Government Failures, Rent Seeking, and Public Choice
Introduction
When markets fall short of delivering ideal outcomes, many turn to government intervention as the solution. But what happens when governments fail, too? This topic explores the concept of government failure—the idea that political decision-making is subject to its own set of constraints, incentives, and inefficiencies. From regulatory capture to misaligned incentives and unintended consequences, this guide invites advanced undergraduates to critically examine whether government actions always improve upon market outcomes—or sometimes make things worse.
Definitions and Basics
Rent Seeking, by David R. Henderson, from the Concise Encyclopedia of Economics
“Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher social security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.
Unintended Consequences, by Rob Norton, from the Concise Encyclopedia of Economics
The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or “unintended.” Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it….
Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. In 1692 John Locke, the English philosopher and a forerunner of modern economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.”
Public Choice Theory, by William F. Shughart II, from the Concise Encyclopedia of Economics
Public choice theory is a branch of economics that developed from the study of taxation and public spending. It emerged in the fifties and received widespread public attention in 1986, when James Buchanan, one of its two leading architects (the other was his colleague Gordon Tullock), was awarded the Nobel Prize in economics….
Political Behavior, by Richard L. Stroup, from the Concise Encyclopedia of Economics
Political activity, however, is startlingly different from voluntary exchange in markets. In a democracy groups can accomplish many things in politics that they could not in the private sector. Some of these are vital to the broader community’s welfare, such as control of health-threatening air pollution from myriad sources affecting millions of individuals, or the provision of national defense. Other public-sector actions provide narrow benefits that fall far short of their costs….
Government Spending, by Gordon Tullock, from the Concise Encyclopedia of Economics
In the past, government spending increased during wars and then typically took some time to fall back to its previous level. Because the effects of World War I were not totally gone by 1929, the line for the United States from 1790 to 1929 has a very slight upward slant. But in the second quarter of the twentieth century, government spending began a rapid and steady increase. While economists and political scientists have offered many theories about what determines the level of government spending, there really is no known explanation for either part of this historical record….
Considering what governments spend money on may help. Government spending on so-called public goods, national defense and police, for example, is sometimes blamed.
It is frequently asserted that the government spends much in helping the poor. Although the government does do so, the bulk of all transfer payments go to people who are relatively well off.
Economists trying to explain government spending have recently attributed it to special interest coalitions lobbying the government to transfer wealth to them. The term economists use to describe such lobbying is “rent-seeking.”
Russell S. Sobel, “How We Failed Our Economics Students and Caused Low Government Approval Ratings,” at Econlib. November 4, 2019.
The power of economics is that it helps us to understand the world around us by examining how individuals are predictably influenced by incentives, and how the institutions of society shape those incentives. Using those basic tools, scholars in public choice theory have now worked out the reasons government, like markets, may sometimes work well, and may sometimes fail. That is—there are systematic failures of government action that we can term government failure.
In the News and Examples
Does Market Failure Justify Government Intervention? (with Michael Munger), EconTalk podcast.
Economics students are often taught that government should intervene when there is market failure. But what about government failure? Should we expect government intervention to outperform market outcomes? Listen as Duke University economist Michael Munger explores the history of how economists have thought about this dilemma and possible ways to find a third or even fourth option beyond government or markets.
Art Carden and Steven Horwitz, “Is Market Failure a Sufficient Condition for Government Intervention?” at Econlib. April 1, 2013.
Externality problems are market ‘failures’ only in comparison to the perfectly competitive model’s equilibrium. In other words, the ‘failure’ here is not that markets ‘do not work’ in practice, but that they fail to live up to a blackboard ideal.
Don Boudreaux on Public Choice, EconTalk podcast.
Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about public choice: the application of economics to the political process. Boudreaux argues that political competition is a blunt instrument that works less effectively than economic competition. One reason for this bluntness is the voting process itself–where intensity does not matter, only whether a voter prefers one candidate to the other. A second reason is that political outcomes tend to be one-size-fits-all, which often leads to dissatisfaction. Boudreaux defends the morality of not voting, while Roberts, who does vote from time to time, concedes that one’s vote is almost always irrelevant in determining the outcome.
Don Boudreaux on Buchanan, EconTalk podcast.
Economist and author Don Boudreaux of George Mason University discusses the life and work of the economist James Buchanan with EconTalk host Russ Roberts. Buchanan received the Nobel Prize in 1986 for his work creating and developing public choice–the field which applies the tools of economics to politicians and political behavior. After discussing the importance of public choice, Boudreaux and Roberts focus on two contrarian articles of Buchanan’s where he argues for the importance of markets and life as processes rather than problems to be solved analytically.
Rent-Seek and You Will Find, by Mike Munger on Econlib
“I don’t know if we should stay in this business.” That city official was just being honest, but his framing of the problem surprised me. The “business” he was referring to was writing and winning grants from the Department of Housing and Urban Development (HUD), the federal agency charged with improving home ownership and low-income housing availability. Fifteen years ago, when I had this conversation, I didn’t understand what he meant….
Clifford Winston on Market Failure and Government Failure, EconTalk podcast.
Clifford Winston of the Brookings Institution talks about the ideas in his book, Market Failure vs. Government Failure, with EconTalk host Russ Roberts. Winston summarizes a large literature on antitrust, safety regulation and environmental regulation. He finds that government regulation often fails to meet its objectives. While markets are imperfect, so is government. Winston argues that idealized theories of government intervention based on textbook theories of market failure are not the way regulation turns out in practice. He argues that special interest politics explains much of the disappointing outcomes of government regulation.
Munger on Private and Public Rent-Seeking (and Chilean Buses), EconTalk podcast.
Mike Munger of Duke University talks with EconTalk host Russ Roberts about private and public rent-seeking. When firms compete for either private profit opportunities or government contracts, there are inevitably firms or people who spend resources but end up earning little or nothing. What are the differences, if any between these two forms of competition? How do they related to competitions that award prizes for discovering new technologies? The conversation begins with a discussion of a recent trip Munger took to Chile where he observed the current state of the Chilean bus system, a topic he has discussed in the past.
Satire on lobbying illustrating the unintended consequences of government policies: “A Petition”, by Frédéric Bastiat (pronounced bas-tee-AH). Chapter 7 in Economic Sophisms
From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps,….
To the Honorable Members of the Chamber of Deputies….
You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry….
We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun,…
Bruce Bueno de Mesquita on Democracies and Dictatorships. Podcast on EconTalk
Bruce Bueno de Mesquita of NYU and Stanford University’s Hoover Institution talks about the incentives facing dictators and democratic leaders. Both have to face competition from rivals. Both try to please their constituents and cronies to stay in power. He applies his insights to foreign aid, the Middle East, Venezuela, the potential for China’s evolution to a more democratic system, and Cuba. Along the way, he explains why true democracy is more than just elections–it depends crucially on freedom of assembly and freedom of the press….
Lobbying is rent seeking. Zingales on Capitalism and Crony Capitalism. EconTalk Podcast:
Luigi Zingales of the University of Chicago and author of A Capitalism for the People talks with EconTalk host Russ Roberts about the ideas in his book. Zingales argues that the financial sector has used its political power to enhance the size of the sector and the compensations executives receive. This is symptomatic of a larger problem where special interests steer resources and favors based on their political influence. Zingales argues for a capitalism for the people rather than a capitalism for cronies or the politically powerful. The conversation concludes with a plea by Zingales to his fellow economists to speak out against behavior that is legal but immoral–lobbying Congress for special treatment that exploits others to benefit one’s own industry, for example.
Economists agree about the drawbacks of rent seeking even if they disagree about other things. Stiglitz on Inequality. EconTalk Podcast:
Nobel Laureate Joseph Stiglitz of Columbia University talks with EconTalk host Russ Roberts about the ideas in his recent book, The Price of Inequality. Stiglitz argues that the American economy is dysfunctional, benefitting only those at the very top while the bulk of the workforce sees little or no gain in their standard of living over recent decades. Stiglitz blames this result on deregulation and the political power of the financial sector and others at the top. He wants an increase in regulation and the role of government in the economy and a more transparent Federal Reserve Bank that he blames for coddling the financial sector. The conversation also includes a discussion of the Keynesian multiplier.
Peltzman on Regulation. Podcast on EconTalk
Sam Peltzman of the University of Chicago talks about his views on safety, regulation, unintended consequences and the political economy of bad regulation. The focus is on his pioneering studies of automobile safety and FDA pharmaceutical regulation and the perverse incentives that even good intentions can produce….
Podcast Archive on Public Choice. EconTalk
A Little History: Primary Sources and References
Bad outcomes happen when government listens to lobbyists representing producers. “A Negative Railroad”, by Frédéric Bastiat. Chapter 17 in Economic Sophisms
I find a remarkable illustration of this in a Bordeaux newspaper.
M. Simiot raises the following question:
Should there be a break in the tracks at Bordeaux on the railroad from Paris to Spain?
He answers the question in the affirmative and offers a number of reasons, of which I propose to examine only this:
There should be a break in the railroad from Paris to Bayonne at Bordeaux; for, if goods and passengers are forced to stop at that city, this will be profitable for boatmen, porters, owners of hotels, etc….
James M. Buchanan, biography from the Concise Encyclopedia of Economics
James Buchanan is the cofounder, along with Gordon Tullock, of public choice theory. Buchanan entered the University of Chicago’s graduate economics program as a “libertarian socialist.”…
A Conversation with James M. Buchanan, Parts I and II.
Advanced Resources
The Collected Works of James M. Buchanan. Nine volumes on Econlib, along with other writings by Nobel Prize winner James M. Buchanan.