Public Choice

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Public Choice: the application of economic theory to politics and government.

David Friedman in his book Hidden Order calls it The economics of politics.

Political Economy or public economics includes:

public choice, constitutional economics, public finance



See Mankiw, key concepts p. 494.



Mankiw: ch22, p. 485, "political economy"

Behavioral assumption: human nature does not change when people enter government.

The two motivations: self interest and sympathy.

See p. 488, next to last paragraph.

Elected officials enjoy power.

They seek re-election, so

they cater to both the voters and the interests which supply them with campaign funds.

Topics: voting, transfer seeking, bureaucracy



Voting

The Condorcet Voting Paradox for more than two choices.

Marquis de Condorcet: vote outcomes not necessarily transitive.

Rational individual choice is transitive: if A>B and B>C, then A>C

Why not also voting? Chart bottom p. 485.

The order in which votes are taken affects the outcome.

An agenda: a list with the selection and sequence of decisions.

Those who set the agenda have much political power.

The outcome of a majority vote does not necessarily reflect the general will of society.



Arrow Impossibility Theorem

Kenneth Arrow, economist, took this further.

Desirable characteristics of a voting system:

unanimity, transitivity, independence of irrelevant alternatives, no dictators.

No voting system can satisfy all these properties together.

Instant runoff is the best for choosing candidates, but still fails the criteria.

Political implication: minimize the importance of voting.

Even where there are only two choices, majority voting may be immoral if the majority violates the rights of a minority.

What makes majority voting both economically efficient and morally proper is:

1) the action does not violate human rights, and/or

2) the action takes place in a voluntary community.

Q: is slavery economically efficient? Why?



Voting is not as good as a benevolent dictator but better than an evil dictator.

Leave as much as possible to individual choice in a free market.

Vote only for representatives in small groups.

In the market we have voluntary dictatorships from which one may exit, such as SCU.



The median voter theorem

Median: half above, half below.

Where would two hot dog stands maximize profits at a beach? (#8, p. 495).

Deciding how much to spend on a public good.

Arrange voters linearly according to how much they want to spend.

The median voter is in the middle: half want to spend more, half less.

Median voter theorem: the outcome of simple majority voting is the median voter.

With just one good, the Condorcet paradox does not apply.

However, even voting for one public good does not provide an efficient outcome.

TV example: 3 room-mates, wanting to spend $40, $60, and $250.

The median is $60, but it would be efficient and rational to spend up to $350.

Demand revelation overcomes this for choosing one public good.



Application: candidates of the major parties move towards the center.

Minority views are given little weight, even when they are better justified.

The mass media pays little attention to minor parties or their ideas.



The problem of "not worth knowing better"

Voting is a social choice for which the benefits are mostly external.

A good voter provides a positive, beneficial, external effect.

Some do so out of benevolence or a sense of duty, but about half do no.

Most of those who do vote do not spends large amounts of time analyzing which policies are in the general interest and which candidates will most likely serve the public the best.

Even if they do spend the time, most voters know little about economics and government.

Economists call this "rational ignorance," better called "not worth knowing better". NWKB.



Unless he is greatly motivated by sympathy for the political process or enjoyment or moral duty,

a rational individual acquires information only if the benefit of having more and better information is worth the marginal cost of obtaining it.



Another element of voting is that in a large election, the probability of one vote determining the outcome is tiny, almost zero.

A rational decision about whether to vote compares the cost and the benefit.

The benefit is the probability of changing the outcome times the marginal value of the outcome.

For example, suppose there is a choice between candidates A and B.

Suppose you place a value of $100,000 on electing A rather than B.

If you were very rich, and you could determine the outcome, you would pay that.

Suppose the probability of your vote determining the outcome is 1 in a million.

What is your expected return on voting? Ten cents.

If the opportunity cost of voting is more than 10, the rational choice is to not vote.

But, ideally, one should also get utility from voting, which adds to the benefit.

Some people vote for minor party candidates with no chance of winning, because of sympathy with that party, cause, and ideology, and the utility of voting is greater than the cost.

People enjoy partisanship, being part of a team and cheering for that team, like being a fan of a sports team. It makes people feel good to on the side of a team, and also to think that they are also benefitting society because their team's policies are better than that of the others.



Some people get information about elections and issues anyway from reading or viewing TV or the Internet, so there is little marginal cost to get information for voting.

As David Friedman says, "The outcome of democratic elections is driven by free information, and reflects the quality of what we get at that price."



Transfer seeking - the market for legislation

Also called "rent seeking" since a forced transfer in an economic rent,

a return not needed to put factors to their best use.

Our voting system is mass democracy, millions voting for unfamiliar candidates.

To get votes, candidates need to communicate with the public using the mass media.

So there is a big demand for campaign funds. Who supplies the funds?

Some comes from individuals. But much of it comes from special interests: corporations, unions, farm owners, owners of commercial real estate, organizations of lawyers and the elderly.

The provide large amounts of campaign funds in return for favors, privileges, subsidies.

Most of this is public information. See http://www.opensecrets.org

This is a political market for legislation.

These subsidies cost consumers and taxpayers hundreds of billions of dollars per year.

Why does the public not successfully oppose it?

The costs per subsidy are thinly spread out.

The public is rationally ignorant; the benefits of opposing the subsidies are mostly external.

In contrast, the benefits to a special interest such as sugar farmers is concentrated and large.

So transfer seeking takes place because of concentrated benefits and spread-out costs.



Even so, why do most Congress representatives vote for a sugar subsidy when only a few are getting sugar money? They trade votes, voting for one-another's subsidy.

This is called "logrolling."



Bureaucracy

A bureau is a branch of government or business that administers policy in a particular field.

A bureaucracy consists of persons employed in bureaus, who implement policy.

This includes issuing regulations that provide specific rules for implementing legislation.

For example, Congress passes laws about the income tax, and the IRS issues the forms and rules to interpret and implement the law.

Bureaucracy creates a principal agent problem.

The primary principals are the voters. Their representatives are their agents, and the bureaucrats are the agents of the elected officials, who are also the principals for the bureaucrats.



There is asymmetric information: the bureaucrats know more than the legislators.

The self-interest of the chiefs of the bureaus is to maximize their power and revenue.

Their incentive is to exaggerate costs, present costs as necessary, and use up all allotted funds.

Often, the chiefs of regulatory bureaus come from the regulated interest, and they act to subsidize the industry. Example, the U.S. Department of Agriculture.

So bureaucrats become another special interest seeking privileges and subsidies.



Constitutional economics or constitutional political economy

In economics, a "constitution" is the highest level of agreement.

At SCU, for example, student conduct rules form a constitution.

When you enrol at SCU, you agree to the rules of the constitution.

In this class, the syllabus is the constitution.

It binds both the instructor and the students.

So I am not an absolute dictator, but am bound by the constitution, even though I wrote it.

There are two levels of decision making: constitutional and operational.

For example, when you get married, that is a constitutional decision.

After you are married, the couple makes operational decisions, based on the constitution.

As another example, when you and a friend decide to be house mates, to share a house,

that is a constitutional decision. You decide how much rental each will pay, etc.

The day-to-day decision are then operational decisions.



Constitutional economics analyzes the choice of constitutions.

Operational economics analyzes choices within the constraint of a constitution.

For example, in money and banking, constitutional economics would compare

free banking with central banking.

Operational economics studies the banking system under a central bank.

What the income tax rates should be is operational economics.

Whether to have an income tax is constitutional economics.



This has important implications for your own life.

You need to be aware of when you are making a constitutional choice that may then constrain you in important ways for a long period of time.

For example, what field to major in is a constitutional choice.

Given that choice, then you make operational decisions about which courses to take when.

Changing constitutional choices is much more costly than making operational changes.