Public Choice Theory

BIBLIOGRAPHY

Public choice theory is a positive theory of interest group politics that applies the microeconomic perspectives of market exchange to political and policy problems. Borrowing from Anthony Downs’s approach of policy selection (1957), wherein governments select policies to appeal to a winning coalition of voters, public choice theory considers the ways in which interest groups’ policy preferences and relative bargaining power will affect government policies. The theory assumes a logic in which the government awards policy goods to those groups best able to lobby for their interests. Although the public choice method borrows from economics, its principal uses have been in the analysis of political questions. Public choice theory and interest group politics have generally been used in a variety of political contexts, such as tax policy (Becker 1983), trade protection (Schattschneider 1935; Eichengreen 1989), public good provision (Olson 1965), and economic sanctions (Kaempfer and Lowenberg 1992).

According to public choice theory, although a market analogy is a useful way to conceive of policy selection, there remain significant differences between economic exchange markets and political exchange markets. For example, economic market exchanges are generally believed to: (1) be undertaken voluntarily, (2) benefit all those involved, and (3) be Pareto optimal. Political markets, on the other hand, tend to favor one group over others, and are thus distributional and inherently conflictual. Thus, the political market is characterized by competition between opposed interest groups that expend their political capital to secure their preferred policies.

Through this competition over policies between opposed interests, the policy goods ultimately awarded by a government will reflect the influence-weighted preferences of the opposed interest groups. More formally, the political market will equilibrate when the influence-weighted utilities of the stronger groups are equal to the influence-weighted disutilities of their weaker opponents. Furthermore, policy changes will result from shifts in either the underlying distribution of the power of opposed groups or as a result of shifts in the relative salience that groups hold for issues of concern. These shifts will, in turn, influence decisions on where these groups expend their scarce political capital.

Public choice theory has two principal variants: the “Chicago School,” which considers the awarding of policy goods through a political market as relatively benign; and the “Virginia School” (based at George Mason University), which is concerned about how competition over government largess undermines social welfare through deadweight costs and inefficiencies. Members of the Chicago School, such as Gary Becker, argue that these social deadweight costs will be minimized for two reasons. First, because the utility of policy goods increases at a diminishing rate (as market distortion and deadweight costs accumulate), winner groups will become decreasingly inclined to lobby for further rents, while loser groups will become increasingly inclined to lobby for relief and a rationalization of the political economy. Secondly, because loser groups lobby to ensure that they suffer the minimum disutilities possible, they will reduce deadweight costs further. As a result, the competition between opposed groups will reduce social costs to a minimum.

On the other hand, members of the Virginia School point out that, because of their political nature, rent transfers are often highly inefficient in order to disguise the extent of the pilfering from the community chest undertaken by beneficiary groups. Worse, when rents are highly concentrated and their costs are widely defused, narrow rent-seeking interests may be able to exploit collective action problems on behalf of the larger body politic for their own benefit, resulting in further net social and economic inefficiencies. For example, the economist Gordon Tullock notes that farm support is often given through inefficient market manipulation, as opposed to more efficient cash subsidies, in order to conceal the real scope of the super-normal returns to farming interests through the political process (1989). Thus, due to their concern with the interaction between interest group pressures and rentseeking and governments’ proclivity for overregulation, the Virginia School is pessimistic with respect to interest groups’ normative impact on policy outcomes.

Although public choice theory and interest group politics have been used with some success in the political economy and economics literatures, critics have noted two potentially significant problems with this body of work. First, public choice theory may give short shrift to the key role that domestic institutions play in determining policy outcomes, because the groups of interest are often modeled as if they were operating in an institutionally unconstrained policy market. Yet while work in the public choice tradition often does not explicitly address institutions, they can still be incorporated into such a framework. As politically determined rule– and agenda-setting mechanisms, institutions are amenable to the same lobbying and bargaining processes described above. That is, by thinking of institutions as meta-policies, public choice tools can be used to endogenously analyze institutions’ creation and downstream effects.

Second, critics allege that public choice theory, which was developed primarily within the American political context, is unsuited to nondemocratic countries in which the capacity of opposition groups to lobby for their policy preferences is repressed. It is important to note that the metaphor of “lobbying” need not be taken literally, however. As conceived of in public choice theory, lobbying can refer to any kind of influence. Regardless of the type of regime, political bargaining always takes place, even if it is only implicit. Although the preferences of excluded groups in nondemocratic countries may not affect the political process directly, they may do so indirectly, since disenfranchised groups can signal their policy preferences by engaging in acts of political resistance such as fomenting armed rebellion. This resistance, or the threat of it, effectively acts as a tax on the ruling group’s willingness and ability to unilaterally set policy because it raises the costs of enforcement and administration. Thus, even in nondemocratic states, policies will be determined through a bargaining process between opposed groups, although ruling groups in authoritarian regimes are, of course, likely to enjoy policies far closer to their preferences. In these regimes there is an extreme concentration of political capital, in contrast to its relative diffusion within democratic regimes.

BIBLIOGRAPHY

Becker, Gary S. 1983. A Theory of Competition Among Pressure Groups for Political Influence. Quarterly Journal of Economics 98 (3): 371–400.

Downs, Anthony. 1957. An Economic Theory of Democracy. New York: Harper.

Eichengreen, Barry. 1989. The Political Economy of the Smoot-Hawley Tariff. Research in Economic History 12: 1–43.

Kaempfer, William, and Anton Lowenberg. 1992. International Economic Sanctions: A Public Choice Perspective. Boulder, CO: Westview Press.

Major, Solomon, and Anthony J. McGann. 2005. Caught in the Crossfire: “Innocent Bystanders” as Optimal Targets of Economic Sanction. Journal of Conflict Resolution 49 (3): 337–359.

Mueller, Dennis C. 2003. Public Choice III. New York: Cambridge University Press.

Olson, Mancur. 1965. The Logic of Collective Action. Cambridge, MA: Harvard University Press.

Tullock, Gordon. 1989. The Economics of Special Privilege and Rent Seeking. Boston: Kluwer Academic.

Solomon Major