody. Gov- ernment must intervene to correct market failures and maxi- THE STATE mize social welfare. Why do we need the state to provide certain goods and serv- That was policy analysis before the public choice revolution. ices? Why not just have anarchy and let everyone fend for him- Today, the view is much different and begins with a simple self either individually or as a member of a private group? The question: How are collective decisions made? The answer, of subtitle of James Buchanan’s seminal 1975 book The Limits of course, is that the decisions are made by policymakers — politi- Liberty summarizes where the individuals presumably want to cians and bureaucrats — and by voters. The starting idea of be: “Between Anarchy and Leviathan.” In the mainstream pub- public choice theory is disarmingly simple: Individuals, when lic choice perspective, the state is necessary to stop the Hobbe- acting as voters, politicians, or bureaucrats, continue to be self- sian “war of all against all.” As Mancur Olson puts it, a “seden- interested and try to maximize their utility. tary bandit,” the state, generates more prosperity than the Excluding immediate precursors like Anthony Downs’ “roving bandits” it puts out of business. 1957 book An Economic Theory of Democracy and Duncan Black’s Once it is admitted that the state is necessary, positive pub- 1958 book The Theory of Committees and Elections, the foundation lic choice analyzes how it assumes its missions of allocative effi- of the public choice school can probably be dated to the 1962 ciency and redistribution. Normative public choice tries to publication of James Buchanan and Gordon Tullock’s The Cal- identify institutions conducive to individuals getting from the culus of Consent. Many well-known public choice economists state what they want without being exploited by it. were congregating around Buchanan and Tullock at Virginia The contractarian approach defended by many public choice theorists is part of the normative leg of public choice theory. It distinguishes a “constitutional stage” in which, conceptually, Pierre Lemieux is an economist at the Department of Management Sciences of the Université du Québec en Outaouais, and a research fellow at the Independent Institute. individuals unanimously accept the rules of the political game, He may be contacted by e-mail at [email protected]. and a “post-constitutional stage” in which the rules of day-to- 22 REGULATION FALL 2004 Why the Majority Wants Both A and Not-A Assume a society composed of three voters: X, Y, and Z. preferences” expressed by the vote are intransitive — A is Further, assume that they are deliberating over three preferred to B, B is preferred to C, but C is preferred to A. mutually exclusive policy proposals: A, B, and C. This happens because the preferences of some voters Table 1 shows each voter’s order of preference among (Voter Y in this case) are not “single-peaked.” To see the three proposals. For example, Voter X’s favored propos- what this means, imagine a one-dimension continuum al is A; his second pref- from A to B to C (like erence is B, and his TABLE 1 if they are placed in least preferred policy this order along an is C. The other voters An Illustrative Case of Voting axis). Voter X’s pref- have different prefer- erences are single- ences. Note that we First Second Third peaked because, from are only assuming Preference Preference Preference his most preferred ordinal utility, which alternative, A, he con- means that only the Voter X A B C tinuously loses utili- rank of the alterna- ty as he moves fur- tives matters. Voter Y C A B ther from A in either Now, suppose that direction. In this case, a referendum asks Voter Z B C A he cannot move “left” the voters to choose, from A because he is under a majority rule, between proposals A and B. at the left extreme on the continuum; but the further he Proposal A will win because both X and Y prefer A to B goes right, the less utility he gets. Similarly, Voter Z’s and will vote consequently; Z, who prefers B, will be out- preferences are single-peaked: his most preferred alter- voted. If, instead, the electorate is presented with a choice native is B, in the middle of the continuum, and he loos- between B and C, B will win because that is preferred by es utility as he moves left to A or right to C. But Y’s pref- X and Z. Now, consider what happens if the voters are erences are not single-peaked: he most prefers C and, as given the choice between A and C. C will win because vot- he moves left to B, his utility decreases, but then ers Y and Z will vote for C. This means that the “social increases again at A. R day politics apply. This latter stage typically involves decisions it wants. Majorities can be inconsistent or, what amounts to based on majority approval, not unanimous agreement. the same, can cycle indecisively among alternatives. (See “Why the Majority Wants Both A and Not-A,” above.” The CYCLING Why would individuals agree to have collective majority can vote for Proposal A over Proposal B, and B over choices made by majority rule? There is only one way an Proposal C, but then vote for C if asked to choose between individual can be sure not to be exploited by a majority: have A and C. The majority seems intransitive, irrational. This veto power over any collective choice or, in other words, explains why the electorate often appears so inconsistent — require that all decisions be approved unanimously. How- for example, when it votes for minimum wages that create ever, unanimous agreement is practically impossible because unemployment, and then for government programs meant the decision cost is prohibitively high — a larger number of to create jobs. individuals will have to be persuaded, and it will be in the Cycling can occur when the preferences of some voters are interest of each one to lie on his preferences in order to not “single-peaked” — that is, given a broad spectrum of manipulate the decision and get the highest benefits and pay options, the force of the voter’s preference does not consistently the lowest taxes. On the other hand, the lower the required decline as he considers options further and further from his top plurality, the higher the risk of an individual being exploit- choice. There is nothing in individual rationality that implies ed. Depending on the cost of reaching a decision and the lost single-peaked preferences. As Mueller notes in Public Choice III, benefits if the wrong decision is made, the proportion “During the Vietnam War, it was often said that some people required may be a simple majority (50 percent plus one vote) favored either an immediate pullout or a massive expansion of or some higher, qualified majority. effort to achieve total victory.” Another example: Some peo- Here, we meet the first problem uncovered by public ple think that either selling tobacco should be forbidden or else choice analysis: majorities — especially simple majorities — smokers should be left alone; middle-of-the-road options are are arbitrary. It is far from clear who the majority is and what less preferred (by some). REGULATION FALL 2004 23 THEORY Another way to see the cycling-inconsistency phenomenon the theorem states that, if all voters have single-peaked prefer- is to understand how redistributive coalitions are unstable. If ences, the winning alternative in a simple majority vote will be the middle class votes with the poor, the two classes can expro- the ideal (or most favored) alternative that is at the median point priate the rich. But then it will be in the interest of the rich to of the preference distribution. This can be seen in Figure 1, bribe the middle class into a new coalition that advocates tak- which represents the preferences of voters X1 to X5. The hori- ing all possible money from the poor and offering a bit more zontal axis represents the different alternatives of a one-dimen- to the middle class.