What Is Public Choice Theory?

Allocating government expenditures
Allocating government expenditures.

Andriy Onufriyenko / Getty Images

Public choice theory is the application of economics to the study of political science and government decision-making. As a unique branch of economics, it developed from the study of taxation and public spending. The public choice theory challenges the public interest theory, the more traditionally established theory which holds that decision-making in democratic governments is motivated by “selfish benevolence” on the part of elected representatives or government employees. In simpler terms, public interest theory presumes that elected and appointed public servants are motivated more by self-interest than by a moral desire to maximize the welfare of society.

Key Takeaways: Public Choice Theory

  • Public choice theory is the application of economics to political science and government policy.
  • Public choice theory developed from the extensive study of taxation and public spending.
  • Public choice is often cited in explaining how government spending decisions often contradict the preferences of the general public.
  • Public choice theory opposes bureaucracy and criticizes its hierarchical administration.
  • Advocates of public choice recommend increased use of private-sector sources by the government to supply public services.

Public choice theory takes the principles used by economists in analyzing people's actions in the commercial marketplace and applies them to government official actions in collective group decision-making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest. While most people base at least some of their actions on their concern for others, the dominant motive in people's actions in the marketplace is a concern for their own interests. Public choice economists operate on the same assumption—that although people in the political arena have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest.

History and Development 

As early as 1651, English philosopher Thomas Hobbes laid the groundwork for what would develop into public choice theory when he argued that the justification for a political obligation is that since people are naturally self-interested, yet rational, they will choose to submit to the authority of a sovereign government to be able to live in a stable civil society, which is more likely to allow them to fulfill their interests.

The influential eighteenth-century German philosopher Immanuel Kant wrote that for any action to have moral worth, it must be undertaken out of a sense of duty. According to Kant, actions taken out of self-interest—selfish benevolence—simply because they make the individuals taking them “feel good” about themselves, preclude the possibility of those actions having any moral value. 

In his 1851 writings on political economy, American statesman and political theorist John C. Calhoun anticipated the "public choice revolution" in modern economics and political science. Calhoun's early speeches and writings argued for an expansive national government. His later works, most notably A Disquisition on Government, argued for a strong version of states' rights, nullification, and secession. In the essay, Calhoun argues that a numerical political majority in any government will eventually impose a form of despotism over a minority unless some way is devised to secure the cooperation of all social classes and interests and, similarly, that innate corruption would reduce the value government in a democracy.

In the late 1890s, the works of Swedish economist Knut Wicksell served as an early precursor of modern public choice theory. Wicksell viewed government as a political exchange, a quid pro quo, or “something for something" agreement to be used in formulating policies dedicated to achieving the greatest benefit to the people when linking revenue raised from taxation with public expenditures.

In the early 1900s, economic analysts viewed the goal of government as one of maximizing a sort of welfare function for society, in contrast to the goals of totally self-interested economic agents, such as corporations. However, this view created a contradiction, as it is possible to be self-interested in some areas while being altruistic in others. In contrast, early public choice theory modeled government as made up of officials who, besides pursuing the public interest, might act to benefit themselves.

In 1951, American economist Kenneth J. Arrow influenced the formulation of the public choice theory when he put forth his “social choice theory,” which considers whether a society can be ordered in a way that reflects individual preferences. Arrow concluded that in non-dictatorial settings, there could be no predictable outcome or preference order for distributing expenditures of government funds throughout the society.

Blending elements of welfare economics and public choice theory, the social choice theory is a theoretical framework for the analysis of combined individual opinions, preferences, interests, or needs to reach collective decisions on social welfare issues. Whereas public choice theory is concerned with individuals making choices based on their preferences, the social choice theory is concerned with how to translate the preferences of individuals into the preferences of a group. An example is a collective or bipartisan decision enacting a law or set of laws as prescribed by the U.S. Constitution. Another example is voting, where individual preferences over candidates are collected to elect a person that best represents the electorate’s preferences.

In his 1957 book Economic Theory of Democracy, American economist and expert in public policy and public administration Anthony Downs, established that one of the chief underpinnings of public choice theory is the lack of incentives for voters to monitor government effectively. According to Downs, the typical voter is largely ignorant of political issues, and this ignorance is rational. Even though the result of an election may be very important, an individual's vote rarely decides the election. Since individual voters are aware that they have virtually no chance to determine the outcome of the election, they see no value in spending time following the issues.

Modern-day public choice theory, along with modern election theory have been dated to the works of Scottish economist Duncan Black. Sometimes called “the founding father of public choice,” Black outlined a program of unification toward a more general "Theory of Economic and Political Choices" based on common formal methods and developed underlying concepts of what would become median voter theory.

In their 1962 book, The Calculus of Consent: Logical Foundations of Constitutional Democracy, economists James M. Buchanan and Gordon Tullock authored what is considered one of the landmarks in public choice theory and constitutional economics. The framework developed by Buchanan and Tullock differentiates decisions into two categories: Constitutional decisions and political decisions. Constitutional decisions are those that establish long-standing rules that rarely change and mold the political structure itself. Political decisions may be relatively transient and take place within and are governed by that structure.

Public Choice and Politics

In most cases, politics and public choice theory do not mix well. For example, public choice is often used to explain how political decision-making results in outcomes that conflict with the preferences of the general public. For example, many special interests and earmark spending projects are funded by Congress every year despite not being the desire of the overall electorate. Such catering to the economies of public choice can benefit politicians financially by opening the door to substantial future income as lobbyists. The earmark project may be of interest to the politician’s local constituency, increasing district votes or campaign contributions. Since they are spending the public’s money, the politicians pay little or no cost in return for these benefits.

Dollar banknotes stream flying around United States Capitol.
Dollar banknotes stream flying around United States Capitol.

OsakaWayne Studios / Getty Images

Known for his work on the subject, American economist James M. Buchanan has defined public choice theory as “politics without romance.” According to Buchanan’s definition, public choice theory dispels the rather wishful presumption that most participants in politics work to promote the common good—anything that benefits and is naturally shared by all members of the society, compared to things that benefit the private good of individuals or sectors of society. In the conventional “public interest” view, elected and appointed government officials are portrayed as benevolent “public servants” who faithfully carry out the “will of the people.” In tending to the public’s business, voters, politicians, and policymakers are assumed to be capable of rising above their self-interests. Over two centuries of experience, however, have shown that these assumptions of benevolently motivated politicians are rarely true in practice.

Economists do not deny that people care about their families, friends, and community. However, public choice, like the economic model of rational behavior on which it is based, assumes that people are guided chiefly by their self-interests and, more important, that the motivations of people in the political process are no different. They are all human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot measures they think will make them personally better off; bureaucrats strive to advance their careers, and politicians seek election or reelection to office. Public choice, in other words, simply transfers the “rational actor” model of economic theory to the realm of politics. Developed in 2003 by American political scientist Paul K. MacDonald, the rational actor model assumes that the primary decision-maker—the politician—is a rational person, making an optimal choice based on calculated expected benefits and guided by consistent personal values.

Elections

By studying collective decision-making by committees, Duncan Black deduced what has since been called the median-voter theorem. The median voter theorem is a proposition relating to ranked-choice voting, an electoral system growing in popularity that allows voters to vote for multiple candidates, in order of their preference Also known as 'Hotelling's law,” the median voter theorem states that if voters are fully informed on the issues, politicians will gravitate toward the position occupied by centrist, rather than left- or right-wing voters, or more generally toward the position favored by the electoral system. 

Because extreme platforms tend to lose to centrist platforms, candidates and parties in a two-party system will move to the center, and, as a result, their platforms and campaign promises will differ only slightly. Somewhat later, the median voter theorem was displaced by the probabilistic voting theorem in which candidates are unsure of what voters' preferences will be on all or most issues, the situation which is true of most modern governmental elections.

Legislation

Ballot initiatives and other forms of direct democracy aside, most political decisions are made not by the citizens, but by the politicians elected to represent them in legislative assemblies like the U.S Congress. Because the constituencies of these representatives are typically geographically apportioned, elected legislative officeholders have strong incentives to support programs and policies that provide benefits to the voters in their home districts or states, no matter how irresponsible those programs and policies may be from a national perspective.

Bureaucracy

In applying the logic of economics to the often illogical problems of distributing public funds and services, public choice theory questions the dominance of bureaucracy and criticizes its hierarchical administration.

Due to the economy of specialization and division of labor, legislatures delegate responsibility for implementing their policy initiatives to various government departments and agencies staffed by career bureaucrats, who secure their positions through appointment rather than election. Launched by economist William Niskanen, early public choice literature on bureaucracy assumed that these government agencies would use the information and expertise they gained in administering specific legislative programs to extract the largest budget possible from relatively uninformed elected lawmakers. Budget maximization was assumed to be the goal of the agencies because more agency funding translates into broader administrative discretion, more opportunities for promotion, and greater prestige for the agency’s bureaucrats.

More recently, however, public choice experts have adopted a “congressional dominance” model of bureaucracy. In this model, government agencies and their bureaucrats are not free to pursue their own agendas. Instead, agency policy preferences mirror those of the members of key congressional committees that oversee particular areas of public policy, such as agriculture, nutrition, and housing. These oversight committees constrain bureaucratic discretion by exercising their powers to confirm top-level political appointees to senior agency positions, finalize annual bureau budget requests, and hold public hearings.

So, is it possible to increase and improve the efficiency of the government bureaucracy? Niskanen holds that to raise the performance of public bureaucracy, the remedy must be increasingly found in terms of private markets where the structure and incentive system exist specifically for the supply of public services. As a result, suggests Niskanen, the monopoly of the bureaucracy must be reduced by exploring privatization—the use of private-sector sources to supply public services.

The Lesson of Public Choice

US Flag wrapped around hundred dollar bills.
US Flag wrapped around hundred dollar bills.

Valentyn Semenov / EyeEm / Getty Images

A key conclusion of public choice theory is that merely electing different people to public office will rarely produce major changes in government policy outcomes. While the quality of government, like art, is “in the eye of the beholder,” electing what a plurality of voters perceive to be “better” people does not, by itself, lead to a much “better” government under this theory. Adopting the assumption that all people, be they voters, politicians, or bureaucrats, are motivated more by self-interest than by public interest evokes the perspectives of one of America’s Founding Fathers and framers of the Constitution, James Madison, on the problems of democratic governance. Like Madison, public choice theory recognizes that people are not angels and focuses on the importance of the institutional rules under which people pursue their own objectives.

“In framing a government which is to be administered by men over men,” Madison wrote in Federalist, no. 51, the great difficulty lies in this: you must first enable the government to control the governed, and in the next place oblige it to control itself.” 

Sources

  • Butler, Eammon. “Public Choice―A Primer.” Institute Of Economic Affairs (March 1, 2012), ISBN-10: ‎0255366507.
  • Mueller, Dennis C. ‘Public Choice: A Survey.” Journal of Economic Literature, 1976, https://web.archive.org/web/20131019084807/http://pages.uoregon.edu/cjellis/441/Mueller.pdf.
  • Tabarrok, Alexander; Cowen, Tyler (1992). “The Public Choice Theory of John C. Calhoun.” Journal of Institutional and Theoretical Economics, Vol. 148, No. 4, 1992, ISSN 0932-4569.
  • Buchanan, James M. “The Calculus of Consent: Logical Foundations of Constitutional Democracy.” (The Selected Works of Gordon Tullock), Liberty Fund (November 11, 2004), ISBN-10: ‎0865975213.
  • Calhoun, John C. “A Disquisition on Government.” St. Augustines Press (September 30, 2007), ISBN-10: ‎1587311852.
  • Downs, Anthony. “An Economic Theory of Democracy.” Harper and Row, (January 1, 1957), ISBN-10: ‎0060417501.
  • Holcombe, Randall G. “Political Capitalism: How Economic and Political Power Is Made and Maintained.” Cambridge University Press (July 19, 2018), ISBN-10: 1108449905.
  • Niskanen, William A. “Bureaucracy and Public Economics.” Edward Elgar Pub., 1996, ISBN-10: ‎1858980410.
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Longley, Robert. "What Is Public Choice Theory?" ThoughtCo, Oct. 27, 2022, thoughtco.com/public-choice-theory-6744655. Longley, Robert. (2022, October 27). What Is Public Choice Theory? Retrieved from https://www.thoughtco.com/public-choice-theory-6744655 Longley, Robert. "What Is Public Choice Theory?" ThoughtCo. https://www.thoughtco.com/public-choice-theory-6744655 (accessed December 10, 2022).