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Public Choice Theory

Whenever something tragic happens, the news media is full of headline stories not only reporting the incident itself but also the background, along with plenty of editorial opinion about what should be done to solve the issue concerned. These issues are wide-ranging, but could include gun crime, drugs, prisons, obesity, ultra-thin models, binge drinking, alleged racism, military intervention, terrorism, famine and so on.

Gun crime: a spate of killings in South London made widespread news headlines. What is the reaction of the government to such headlines and are the policies and laws that are put in place really in the public interest? Copyright: Cathy Kaplan, from stock.xchng.

Professor Anthony King, Professor of Government at Essex University (you often see him as an expert analyst on BBC Election Specials), chaired a group which published a report on drugs policy in the UK. Professor King refers to the state of 'moral panic' that occurs when issues like drugs make the headlines. That moral panic can lead to excessive pressure being put on decision-makers - governments, for example - and when that happens, decisions can be made not on the basis of rationality and a focus on how to solve the existing problem, but on placating some individual or group self interest. When this happens, we get what is called 'government failure'.

The theory came about when economists looked at some apparent contradictions in human behaviour. Think about it in this way - what do governments exist for? You might argue that they are there to act in the public interest. Acting in the public interest might be defined as a case where decision making is based on a principle where the maximum benefit is gained by the largest number of people.

Any decision will involve some sort of cost, so there will be some people that will be affected adversely by those decisions. If those people are in the minority and the benefits to the majority outweigh those costs, a decision might then be regarded as acting in the public interest.

An Example: Road Congestion

One solution for road congestion is to make people pay for the use of the roads. If this results in a reduction in road usage, or a more efficient use of the roads, there will not only be widespread benefits for road users, but also for the environment as a whole - what value can be placed on that?

However, there is a vocal group that are very much against road pricing. They are backed by some newspapers, for example, which have decided to champion the cause of the road user, going so far as to provide car stickers showing support for the abandonment of road pricing. On the Downing Street Web site, there was consternation when a person called Peter Roberts posted an online petition calling for the abandonment of road pricing.

Would road pricing succeed in helping to reduce the costs imposed by congestion? Could an individual politician ever put themselves in a position were they see the public interest beyond self interest? Copyright: Alexander Abolinsh, from stock.xchng.

The petition gained over 1.8 million signatures, which received high-profile media coverage. Each of those individuals who signed the petition is acting in their own self interest. The chances are they see the impact of road pricing on them personally and feel it is grossly unfair. This is where the contradiction in human behaviour comes in. If a person felt so strongly about road pricing that they decided to go into politics as a result, would they suddenly become an individual consumed with the desire to promote and maximise the public interest?

The Invisible Hand versus Public Interest

Public choice theory developed out of an economics tradition that stems from Adam Smith. Smith famously referred to a state where individuals pursued their own interest and in doing so, would through an 'invisible hand' promote the interest of the state as a whole. However, despite this seemingly clear support for self interest, Smith did spend time discussing government in The Wealth of Nations. That discussion was based around the understanding of a moral concern with public interest.

The basis of public choice theory, therefore, centres on the behaviour of people as individuals in comparison to the behaviour of those individuals when they become political animals. Can an individual put aside their personal feelings and preferences and become transformed to understand and appreciate the broader public perspective when they are in government?

The invisible hand, it is argued, may act to guide resources in a manner that leads to an efficient allocation of those resources. However, government will always have some role - do they allocate resources efficiently? Copyright: Semacc, from stock.xchng.

Public choice theory tries to look at the economic analysis of human behaviour as individuals and transfers this analysis to political science.

What public choice theory looks at are cases where that individual interest leads to decisions and the allocation of resources which may not be the most efficient allocation. This is called 'government failure'.

Politicians and their Consumers

Pubic choice theory likens politicians to a business. Imagine that a business produces a good which does not meet customer needs. It is very likely to fail. Politicians are like products: if they do not meet the customer's needs, they fail - they are not re-elected at the next election! The obvious behaviour, therefore, is to do what the consumer (the electorate) wants. What the electorate wants is not always clear. What is clear is that those who make the most noise are likely to be the ones that attract the most media attention (the moral panic that Professor King referred to) and these may be the people who politicians listen to.

Individuals have specific knowledge about certain issues that are closely related to them. As a result of this information, special interest groups that represent these views tend to develop and politicians may be more inclined to listen to these groups and base their decisions on what these groups are saying.

There are a number of key ideas that form the basis of public choice theory. We will discuss each in turn.

Logrolling

Logrolling is a term used to describe vote trading in government. A voting member of the government (it could be the House of Commons in the UK, a member of the European Parliament, the US senate or any other legislative chamber) will vote for something which they do not really support or believe in on the understanding that another member will vote in support on something that they do feel passionate about and want to support.

The activities of the 600-plus Members of Parliament in the UK government system might all be centred on dealing with case of self interest that have beneficial effects on some but might represent a net loss to society as a whole.

The arguments for logrolling is that decisions or laws that affect relatively small groups of people to a significant extent can be secured when as a general rule, such laws etc. would not be passed as it might not have a wide enough effect on society as a whole. The benefits to the group might still be more significant than the costs of implementing the policy or law. Without logrolling, those benefits would not be gained.

The problem with logrolling comes when the benefits to the group are negligible. In a complex web of agreements and deals over voting, it is quite possible that the net gain to society is less than the costs imposed in achieving those net gains. In other words, resources are allocated inefficiently and the public interest is not maximised.

One excellent example of where this might occur in reality is the whole issue of agricultural support - subsidies. The vast majority of the public know that subsidies exist but do not really understand the complexities of the issue or the effect it has on them.

For farmers, the issue is a very real one and there are plenty of lobbying groups that have particular self interests - be it in dairy farming, arable farming, livestock and so on. The net effect of this web of agricultural support mechanisms in place throughout the world on society as a whole represents a significant misallocation of resources. The costs of agricultural support are less than the benefits. The benefits to those who receive them, however, are very important to them.

The costs to society of the Common Agricultural Policy (CAP) are huge and are likely to far outweigh the benefits to society as a whole. Copyright: Stephanie Bretherton, from stock.xchng.

Rent Seeking

'Rent' in this context refers to the income some individual or group receives from an activity. The rents concerned do not always have positive social benefits; in fact, they are likely to have a negative social impact.

Two possible examples of this concept can be seen in the US and in the UK.

Steel Tariffs

In the US in 2003, President Bush announced tariffs would be imposed on steel imports to the US. The result of that was a rather pleased steel industry that was struggling to compete with imports. The benefits to this group might be extensive, not least in the jobs that might be saved as a result. However, when balanced out against the wider effects, these benefits might pale into insignificance.

There were threats of retaliation by other nations affected by the tariffs. This led to a reduction in demand for US-manufactured goods - along with potential job losses across a wide range of industries that might have used steel but also who had nothing to do with the steel industry. In addition, the tariffs meant that steel prices to US users rose - either through having to pay the tariff price for imported steel, or the switch to more expensive US producers. The ultimate effect was that the rents to the steel industry in the US could ultimately be argued to have had a negative social value.

Migrant Workers

In the UK, there has been much written about immigration into the UK from the new members of the EU. In particular, the number of workers coming into the UK from Poland has been substantial. The Office for National Statistics (ONS) reported that 1 in 19 workers in Britain was a foreign national. This might not include the number of illegal immigrants that cause so much consternation in the tabloid press.

Thousands of Polish workers have left Poland to come and work in the UK since Poland became a member of the EU. Their contribution to output has been praised by many but some are concerned at the effect such that migrant workers have on the UK. Copyright: Monika Zietek, from stock.xchng.

In the case of Polish workers legitimately working in the UK, there are many reports of the high level of skills, motivation and expertise of these workers. The benefits to the UK economy of these workers have been mentioned as a positive benefit to the UK. There are some, however, who have expressed deep concern that the flood of migrant workers to the UK is damaging. The usual argument is that these workers are taking jobs that could be done by UK workers and that they are taking these jobs because they are prepared to work for substantially less than UK workers would be to do the same job.

The reaction - lots of speeches by the Home Secretary attempting to deal with the high-profile news reports about migrant workers. Bulgaria and Romania, the most recent new members of the EU, now have restrictions on the number of migrant workers who can come to the UK - despite being part of the EU and the single market.

In this case, the rents are the wages paid to UK-based workers who take jobs. The costs are that the job concerned could be done by someone from Bulgaria (for example) at a lower wage, as well as to a higher quality. The benefits to society as a whole of having migrant workers are subsumed amidst the fear of the effect of the flooding of the labour market with migrant workers.

Empirical Evidence?

Both these examples are, to a large extent, anecdotal. The public choice theorist would be looking to judge empirically the effects of rent seeking in both these cases. The investigation would focus on whether the use of the government to raise the income of an individual or group and the amount of resources that would be needed to raise that income would have a negative overall social impact.

Tax Issues

Taxes are a reality in most people's lives. We all have to pay taxes. However, some people or groups are in a position to know enough about the system or have the resources to be able to legitimately avoid paying tax. There are plenty of loopholes in the tax system that individuals can exploit. The recent high profile case of so-called 'carousel fraud' being one example (see our In The News story). As these are loopholes, they are legitimate, even if they are not in the spirit of the tax system.

There are also plenty of people who live and work in the so-called 'black economy' or 'informal economy'. In such cases, these people will earn income which is not declared for tax purposes. That earned income might be legitimate or it might be from criminal activity.

In any event, the cost to society of the combined activities of tax avoidance and tax evasion is substantial. Because of the very nature of the two, estimates vary, but figures of £75 billion and above have been mentioned. That represents about 15% of the total tax receipts of the government in the UK.

We all have to pay taxes and might not like it. For some, the possibilities of avoiding tax (legal) or evading tax (illegal) is possible, but the cost to society as a whole is massive! Copyright: Steve Woods, from stock.xchng.

There is a massive opportunity cost involved in such figures. There are plenty of adverts in the UK at the time of writing, which suggest that benefit fraud is wrong, but also highlights that many people do not see it as wrong. There are few individuals in society who have not contributed to the informal economy in some way. Most would not see themselves as criminals.

One of the reasons for the existence of tax avoidance and tax evasion might be the design of the tax system. No system is going to be perfect but if people perceive that the system is unfair, there is a greater incentive to find ways around the system or live outside it. In such circumstances, there is a clear case of government failure.

The Drugs Problem

We can return to the issue we started this discussion with - the drugs problem. If we take a rational look at the drugs issue, as suggested by Professor King, we see that drugs impose a huge social cost on both individuals and society. Those involved in selling drugs do so because the returns can be considerable. The risk to them of getting caught is deemed to be less than the size of the benefits they receive from being involved - profits are high.

In any economic analysis, we can see that when profits exist, there is an incentive for new 'firms' to join the industry attracted by the profits that exist. Attempts by government to restrict supply serve to force up the price of drugs and make the returns, and therefore the attractiveness, even greater. The question has to be asked, therefore, whether the current policies and laws on drugs are working. Professor King thinks they are not.

Have governments around the world got drugs policies right, or do Professor King and his colleagues have a point? Copyright: Josh Klute, from stock.xchng.

He proposes a radical rethink in how we approach the drugs issue and wants to see drugs classed alongside tobacco, alcohol, over the counter and prescription drugs and solvents. The major focus of policy should be to reduce harm and treat users as requiring health treatment rather than focus on seizing drugs and prosecuting offenders. In shifting the emphasis in this way, there is an implication that treating drugs such as tobacco and alcohol could lead to the opportunity for the government to tax non-medicinal drug use. In so doing, the attractiveness of the drugs industry dims, because the profits are not as great. The long-term effect might be to reduce the incidence of harm as a result.

This is a very simplified view of the report, which took over two years and contains over 300 pages. (http://www.rsa.org.uk/acrobat/rsa_drugs_report.pdf) However, the important issue is the idea that current government legislation might serve to meet the self-interests of some groups who believe that a strong response is needed against drug users. Whether such a policy is ultimately in the public interest is not necessarily the case. Professor King would argue, I suspect, that current drugs policy was a clear case of government failure an example of public choice theory in action.