Worldly philosophers

by Henry on July 20, 2003

Friedrich Blowhard has discovered public choice economics a la Buchanan and Tullock, and decided that he quite likes it.

What a gas to see a group of smart people take many of my private musings of the past decade and set them out with more clarity than I ever gave them. I actually read a webpage outlining some of the notions of public choice while literally laughing out loud to see that I wasn’t the only lunatic in the insane asylum.

Friedrich is especially impressed with public choice’s description of how government tends to get captured by special interest groups, who gorge themselves at the expense of the public purse. He also suggests that public choice provides some interesting alternatives to the current political system.

Actually, it gives me more than hope, it gives me an idea. Isn’t it time for virtuous people everywhere to start thinking seriously about a system of governance that works better than democracy (or at least how American representative democracy is practiced in 2003?

Specifically, Friedrich points to various market-based or locality based means that are proposed by public choice economists as ways of limiting the redistributive elements of politics.

Now I’ve blogged in the past about my dislike for public choice economics. As far as I can see, the ideology usually drives the economic models, rather than vice versa. There are some exceptions (see below) but public choice usually starts from a bias. As is made clear by Charles Rowley, editor of the flagship journal, Public Choice, who has defined the approach as a “program of scientific endeavor that exposed government failure coupled to a programme of moral philosophy that supported constitutional reform designed to limit government.” But then, Rowley has also claimed that political scientists like myself, who have failed to embrace public choice methodologies, are “scholars who had rendered themselves dependent on the subsidies of big government and whose lucrative careers in many instances were linked to advising … agents of the compound republic.” In plain words, Rowley is claiming that social scientists who disagree have been bought off; we have our snouts stuck into the same trough as the special interest groups.

One could respond to this in an equally ad hominem fashion (a quick glance at Rowley’s resume suggests that he’s not averse himself to hogging out on grants from right wing foundations). But this would distract from the interesting and important questions that Friedrich raises. Does public choice, as propounded by Rowley, Tullock et al., provide a good understanding of how government works? And does it provide an appropriate set of solutions to the problems of majoritarian democracy?

I suggest that the answer to the first question is a qualified yes, and to the second is a more-or-less unqualified no. There’s no doubt that the phenomena described by public choice – rent-seeking, capture of the political process by special interest groups etc – happen, and indeed are endemic to democracy. And the US has a particularly bad case of this, thanks in large part to its lax rules on the financing of politics. It’s also interesting to note that Tullock and his crowd are in perfect agreement with lefties like political scientist, Charles Lindblom, about the corrupting intersection between big business and government. The problems identified by public choice are real ones.

But the proposed solutions propounded by characters like Buchanan,Tullock and Rowley have their own, very considerable flaws. Public choice economists propose that government should be replaced, insofar as is possible, by market-type mechanisms. They argue that the kinds of choice permitted by free markets are inherently superior to the kinds of choice permitted by majoritarian democracy. Some argue, quite simply, that politics is all a horrible mistake, and should be replaced by so-called “incentive compatible mechanisms.” But they don’t have very good grounds for so doing. First of all, proposals for the replacement of politics by economic mechanisms arguably fail on their own terms: economic theory suggests that they remain inescapably politicized.* Second, public choice theory itself suggests that while majoritarian democracy is flawed, so too is any means of aggregating collective choices. Nobel prizewinner Kenneth Arrow showed this in his “Impossibility Theorem,” perhaps the single most important result in social choice and public choice theory. The theorem shows that no means of making social choices – democracy, market or any reasonable alternative to either- can be perfect – they all necessarily involve important tradeoffs.

What this suggests to me (and, indeed to Arrow, who’s a committed social democrat), is that simplistic prescriptions of “all markets, all of the time” don’t work. Majoritarian democracy has its problems; so too do unbridled free markets. Which isn’t to say that there’s no scope for reform. However, economic theory provides pretty well as much support for certain kinds of lefty retrenchment, as it does for the kinds of change that public choice economics (and Friedrich) would like. But that’s a subject for another post.

.* On this, read Miller, Gary J. and Hammond, Thomas. Why Politics is More Fundamental than Economics: Incentive-Compatible Mechanisms are Not Credible. Journal of Theoretical Politics. 1994; 6(1):5-26. Miller’s book, Managerial Dilemmas: The Political Economy of Hierarchy (Cambridge University Press, 1992) provides a slightly different version of this argument, and is also the most accessible introduction to these questions that I know of.

{ 18 comments }

1

back40 07.20.03 at 7:28 am

“..simplistic prescriptions of ‘all markets, all of the time’ don’t work.”

This isn’t what is advocated by public choice economics. It advocates the use of alternative mechanisms, such as government regulation, where markets are imperfect. It reverses the order of preference. Instead of knee-jerk regulation to distort markets in ways sought by powerful interests (old people, business, unions etc.), it seeks to use regulation sparingly, and reluctantly, to intervene in market failures.

Public choice economics provides a useful lens for viewing policy, and mental tools for making policy decisions. By recognizing that regulatory failure is more common and more destructive than market failure better policies can be made. Regulation can be seen as medicine, something to be used sparingly and when needed rather than habitually or excessively. A little bit at the right time can be good but a lot all the time usually isn’t.

The conflict isn’t between democracy and markets as you have presented. Markets, after all, are quite democratic. It’s a conflict between authoritarian government dominated by special interests and liberal government that doesn’t play favorites quite so much, that protects minority interests more effectively.

2

Henry 07.20.03 at 2:57 pm

Not really so. Viz. public choice economists’ notorious skepticism that governments _can_ correct market failures; i.e. they typically argue that the cure is worse than the disease. On public choice’s “all markets, all of the way” ethos read some of the literature on incentive compatible mechanisms, which more or less explicitly states that politics should (and can) be replaced wholesale by properly designed mechanisms of public choice. The statement that “markets, after all, are quite democratic,” seems to me to be rather confused – you may quite reasonably want to argue that markets are a superior means of choice to democracy in some contexts (and I’d agree), but that’s a very different thing to saying that they’re “democratic,” which seems to me to be a straightforward category error.

3

Matt Weiner 07.20.03 at 3:11 pm

back40–
Markets aren’t democratic at all, unless you think “one dollar, one vote” is more democratic than “one person, one vote.”

I’m quite serious here. As Brad DeLong mentions, the competitive market equilibrium “maximizes a social welfare function that is the sum of individual utilities in which each individual’s weight is the inverse of their marginal utility of income.” Your marginal utility of income is almost guaranteed to drop with absolute income–so this means that the competitive market does more good for rich folks than poor folks.

Well, duh. But market evangelists often don’t seem to recognize this. Friedrich, for instance, argues that we don’t spend enough on crime control, so those who value safety are forced to live in gated communities. I would guess that people living in extremely dangerous neighborhoods don’t place a much lower value on their safety than do people in gated communities–they just can’t afford to live in gated communities. The people in gated communities spend more money on security because they have more money to spend (hence their marginal utility of income is lower).

Economic inequality creates massive distortions in the market for utility. Democracy, though it has its problems, is the only way to correct that. It would do it better if we got money out of politics, not the other way round.

(And to describe democracies as “authoritarian government[s] dominated by special interests” is ridiculous, unless you think that the freedom to work for less tham $4/hr is more fundamental than freedom of speech. Sweden is less authoritarian than Singapore.)

4

back40 07.20.03 at 4:07 pm

Markets are an expression of democratic choice. Products are offered by producers, people choose among them. Good ones succeed, bad ones wither.

Political contests are market activities. Politicians offer themselves and their ideas, people choose among them. Good ones win, bad ones lose.

Henry you are simply wrong. Public choice economics does not seek to replace all regulation with markets, it seeks to use regulation wisely and appropriately to intervene in market failures, and use a combination of markets and devolution to intervene in regulation failure.

“Friedrich, for instance, argues that we don’t spend enough on crime control…”

No, he doesn’t. He points out that some people want a higher level of crime control than others as part of the larger idea that people are diverse. One size doesn’t fit all. There are few things that everyone can agree about and public choice economics argues that there are few things that everyone needs to agree on. Flexible systems that allow choice and support diversity are more satisying to more people. In large pluralistic societies the use of markets to allow choice is one method to achieve a better match and where markets are inadequate to the task local regulation can sometimes serve. Where local regulation is inadequate then national regulation may serve. Use a tool appropriate to a problem rather than using a favorite tool for all problems.

5

Bob 07.20.03 at 7:17 pm

It may illuminating to put some scaling into the division between resource allocation by public-political choice or by markets through looking at international comparisons of tax burdens among the affluent OECD countries as shown in Fig 1 at: http://www.oecd.org/dataoecd/15/57/2968128.pdf with updated data through to 2001 at: http://www.oecd.org/dataoecd/6/63/1962227.pdf

If America is near the lower end of the tax burdens scale, for some West European countries the burden is near to, or over 50% of GDP and was even higher for a few countries not long back. Is 50% “too high” and, if so, by what analysis? It is administratively feasible to redistribute all income according to “need”. All governments need do is levy tax at the rate of 100% on all incomes and redistribute the proceeeds net of government operating costs, tax collection expenses and public good provision according to official assessments of individual or family need. For some reason not many citizens seem to like that and few vote for it when opportunities allow.

For all the appealing benefits of public goods and social safety nets or income redistribution, how are we to decide when enough is enough? By account of the latter OECD data above, tax burdens have been falling among many OECD countries in recent years so are we to interpret that as a growing electoral preference for market allocation over public choice?

On government intervention to correct for market failures, there is generally a high order information requirement to devise optimising regulatory or tax-subsidy remedies. The question is, where and how do government acquire the necessary information for centralised decision making?

6

Henry 07.20.03 at 10:24 pm

Back40, there really is a rather large literature out there, both inside public choice and outside it, which suggests that matters are much more complicated than you seem to think they are. Again, I recommend that you read the idealistic literature on incentive compatible mechanisms that I was referring to, which explicitly makes the argument that politics is bad. And your claim that political contests are market activities is, as I’ve already said, a category error. Both involve choice, but under very different constellations. While simplistic models (like Schumpeter’s one) model political choice as if it “were” market competition, they by the same token simplify out most of the interesting bits of politics. And you don’t need to take my word for it; Mancur Olson, Doug North and a host of well-known public choice/political economy types say so too, and criticize public choice for the same reasons, more or less, that I’m criticizing it.

7

back40 07.20.03 at 11:54 pm

Henry, I suggest you do some reading and thinking about the field to get a feel for it. When you focus narrowly on a few articles that argue particular aspects, and don’t understand the context, you can come up with the skewed judgments you have voiced. Matters are indeed complicated but I’m afraid it’s you have the simplistic views having mistaken strong argument on a particular for statement of the general.

You confusion about politics as a market behavior is noted.

Repeating your ‘all markets, all of the time’ assertions don’t make them more true. Public choice economics uses markets as one of several tools and seeks to select the proper tool for each application. There is enthusiasm for using markets when possible since they are elegant and adaptive in ways that regulation is not, and there are persuasive arguments in response to the sordid history of regulatory excess and failure that has harmed so many societies in the past several decades. Enthusiastic advocacy of using markets on problems of regulatory failure doesn’t mean that there are no problems suited to regulation. Regulation is a blunt instrument, a hammer, that has been used too often and to bad effect, but there are problems well suited to hammering.

You might also benefit from more reading of the authorities you cite, such as Arrow, to understand their views of the virtues of markets as well as their failures, and their current groping towards understanding societies and economies as complex adaptive systems heavily affected by information flows.

8

Matt Weiner 07.21.03 at 12:32 am

Markets are an expression of democratic choice. Products are offered by producers, people choose among them. Good ones succeed, bad ones wither.
And the number of votes each person has is proportional to wealth. That’s not democracy.

If one billionaire judges a product worth his entire fortune, it will beat out a product that 999,999 thousandaires judge worth their entire fortune–though the latter product probably does more total good.

As for my interpretation of Mr. Blowhard, he said:
“Examples of the consequences of these mismatches abound: people—say those raising families—who value public safety very highly have been forced to move into gated communities because society as a whole won’t pay for enough crime control…. And ‘public choice’ economists have made some interesting suggestions for how to improve these and other governmental shortcomings.”

If that doesn’t count as (what I said) “argu[ing] that we don’t spend enough on crime control…,” I don’t know what would. Note that he did not say “as much crime control as they would like.”

(Surely some public-choice economists have applied the lessons to governmental decisions about crimefighting and also warmaking? They’ll be just as subject to regulatory capture as any other domain.)

9

Randolph Fritz 07.21.03 at 12:33 am

“Political contests are market activities. Politicians offer themselves and their ideas, people choose among them. Good ones win, bad ones lose.”

And is there therefore to be no negotiation, no compromise? Ideas must be taken or left, without changes? That is not the reality of politics or markets!

Back40, I don’t think you’ve negotiated a contract in your life.

10

back40 07.21.03 at 2:22 am

Negotiation and compromise occur continuously in all sorts of markets. This is a key issue – the exquisite sensitivity to feedback – that makes viewing complex adaptive systems such as economies and polities as markets a useful tool. It is also why regulation is such a poor tool, useful in emergencies to avert immanent collisions but less useful in other situations since it stunts and eventually kills systems.

If your mind had to decide how to move your body you couldn’t walk. The combination of inadequate processing power and propagation delay would have you doing the wrong things at the wrong times. You rely on your body to react, to do the sophisticated parts of locomotion. Similarly, economies and polities must rely on individuals and aggregates to do the sophisticated decision making in a timely way since they don’t have enough information, what they have isn’t fresh and they lack the ability to understand the information in real time, if ever.

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William Sjostrom 07.21.03 at 9:52 am

Well at least I have a better idea of why Henry and I disagree. I had to review Miller’s Managerial Dilemmas for Kyklos back in ’93, and I did not like it all. As I recall, a lot of economists gave it unfavorable reviews, although John Roberts in the Journal of Economic Literature is the only one that comes to mind.

12

jay currie 07.21.03 at 10:51 am

I have often thought public choice theory was more valuable as an analytic tool than as an end in itself. Faced with a issue of institutional design it is very useful to ask how best to avoid regulatory capture or to minimize the opportunities for really agressive rent seeking.

Democracy leads to laws and laws to regulation and statutory authorities, boards and tribunals: as a matter of practical policy the grosser predictions of public choice theory can inform the structure of those institutions. Which makes it a significantly useful tool regardless of its absolute status as theory.

To take the example being discussed: the people who live in gated communities are voting with their dollars for the perception of greater security as well as a host of other alledged virtues attaching to those communities. Sorting out the economic value of each virtue makes analytic sense because it may well turn out that security is trumped by excellent schools or conforming architecture as the primary value offered by the gated community.

Moreover, really clear analysis may turn up the fact that all of these values may be acceptable proxies for less acceptable but real underlying values. “I am willing to pay big money to live with other white/chinese/black people.” being the most likely.

Only if we actually know what people really want – which is often very difficult to accertain – can we determine how effective markets or politics are in delivering it. Officially politics cannot deliver segregation, unofficially markets can and do.

What I have been struck with reading public choice theory is that it often delivers messages that politicians do not want to hear. Which makes it all the more valuable.

13

Henry 07.21.03 at 4:05 pm

William – is your review available anywhere on the web? Would be interested in seeing what you have to say. I know that Robert Gibbons likes Miller’s work as well; Miller seems to appeal more to the game theorists than the standard neo-classical or transaction cost types.

14

Kevin Brancato 07.22.03 at 10:11 pm

I studied Public Choice (PC) with Charles Rowley in Fall of 2002 (at George Mason University).

To put it lightly, “all markets, all of the time” is not a good motto for PC–especially as taught by Rowley. PC has several different flavors, so some of the wrangling in the comments above might be due to the different interpretations we’ve been primarily subject to.

Henry wrote: Second, public choice theory itself suggests that while majoritarian democracy is flawed, so too is any means of aggregating collective choices…. no means of making social choices – democracy, market or any reasonable alternative to either- can be perfect – they all necessarily involve important tradeoffs.

I would disagree, to an extent, though I understand why it would seem like PC has little to offer. To me, your arguement sounds a lot like social choice theory–not Rowley’s public choice theory. The latter might be best represented by Jasay (in Before Resorting to Politics) who argued for a rights-based mechanism that strictly limits the role of flawed collective choice schemes. He would argue that not everything should(?) be fodder for collective choice.

Public Choice doesn’t present solutions to many problems. I think Henry’s clearly right when he says PC economists are skeptical of government correction of market failure. Their focus is clearly on government failure.

I can’t get into more discussions at this point, although I see several lengthy blog posts in the future.

15

Henry 07.23.03 at 12:11 am

Kevin

You’re right in that I’m a bit lax in describing the impossibility theorem as public choice rather than social choice – but my recollection (perhaps flawed) is that Rowley does the same thing too. The quotes are from his intro to the Edward Elgar two volume set of public choice, which is a truncated version of an earlier article. I don’t know what he’s like in person, or as a teacher, but I found the piece to be a little obnoxious; efforts to score points on behalf of “his” Virginia School, as opposed to the people at Chicago and Rochester, and boastful claims that Friedman (if I remember correctly) had given the Virginia crowd his imprimatur. And the rude stuff that I quoted about political scientists who hadn’t seen the light, which I suppose got my back up a bit.

16

Kevin Brancato 07.23.03 at 5:56 pm

(I don’t have the EE compilation handy, but I think I remember that article your referring to.)

Really, this generalization won’t do:

“scholars who had rendered themselves dependent on the subsidies of big government and whose lucrative careers in many instances were linked to advising agents of the compound republic.”

I don’t blame you for taking exception. Dr. R has had particular enemies who were clearly on the take and hated his guts; but for him to brandish an entire community is of course very bad form. (That is something he did not do in class).

In class he likes getting into firefights. I locked horns with him a few times on particular issues, but he’s very fair to those who disagree.

Apparently I’ve been drafted into the “Virginia School”. I don’t mind, really, because its assumptions and methods are different, and more in accord with mine. The question is whether I will be dishonorably discharged after I’m awarded the Ph.D..

The Public Choice field exam is in 3 weeks. I’ll see if I can’t make some of his lectures blogworthy. Perhaps he won’t come off so pretentious.

17

Henry 07.23.03 at 7:52 pm

Kevin

I should say in fairness to Rowley, that the original quote is slightly more qualified than my presentation thereof (as far as I recall, it has some qualifier like “many of whom”). If he’s had brush-ups with specific enemies, then the comment is a little less egregious ( a specific dig at particular people, rather than an _ad baculam_ dismissal of an entire intellectual approach). That said, I would imagine that most readers came away with the same understanding of what he was saying as I did). If he’s tolerant of other approaches in class, then that’s a definite plus in my book.

18

natasha 07.26.03 at 5:42 am

back40 – “No, he doesn’t. He points out that some people want a higher level of crime control than others as part of the larger idea that people are diverse. “

You realize that the converse of this implies that many people actually prefer to live in crime ridden areas. It would, in this view, be the only explanation for why such vast quantities of people live in areas where they’re at high risk of being victims of crime. Because it sounds like you’re trying to argue that people make choices in absence of circumstance.

It’s as though you’re saying that a minimum wage worker born into a poor family in the worst part of Los Angeles had a fairy godmother come down and offer a choice between a gated home in Bel Aire and a third-floor fire trap with substandard everything, and picked the fire trap. Because apparently, their safety and well-being just isn’t very important to them. If your idea that these choices are explained by diversity were really correct, than a far greater number of wealthy people would decide to move into slums.

This argument takes the idea of diversity and twists it into an implication that the majority of humans actively desire suboptimal conditions. It sounds kind of ‘cute’ when you’re talking about someone at the high end of the income pool whose choices are minimally restricted. It sounds absolutely vile when applied to those at the bottom of the pecking order.

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