ENGR. KERWIN JAY C.

CONDORw

PUBLIC CHOICE THEORY

POINTS WHICH WILL BE COVERED IN THIS TOPIC:

• What we think happens in politics

• What actually happens in politics
• Meaning of Public Choice theory
• Some of the questions related to Public Choice theory
• Schools of Public Choice Theory
• The connection of public choice theory and Law
• Conclusion
• References
WHAT PEOPLE THINK THE GOVERNMENT DOES…

• Government is benevolent, politicians works towards the

welfare of the people.
• If the market fails then the government will intervene to
correct it as it has incentive to do so.
• The government knows what to do and it will do it.
• In a state of market failure the next best option is
government intervention.
• The negative externalities such as the problem of pollution
will be controlled by the government.

WHAT IS ACTUALLY THE CASE…

• People are rational beings who look for their own self-interest. When it comes to politics,
the case is the same. They don’t suddenly become benevolent, they strive for their own
self-interest.
• A failed market is better than a failed government as the
consequences of the former is less disastrous as compared to
the latter. In the past decade, markets have at most polluted the environment
or released some dangerous drug but the government has caused the death of thousands
of people.
• The government may know what to do but if it does not coincide with its self interest
of getting more votes then it won’t take any measures and instead of solving the
problem it might introduce a new one.
• Taking history into account, it is clear that the market is better off without government
intervention unless and until the market failure become severe or in the extreme cases of
national defense or global warming.
• In the case of negative externalities, far from controlling it
the government has in times introduced it. In the case of pollution, the
government

MEANING OF PUBLIC CHOICE

 • Developed by James Buchanan and Tullock, the concept of applying economic theories to
analysis the concepts of politics is the basic idea of public choice theory. It disagrees with the
idea that the people working for the government are public interest oriented or have a
benevolent deposition. In simple words, it mentions that people are the same but the
institutions are different so if a person is placed in a political environment then that person will
behave the same as any other person in his place.
• People are self-maximisers even in the field of politics hence they will look after their self-
interest instead of the public welfare. James Buchanan described this theory as “politics
without romance” as it gets rid of our wishful thinking about the government and shows its
realist form.
• Public Choice Theory is positive (what is) and not normative(what ought to be). It does have
some normative content but that concerns with the rules that govern the political activity.
• The theory throws light on the fact that the incentive such as winning elections or
Popularity drives the politicians to make a decision.
• The similarities between markets and government is they both can fail and as they both of
consists of people who are driven by their own self-interest. This doesn't make them greedy, it
just means they have their own incentives which drive them.
• The crucial point of this theory is for economists to not imagine a perfect benevolent
government. The famous Nirvana Fallacy comes into play, it emphasis that just because a
solution isn’t perfect doesn’t mean that one should reject it. The market is flawed but
government intervention is not the answer to it as the government might be worse.
• In economics, there is a cost and benefit a person chooses to pay for a product or
service and gets benefitted by it. Similarly in the field of politics, taxpayers pay the cost but the
benefit may or may not be to them. For instance a road is built, that road will be beneficial to
only those people who use it but the cost is been borne by everyone. This is favourable to the
majority and the minorities are exploited.
• This is the kind of injustice that comes into light when an economic analysis of politics is done.
This does not mean that government is selfish or it does not care about people, they might care
about the community but they will pass policies or take steps to try to increase the motive that
they care about like people do. This evidently points us to the fact that government- legislators,
bureaucrats are just like people who are driven by their personal motives and government is not
a perfect system instead it is flawed.

REAL LIFE SCENARIOS

• The most valid example of government intervention could be the controlling of drug prices by
the government through the DPCO (Drugs Prices Control Over) 2013.
• The government aimed to control the prices of the drugs which were essential to the people.
But according to surveys instead of price decreased, the price increased about 2 times the
earlier price. Comparatively other drugs which were not regulated by DPCO were more cheaper
and the price increase was much lesser.
• In the agriculture sector especially in food grains, the government has become a monopoly due
to its various policies. This has lead to it hoarding rice and wheat which has caused inefficiency
in the market and has affected the competition severely.

QUESTIONS RELATED TO PUBLIC CHOICE

  Public Choice theory asks some important questions which are crucial to understand the
political dynamics.
• If the legislators are indeed guided by their own self interest then how can they make policies
which will benefit the public interest?
• How will the people know which candidate’s self interest is akin to theirs so that they can vote
for them?
• If the policies are made by looking at the majority, are the minorities always exploited?
• Should government not intervene in the matters of the market?
These are some of the questions which will be answered in this topic.

PUBLIC INTEREST

• The very concept of public interest is flawed as the theory disagrees with the concept of
groups or communities. It instead focuses on individuals as they are the ones who have ideas or
interest , a group has members of conflicting ideas. Hence coming to a collective decision is not
possible.
• In this dilemma, Kenneth Arrow had spoken about the impossibility theorem where he states
that only a dictatorship will solve the problem of coming to a particular decision as it will
convert a community with diverse ideas to a single oiled machine. But of course dictatorship is
never the solution.
• A new theorem called the “median-voter theorem” by Duncan Black came into the picture.
Assuming that people are well-informed and all the voters have a preferred outcome and there
is a majority rule then this theorem will be successful. Median voter is one whose in the
middle of the spectrum. The spectrum has a left side and a right side, if a proposal is
closer to the median voter then that will be considered rather than other proposals which
are in the extreme sides. This will determine the popular decision among the people.

REAL LIFE SCENARIO

• The best example of median voter spectrum could be the wining of AAP in 2015 elections. In
this theorem, every candidate will like to be in the middle as that’s where the person is going to
secure the maximum votes. In this, the party also has to keep in mind the rival positions and
make decisions accordingly. In this situation not only is the position of the party considered but
also his core believes are taken into account.
• In the 2015 elections in Delhi, there were two major parties AAP and BJP. They both had equal
chances of winning but the core believes of the parties played a major role in deciding the
victor.
• The BJP party spoke mainly about Hindus and their superiority, creating an image that were
against other religions. Whereas AAP did neither, they did not showcase themselves as anti-
Hindu or anti-Muslim. So excluding the Hindu ardent, every other voter voted for AAP. It was
predicted by applying this theorem 54 per cent for AAP and 32.5 per cent for BJP and the rest
were for other third parties. This was exactly what happened and AAP won the elections.

VOTES

• Even though “your vote matters” has been the propaganda during elections, scholars suggest
that that’s not the case. The chances of one vote changing the outcome of elections is so
minute, that if it happens then there are high chances of some foul play and re-elections might
 take place. This is the case because the population is large and the votes of the voters are not
evenly split. Hence if one analysis the voting system then it will become increasingly clear that it
the cost of voting far exceeds the benefits of it.
• The cost of voting includes studying politics, educating oneself about the candidates or going to
the voting booth far exceeds the benefits as your vote is not even valuable. This makes the
whole voting system an irrational act.
• So if a person wants to vote for a particular candidate because he/she is confident about that
person unless and until a large population of people vote for the same person it is unlikely that
that candidate will be elected.
• So why do people vote? Most of the people vote because they think its there duty or due to
societal pressure or the feeling of expressing their opinion. Voting is akin to cheering your
favourite cricket team.
• Even though people vote, many of them are ignorant about basic facts related to their
candidates. This is rational as even if there were aware it won’t do them any good. This is called
rational ignorance which was first introduced by Antony Downs.
• It can’t be assumed that every voter is ignorant, the informed voters are essential too. The
Miracle of Aggression suggests that the votes of the ignorant people are cancelled out by the
votes of informed people. For instance if 80 per cent of the voters are ignorant and they
randomly choose any candidate then according to this theory the votes will be split among
the two candidates and the remaining informed individuals will add their votes hence the
person who deserves the most will win.
• The above theory is a miracle as it proves that the vote of the informed matters that . There is
however a major assumption in the above theory, the assumption is that the voters vote
randomly and not systematically. It has also been suggested by various scholars that in
most of the cases the irrational voters influence elections.
• It has also been seen that voters for a large part have been biased, they have
underestimated the economic effect that there request may led to. For instance, the
voters might be afraid of losing their jobs so they might protest to make sure that the
government does not shut down the industries even if it is making a loss. They might be full
aware of the consequences but due to the pressure of the voters they might have to make
irrational choices. Hence rational voters are few in number.

MINORITIES OR INTEREST GROUPS

• In a political scenario unlike the market, the choice of the person is not taken into account.
While buying a good or a service a person can easily say no to a certain good and get the good
that he/she wants but in a political situation a person is forced to abide by the policies made by
the legislators. If a person doesn't abide by it then he/she is punished. This can lead to people
getting oppressed by the decisions of the many.
• In this case not only can a majority not exploit a minority, it has been witnessed that the
minority groups team up to get their objectives fulfilled by the government and make the
majorities pay the cost of it.
• This groups mainly known as special interest groups have shared interests and a strong motive
to fulfil it unlike the majority groups which consist of varied interest and are disorganized.
• These small groups are more active and more likely to voice their opinions. They might also join
with other minority groups to form coalitions to put more pressure on the people.
 • This is most effective when the people have to choose a candidate for the legislature. As the
candidates are more likely to listen to these groups with strong incentives rather than majorities
with weak ones.
• The minority groups also impose their motives on the majority groups persuading them to join
their cause by making the reasons of their motives applicable to them as well.
• This leads to the minority group getting what they want and the burden of the cost falls on
the majority group.
• The government will create externalities instead of reducing it so that the minority
groups are benefited while the majority group will be pay the price in the form of taxes.
• Minority groups objectives are most fulfilled by the government as they too have their self
interest and these groups spread their interest effectively by conducting debates or protesting.
Thus for fulfilling their demands the government will increase the taxes or put restrictions over
the majority.
• This is dangerous in the long run as it effects the majority of the taxpayers and the coalitions
practice of influencing the governmental officials to act the way that is beneficial to them might
affect the whole economy of a country.
• This is also used by the politicians to secure more votes where the minority group try to attain
their interests is by vote-trading or logrolling. In this method, the minority group makes a deal
with another group by mutually agreeing to help each other attain their desired goals. For
instance, one group’s goal is to improve the water supply in one locality they will make a
deal with the other group to vote for them in return they will improve water supply in their
locality too. This is known as explicit logrolling.
• In implicit logrolling, various groups combine their manifestos to form one proposal and the
people who feel strongly about any objective in the proposal tend to vote for that person by
automatically agreeing to others.
• Logrolling has some positive and negative effects. The positive effects are that the objectives
which the minority groups have strong incentives about is achieved through vote-trading. The
negative effects are people are made to pay for projects which might not benefit them at all.
Projects whose benefits are not equal or more than to the cost are agreed in this manner which
is wasteful and irrational.
• Another major problem of interest groups is rent-seeking. This happens when the group’s
incentives if attained will benefit the group but pose a economical loss to the whole country.
Simply put, it is a case when you earn the benefits but you don’t pay anything back.
• Hence it is important that the people in the majority group carefully understand the agendas of
the minority group and analysis the consequences of it and not follow it blindly.

REAL LIFE SCENARIOS

• India being a diverse country has faced the problems of interest group quite often. The protest
by Gujjar communities in Rajasthan demanding reservations is a important example of interest
groups.
• The gujjar communities used violent methods to get the 5 percent reservations that wanted but
the end result remains that it is going affect the community. Reservations have always been
debated in our country, few calling it the downfall of our country.
• The benefit if the reservations will also be less as it is always thousands of people competing
for a few seats.

GOVERNMENT
 • Even though it has been evidenced that government consists of people motivated by their own
self-interest. The role that a government plays cannot be played by a market.
• Public goods are goods which are enjoyed by everyone but few pay for it, this is also called the
free-rider problem. They consist of cleaning the pollution or building hospitals or a park.
The market cannot or does not help in providing these goods and hence we need the
government to produce them.
• Bunchanan and Tullock regard government as “means by which rational, self-interested
individuals combine to promote their personal interests through collective action.”
• The reason we need the government is because even though government is not that reliable but
without it there will be anarchy. In a state of anarchy the conditions will be far worse as the
weak will be exploited by the powerful.
• The people in power will live in fear of hostility. They could instead prefer a peaceful
environment. This is the reason why the government is indeed important.
• The individual live by agreeing to countless number of agreements to live peacefully.
• In the book “The Calculus of Consent” written by Tullock and Bunchanan, they cite the above
mentioned reasons for the importance of government.
• As mentioned in earlier slides, the government cannot be romanticised to show it as an ideal
places with people like angels who work only for the public. If all men were angels then there
could not be a need for a government.
• The bureaucrats are also people driven with their own self-interest and their motive is to keep
on producing goods for budget-maximization. The more funding leads to more administration
decision, more prestige and increased possibility of promotion.
• So they produce more goods to the point where it is not useful as there incentive is not cost but
budget-maximization.
• One of the major point of public choice theory is that even if you change the people working
in a government that doesn't necessarily mean that the government will be better. It’s not
the people but the institutions, as people are rational beings who look after their self-interest.
• Hence it can be concluded that we need the government as the number of choices made
by the government is too high and the difference of opinions among the people make it
impossible for us to vote on every issue.

SCHOOLS OF PUBLIC CHOICE THEORY

• Virginia School of Public Choice – by Bunchanan and Tullock

• Rochester School – by William H. Riker and Kenneth Shepsle
• Chicago School - by George Stigler

VIRGINIA SCHOOL OF PUBLIC CHOICE

• It was founded by James Bunchanam who is regarded as the Father of Public Choice, he
received a Nobel prize for his contributions. This school was co-founded by Tullock whose part in
public choice theory is indeed commendable.
• This school focus on the real world politics and the relation between public choice and
constitution.
• This school has done a major part in discovering various theories under public choice theory.
Few of them have already been discussed. The crucial part of this school is the emphasis that it
put on role of the constitution.
 • Tullock and Bunchanan state that the people are not vulnerable to be exploited by the interest
group or the politicians as they can take the cover of the constitution to protect themselves and
secure their themselves from being exploited.
• They see constitution as a set of agreements formed by an individual by agreement with an
another individual. The order by the courts form to be part of it and every law is passed by a
rational person. The people have accepted it as even though it might curb some of their wishes,
people are still content on following it.
• The problem in it is as said by James is to come to a collective decision which is agreed by all.
James and Tullock have developed a two-stage process, people should agree on the areas where
collective decision is needed and then set a precedent for how the decisions in the future will be
made. After deciding how the decisions will be made will the decision of what to do will be
decided.
• This is based on the theory that no person will make decisions which will harm them in the
future.
• They believe that informed majority people should place votes to make sure that the minority
are not exploited.
• A constitution is made by a rational individual hence that person will place considerable amount
of limits on the politicians and bureaucrats to limit their power so that they cannot exploit the
people.
• James Buchanan emphasis on his idea of fiscal constitution that there should be a control on
the tax policy and any rational person will make the constitution in such a way that any of the
groups-major or minor is not exploited as that person might belong to a majority group now but
in few years that might change and a rational person will know this and hence act accordingly.
• James believes that this will stop the people from favoring their own group.
• This school puts special importance on federalism and localism. It talks about the fact that to
limit power in a few hands, one can just divide it.
• In this case, it will be easier to take decisions in smaller groups instead of larger ones and in
smaller groups people will share more similar taste and opinions. Hence it will be easier to make
some decisions locally.
• There is another advantage to this method, if a person doesn't agree with decisions of one
place then he/she can simply move to an another place.
• Federalism also permits laws or regulations to be made which are better suited to one region.
• This theory was regretted by the critics who argued that constitutions are not made by the
unanimous consent of the people. Some citizens have been following the constitution which
had been drafted by people who were of minority groups for their benefit. Some have been
following constitution which have olden rules and they have no say in the matter.
• The main drawback of this theory is that parliament is sovereign and the constitution does not
restrain its taxation powers.
• Even with these drawbacks, this school has brought a major change in the theory of public policy
as it has made economists aware that they can’t design policies without speaking to the people
and even then it might be one person loss and another person’s gain. The policy can be
beneficial only if it is agreed by all.

ROCHESTER SCHOOL

• William Riker played a major part in developing Rochester School, he focused on the interest
group forming coalitions to better its chances against the majority. He realised that coalitions do
not last for a long time as it is difficult to maintain the group.
 • He came to a conclusion that best plan for a minority group could be to form a group with
enough members to win but not too large that it becomes difficult to manage. He coined this
strategy as minimum winning coalition.
• William Ricker also brought in the game theory to better understand the voting mentality of the
voters.
• Game theory talks about the choices that one makes keeping in mind the actions of others. The
prisoner's dilemma is one of the best examples of game theory.
• In this scenario there are two prisoners, each one of them is kept in a separate room and they
are given three options. Fearing that the other person will throw him under the bus, both of
them confess to their crimes.
• This same scenario is compared to a voting system, where people will try to guess the choice of
the other voters to vote so that the person they dislike is not chosen or the person they like is
more likely to be elected.
• By knowing this, we can decode the real choice of the voter and a candidate will be elected who
suits the public to prevent manipulation by minority groups.

CHICAGO SCHOOL

• This school focus more on the pure economics i.e. the logical aspect of economics. It takes the
basic concept of supply and demand and uses them to analysis the political situation.
• It talks about the need to make a collective decision which can be the price which keeps the
need of the government who are suppliers and hence laws are the demand by the people which
are fulfilled by the supply of the government.
• George Stigler was the frontier in the Chicago school, he spoke about the interest groups. He
emphasised that it won’t be long before the government starts to work for the interest of this
minority special interest groups rather than the public interest.
• The special interest groups with their strong incentives will manipulate the politicians who will in
turn set up regulations and restrictions for their benefit.
• He further spoke about the government setting up agencies to specifically support the interest
of these groups.
• In the regard of politicians winning more votes, the politicians have to be brokers between the
groups who lobby the government for their own benefit and the taxpayers who in turn pay it.
• They may get benefited in the votes that they get which can be called as their brokerage fees
and if they are successful in winning the elections then they can be rewarded in terms of cash
or status, public attention etc.
• They may even get favours from the groups that they benefited in terms of cash or some other
bargain.
• The criticism of this school is that it simplifies factors which are not so simple. It changes
complex situations by analyzing it with basic economics.
• Even though buying of votes or people like in a marketplace is true in economics, similar terms
can not be used while speaking about politics as it could horrify the people. This is an abstract
comparison and can’t be taken literally, the problem arises when people do.
• Still this school has helped in deeper understanding of the principles of Public Choice Theory.

LAW AND PUBLIC CHOICE – THEORY

• Professor Daniel A. Farber and Philip P. Frickey analyzed the relation of law and public choice
theory in their book “Law and Public Choice: A Critical Introduction”.
 • They adopted a wait and see response to public choice theory. There approach is based on the
fact that a unplanned reaction to a threat even of large magnitude might lead to even higher
cost for the society.
• The professors do not agree with the fact that changes should be made in the government due
to the results of the analysis of public choice theory. Instead they want to wait and
confirm the findings of this theory as it might lead to some concreate applications with
promising results in the future.
• The professors agree with the popular view of the public choice theory that the politicians have
their won interest which mostly means getting more votes. This incentive drives them to make
decisions which are popular with the public so that they may still be in power in the re-election.
• A legislator on the other hand, has to make sure that his/her constituents (people who vote
their representative to represent their interest) wishes are being heard and hence will
act accordingly. She/He will vote according to the majority decision of his/her constituents. But
this view goes with the assumption that the constituents (a registered voter) will be rational i.e.
he/she will vote according to his/her self interest. This is not the case as most of the voters act
irrationally i.e. against their own self-interest. The truly rational person will never even vote as
he/she knows that his vote doesn’t count. According to the professors, people vote because of
their sense of duty towards their country.
• The professors further spoke about their views on the Arrow’s Theorem which states that
political results does not reflect the popular preferences of the voters instead their views get
destroyed through strategic behavior and manipulation.
• They disagreed with the statement in this theorem that democracy was a black box with strict
majority rule instead they believed that democracy takes the public views and processes it
through the public institutions to give the people the best decisions.
• Even though they agree that rent-seeking behavior is harmful to the economy. They believe that
it won’t manipulate political outcomes as in many cases majority voter’s choices prevail over the
minority groups.
• They further emphasis the government’s role is not restricted to economy as they have various
other factors to look after like equality among people or equal distribution of income.
• The professors give remedies to stop the power of interest groups by bringing in the Congress.
They talk about using the power of the Congress for limiting the power of the interest groups
by putting restrictions.
• Concluding their analysis, they emphasized the use of public choice in the interpretation of
statues to better understand the influence it will have among the people and to understand
whether the people who will be affected by the statue have proper representation in the
legislature.
• Hence they believe that though public choice theory is a good concept it still has a long way to
go before one can take any changes in the government.

CONCLUSION

• Public Choice theory has indeed done a remarkable job by applying basic economics to
the working of politics to show the political scenario in the most realest form.
• It breaks the very foundation of the early thinkers that a market failure will guarantee a
government intervention and hence all will be saved. It exposes the working of our political
system to show the people how vulnerable and prone to failure the government actually is.
• Even though political choice theory opens newer grounds that haven’t been explored it still
leaves us with a few questions.
• Do people really think about their economic interest ? Do they even know or care about the
political situation? It has been seen that people blindly follow leaders who are corrupt.
• It is even saddening to know that the judiciary particularly in India has sided with the majority
rule in the country. So it is evident that constitution can not do any action to limit the power of
the politicians.
• Hence, there are more questions to be answered by future theorists and even after these
criticisms, this theory is still held to be a important one which has dig deeper into the political
dynamics to analyse it further.