Public choice theory

Regulations don't just "happen". Much like with sausages there is a dirty game behind it.

Before the 1960s, most social scientists were still naive enough to take politicians' speeches about "the general welfare" at face value. But that was soon to change.  In the 60's and 70's, economists began to use their standard tools to understand how democracy works.  "We would never believe a businessman who claimed to work for the public good," they reasoned.  "Why should we believe a politician?"  Instead, they assumed that politicians maximize votes, just as firms maximize profits.  The result was public choice theory, and eventually won James Buchanan a Nobel Prize. (Buchanan 2001).

Public choice theory emphasizes the contradiction between the propaganda of government intervention and the reality.  Government supposedly intervenes to advance the interests of the majority. In reality, however, its goal to advance the interests of political insiders at the expense of everyone else. (Tullock 1967; Krueger 1974)

One of public choicers' favorite examples is airline regulation.  The Civil Aeronautics Board of USA claimed to protect travelers from rapacious airlines.  In fact, the mission of the CAB was to keep airfares up by restricting competition.  To say that "regulation did not work" is rather misleading.  It failed in its official goal of helping consumers, but it succeeded in its actual goal of shielding the regulated industry from competition. (Friedman and Friedman 1979)

In each case, the altruistic rhetoric is a smokescreen.  Laissez-faire would make most people better off, but financially endanger or even bankrupt the politically connected forces behind the expansion of government power.

Each piece of legislation has the following components:
  1. A public-interest rationale.
  2. Supportive interest groups with a hidden financial agenda.
  3. "Full rent dissipation".
  4. Negative consequences for the general public.
Full Rent Dissipation:

The idea is simple.  If the government has $1,000,000 to hand out, lobbyists will spend up to $1,000,000 to sway the legal process to get their hands on it.  So begins a legal "arms race"; the more the government distributes, the harder interest groups fight to get their cut.

Furthermore, lobbying cannot remain unusually profitable for long, because high rewards attract new entry – like the ruthless. The long-run effect is not to enrich the special interests, but to destroy wealth.  This is a common explanation for the failures of India's economy. (Krueger 1974). Everything is politicized, so vast resources that could have been used for production instead chase after government privileges.

But why does democracy put the economy up for grabs, if it is such a bad idea?  Public choicers' standard answer blames voters' rational ignorance.  Paying attention to politics has virtually no payoff for the average voter, so it is rational to not pay attention.  The result: Few see through the smokescreen of public interest rhetoric to the sordid reality of the sausage factory.  Even fewer realize that government intervention is the fuel of pressure group warfare.

The appeal to rational ignorance has its critics. (Wittman 1995)  Big problem: There is a difference between ignorant and gullible.  If voters were really "rational ignorant" about politics, they would greet altruistic rhetoric with skepticism. If rational ignorance were the central weakness of democracy, voters could protect themselves with a simple slogan: "When in doubt, vote No."

If voters were plain ignorant, they would have the modesty to leave other people in peace. In practice, however, the man in the street combines ignorance with self-righteous dogmatism – and votes for politicians who pander to his folly.  The ultimate source of destructive policy is grassroots neglect of the virtue of rationality.

Public choicers think that interest groups are the proximate cause of a lot of wealth-destroying legislation. But in my judgment, there is one more step ahead of the standard public choice story: Yes, lobbyists enrich themselves at the expense of the majority, but only after the majority paves the way for the lobbyists by electing statist politicians.

The sausage factory is right in front of the voters, but they refuse to see it – or even think about what goes on inside.    
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