Public Choice Theory
Public choice theory applies the methods of economics to the analysis of political behaviour, treating politicians, bureaucrats, and voters as rational agents pursuing their own interests. It challenges the view that government acts benevolently in the public interest and provides a framework for understanding the outcomes of political processes.
Rational Actors in Politics
Public choice theory assumes that individuals behave rationally in political as well as economic settings. Politicians seek to win elections and to retain office. Bureaucrats seek to advance their careers, to expand their budgets, and to pursue the objectives of their agencies. Voters seek to advance their interests, weighing the benefits of voting against the costs.
The assumption of rational self-interest does not preclude public-spirited behaviour, but it does not assume it either. The theory analyses the consequences of behaviour under the incentives and constraints of political institutions, rather than assuming that actors are motivated by the public interest.
Rent Seeking and Interest Groups
A central theme is rent seeking, the use of resources to obtain benefits from the political process. Concentrated interests with a lot at stake may organise effectively to lobby for favourable policies, while diffuse interests, such as consumers, face higher costs of organisation and are less effective.
The result can be policies that benefit narrow groups at the expense of the broader public, including tariffs, subsidies, and regulatory protections. The analysis of interest groups and of the demand for and supply of regulation informs the assessment of policy outcomes and the design of institutions.
Voting and Collective Choice
Public choice theory analyses voting behaviour and collective choice. The median voter theorem predicts that, under certain conditions, policy reflects the preferences of the median voter. Other analyses emphasise the role of agenda setting, coalition formation, and strategic voting.
The theory also addresses the problems of collective choice identified in social choice theory, including the possibility of cycles in majority voting and the sensitivity of outcomes to the agenda. These results imply that political outcomes may not reflect a coherent social preference and that institutions matter for the results.
Implications
Public choice theory implies that government intervention should be assessed with attention to the incentives it creates and to the political processes that shape it. It motivates the design of institutions that constrain discretion, enhance transparency, and align incentives, including constitutional rules, independent agencies, and mechanisms for accountability.
The theory also informs the analysis of government failure, providing a framework for understanding why interventions may not achieve their intended objectives. It complements the analysis of market failure and informs the comparative assessment of alternative institutional arrangements.
Interest Groups and Collective Action
Public choice theory analyses interest groups and the conditions under which they organise. Mancur Olson's logic of collective action holds that large groups with diffuse interests face greater difficulty organising than small groups with concentrated interests, because the benefits of collective action are shared while the costs are borne individually.
This asymmetry explains why producer groups are often more effective in politics than consumer groups. The result can be policies that benefit producers at the expense of consumers, including tariffs, subsidies, and regulatory barriers to entry. The analysis of collective action informs the understanding of the formation and influence of interest groups.
Political Business Cycles
The theory of political business cycles holds that politicians may manipulate the economy to win elections, stimulating before elections and tightening afterwards. The resulting cycles in output and inflation reflect political rather than economic factors, and they can impose costs on the economy.
Empirical evidence on political business cycles is mixed, and the phenomenon appears to have diminished in some countries, perhaps because of greater central bank independence and of the credibility of policy frameworks. Nonetheless, the analysis highlights the potential for political incentives to influence economic policy.
Bureaucracy and Budget Maximisation
Public choice theory analyses the behaviour of bureaucrats, who are assumed to pursue their own objectives, including budget maximisation, within the constraints of their agencies. The resulting behaviour may lead to larger government and to inefficiency, since agencies have an incentive to expand their activities and to resist reductions.
The analysis informs the design of institutions to constrain bureaucratic behaviour, including performance targets, competition among agencies, and mechanisms for oversight and accountability. It also informs the analysis of public sector reform and of the conditions under which such reforms succeed.
Constitutional Political Economy
Public choice theory has a constitutional dimension, concerned with the rules that constrain political action. Constitutional political economy analyses the choice of rules, including rules on taxation, spending, and the conduct of policy, and the conditions under which such rules improve outcomes.
The analysis informs debates about fiscal rules, balanced-budget amendments, and the design of institutions such as independent central banks. It emphasises that the choice of rules is itself a political decision and that the rules adopted reflect the interests and the constraints of those who choose them.