Old habits of thought are difficult to shred. Public choice theory entered economics three quarters of a century ago, but many analysts and journalists have barely noticed. A Financial Times column is a case in point (Gillian Tett, “Snickers Wars Reveal the Enduring Perversity of Human Behaviour,” April 4, 224):
First, business competition does not always deliver true efficiency; markets can fail. Second, this market failure arises because consumers are not the all-knowing rational agents that they appear in economic models. They have cognitive biases that lead them to make poor choices and leave them ill-equipped to make judgments about inflation.
The public choice intellectual revolution started with a simple analytical assumption: just as the typical individual generally seeks his own interest in private choices, he continues to do the same when he enters the public-choice sausage machine as a politician or government bureaucrat. (His voting behavior can be different because he has no influence on the outcome of elections and referendums, so he can be altruistic or otherwise ethical at no cost.) The self-interest assumption has proven very useful in explaining how governments actually work, as opposed to assuming a nirvana government acting benevolently and with perfect knowledge to correct “market failures.” In reality, government failures are generally worse for most individuals than market failures. In short, politicians and government bureaucrats are just ordinary individuals with ordinary incentives—but to whom immense coercive power is granted over other ordinary individuals.
That this discovery waited 300,000 years—some 3,000 years of intellectual history—to be correctly formalized is not surprising. During nearly all these centuries and over nearly all the surface of the globe, individuals of the Homo Sapiens species thought that political authority figures were part of a superior sort of mankind. Such beliefs probably had evolutionary (survival) benefits. As Bertrand de Jouvenel wrote, individuals obey authority because it “has become a habit of the species.”
Typically and boringly, the columnist’s solution to “market failures” is to give governments—homo politicus and homo bureaucraticus—more power to control individual and private choices. As if it were obvious that a free consumer is less rational than a coercive politician. As if the former’s individual choices were less economically efficient and more dangerous than, say, what Joe Biden, Donald Trump or Katherine Tai would impose on him.
As for the behavior of the voters themselves, public choice theory explains Joseph Schumpeter’s observation in his 1950 book Capitalism, Socialism, and Democracy:
[The private citizen] is a member of an unworkable committee, the committee of the whole nation, and this is why he expends less disciplined effort on mastering a political problem than he expends on a game of bridge.” …
Thus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his own interests. He becomes a primitive again.
Those who already had an ideological preference for collective choices over private choices, for authority over liberty, for command over contract, were more likely to miss the public choice revolution. But they later quickly embraced “behavioral economics,” which ignores the individual’s cognitive biases when he enters the political realm. Such is the main cognitive bias of behavioral economists or, at least, of their admirers.
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DALL-E described as follows the image I, somewhat tendentiously, instructed him to generate: “Here are the images depicting the stark contrast between the hardship under market failures and the transition to a political land of plenty and happiness, under the guidance of a loving political leader.”
READER COMMENTS
Warren Platts
Apr 7 2024 at 12:27pm
Excellent article sir. Agree 100%. Only quibble is the politician in the image should have an Abraham Lincoln-style beard! 😀
Jose Pablo
Apr 7 2024 at 4:20pm
I don’t know, Warren, maybe an image from the “Great Leap Forward” campaign in China would have been much more appropriate.
https://chineseposters.net/themes/great-leap-forward
Pierre Lemieux
Apr 7 2024 at 5:05pm
Jose: These posters, which I did not know, are quite extraordinary. And it seems that we can use them. DALL-E may have some competition.
Jon Murphy
Apr 7 2024 at 5:29pm
Thank you for sharing. The artwork on those are beautiful.
One of the interesting things to me is the translations. Amazing how many of the slogans are very similar to the pronouncements made by Trump, Biden, Cass, Piketty, and other industrial planner wannabes. Plus ça change, plus c’est la même chose, non?
Jon Murphy
Apr 7 2024 at 12:44pm
Great stuff. It always amazes me how the simple insight that politicians are people too is either ignored or dismissed as irrelevant.
Such an insight I think is the biggest reason* why industrial planning, trade wars, and other interventionist methods are doomed to fail. They just have completely unrealistic assumptions about the behavior of politicians. Especially when it comes to international trade, it amazes me how protectionists have absolutely no theory of politics at all.
*Some may argue that the Hayekian knowledge problem is a bigger factor. It certainly matters and is significant, I do not deny that at all. But that’s a conversation for a different time.
Pierre Lemieux
Apr 7 2024 at 3:26pm
Jon: My “and with perfect knowledge” was meant to acknowledge the central planner’s knowledge problem. I probably thought, like you, that this should be another conversation.
Jon Murphy
Apr 7 2024 at 5:26pm
To be clear, my “another conversation” remark was referring to whether incentive problms or knowledge problems constitute a bigger reason for planning (centralized or otherwise) failure.
Jose Pablo
Apr 7 2024 at 4:25pm
Such an insight I think is the biggest reason* why industrial planning, trade wars, and other interventionist methods are doomed to fail.
For the very same, very real, reasons, Jon, a minarchist state limited to assure protection of the individual against foreign invasions and domestic violence, is also “doomed to fail”. “Normal people” once granted this kind of power, would be tempted to expand their initially limited “mandate”.
Jon Murphy
Apr 7 2024 at 5:24pm
Yes, I think that’s probably correct. Which brings us to the great constitutional question: how to limit the ability of people to overstep their constitutional mandate?
Laurentian
Apr 7 2024 at 6:11pm
But if all traditions, customs and social norms should be challenged then why shouldn’t the “limited mandate” be challenged as an outdated tradition, custom or social norm?
And constitutional mandates only work if people think the constitution is worthy of respect. A significant number of Americans think the US Constitution is outdated document written by a bunch of genocidal racist slave-owning straight white men. So appealing to the Constitution won’t work for them. And a significant number of Americans also think the American Revolutionaries were villains so appealing to the Declaration of Independence or the Articles of Confederation won’t work either.
Also where are those judges who will enforce this constitutional mandate? And why would a President appoint judges who will limit his power? And doesn’t that require voters who will vote for that sort of President?
And constitutions can be amended or replaced. What is to prevent this amendment or new constitution from creating a much more expanded mandate?
Jon Murphy
Apr 7 2024 at 7:56pm
Almost* all societies have some concept of limitations to what a government can do. While one can certainly challenge that idea, I don’t think you’ll find many people who argue for absolutely no limits whatsoever on government.
All fantastic questions, ones which political economists and philosophers have been thinking about for centuries. There are, of course, no easy answers. Adam Smith thinks about these issues in Wealth of Nations and Theory of Moral Sentiments. And, of course, James Buchanan & Gordon Tullock in Calculus of Consent.
A simple start to answering your questions is that institutions matter. Structuring incentives to minimize nonsense is important. Not to mention buy-in. For example, you asked the questions:
The glorious thing about the US system is that the court system (at least at the federal level) is not dependent on voters at all. Judges are appointed by the President, but must be confirmed by the Senate. And, once confirmed, the judges are no longer dependent on the patronage of either body; they are appointed for life. Thus, we judges are extremely impartial and rule against the president who appointed them frequently. In 2020, Trump routinely lost his election tampering cases even when appearing before judges he appointed. The judges owed no loyalty and faced no incentive to place Trump above the law because of the framework the federal court system operates under. The same has happened with Biden.
There is a lot more to say, not the least of which is that good institutions are hard to keep. But this comment is already way longer than I indended.
*I say “almost” because I am unaware of any political philosophy or society that calls for unrestrained government, but just because I am unaware of it does not mean it doesn’t exist.
Pierre Lemieux
Apr 8 2024 at 9:23am
Laurentian: The idea that limits cannot be imposed on the state is well defended by Anthony de Jasay in his article “Is Limited Government Possible?” reproduced as chapter 2 of his book Against Politics. It is the best defense I have seen. On the other hand, it is also important to understand classical liberal arguments that these limits are possible with some constitutional devices (that’s the Buchanan strand of analysis) or with some traditional institutions of a certain type (that’s the Hayekian argument). The special interest of de Jasay is that he was both a public choice theorist and an anarchist. The special interest of Buchanan and his collaborators is that they were at the origin of public choice theory.
Craig
Apr 7 2024 at 7:54pm
“Normal people” once granted this kind of power, would be tempted to expand their initially limited “mandate”.
The flaw of the US Constitution lies in this: the federal government is itself the sole arbiter of the extent of its powers.
Jose Pablo
Apr 7 2024 at 8:33pm
Yes Craig, but, at the same time, the “federal government” is far from “monolithic”. Some parts of the federal government are, by design, the arbiter of the extent of the powers of other parts of the government.
Scalia at his best …
https://www.youtube.com/watch?v=Ggz_gd–UO0
And yet, despite a great design on the part of the FF, the different “federal governments” that make up “the federal government” have done nothing but expand the extent of its collective power.
This basically means, that the US Constitution’s “try” of limiting government powers was, at the same time, a) not fully satisfactory by any means and b) not bad at all for 1787 (with its lack of historical valid references)
[I love the “excess of legislation” part. If Hamilton were to rise from the dead and behold the immense volume of legislation in our present era, we would have no choice but to concede his strepitous defeat]
Laurentian
Apr 7 2024 at 10:53pm
I wasn’t talking about all limits on government but on a limited constutional mandate. If people think modern life requires bigger government than how does one deal with that?
Also while societies accept limits on government in theory in reality they accept no limits as long as their side is in power and there is a crisis and the bad people are objecting to it. Communists have limitations of government but will ignore if the Party thinks it is necessary and if reactionaries object to it. Also see Covid.
For example in this paywalled Quillette article (https://quillette.com/2021/01/16/rise-of-the-coronavirus-cranks/) Christopher Snowdon defended lockdowns by saying that if lockdowns were bad then they wouldn’t have happened. This is a circular argument and can be used to justify practically anything.
And how about parliamentary supremacy? It argues that Parliaments have unlimited power.
https://thecritic.co.uk/against-constitutional-obscurantism/
Laurentian
Apr 7 2024 at 11:18pm
Yet those institutions are made up of people. A good institution run by bad people will quickly become bad.
Institutions can change into unrecognizable entities.
Also institutions require traditions customs and social norms to remain good. But all of those traditions, customs and social norms should be challenged.
Also classical liberals still have no idea how cultural, economic, social and political changes will affect these institutions. After the adoption of the internet governments are bigger than ever and freedom of speech is in serious trouble. Or how about McDonald’s restaurants stopping Russia from invading the Ukraine?
Laurentian
Apr 7 2024 at 11:27pm
By the way here is CATO in 1998 endorsing the McDonald’s peace theory.
https://www.cato.org/commentary/peace-earth-free-trade-men
Pierre Lemieux
Apr 8 2024 at 9:35am
Laurentian: Trade in general and international trade in particular are crucial institutions in any free society. They are not sufficient conditions for peace, but certainly necessary ones (peace being defined as including no immediate threat of aggression).
Laurentian
Apr 9 2024 at 7:30am
When did I say it wasn’t? I am saying that the classical liberals overestimated the ability of free trade to end war and authoritarianism. France and Germany made war in 1914 despite their trade with each other. UK and France went to war with mostly German-made munitions in 1914 as well. Xi Jinping arose after opening up Chinese Trade. Woodrow Wilson and Franklin Roosevelt were free traders yet were statists, racists and warmongers.
Jon Murphy
Apr 9 2024 at 7:52am
Did we? I think you’ll have a hard time supporting that claim. The effects of trade on war are hotly debated among classical liberals (for one such case, see my back and forth with Edwin van dee Haar in the October 2020 issue of Economic Affairs). Indeed, one of the reasons i recommend Edwin’s book above is to try and debase you of some misconceptions you’re operating under.
Furthermore, you’ll not find anyone who claims trade ends war and authoritarianism. Again, while the effects are debated, the argument is trade reduces the likelihood of war and authoritarianism. Consequently, a few examples does not disprove the thesis for the same reason tossing three heads in a row does not mean a coin is biased.
Laurentian
Apr 9 2024 at 8:45am
Well there weren’t any conflicts between the West and Native tribes in the Americas and Sub-Saharan Africa before contact. And theren’t any conflicts with Japan and China with the West when they were isolated from each other. Indeed it was the west that invaded and threatened them to open trade with China and Japan in the first place. And arguably these wars to open them to the West had disastrous consequences: Japanese Militarism and Chinese Communism.
And the reaon we haven’t any wars with space aliens (assuming they exist) is more due to lack of contact with them rather than trade with them.
Laurentian
Apr 9 2024 at 8:52am
And yes, an obvious issue that my previous post doesn’t address is that China, Japan, The Americas and Sub-Saharan Africa being isolated from the West may have prevented wars with the West it didn’t prevent internal conflicts or wars with their immediate neighbors. And assuming Space Aliens are real they may too have internal unrest or wars with other alien species.
Jon Murphy
Apr 9 2024 at 9:07am
Might as well argue that the sun rising causes war in that case.
True there cannot be conflict between two parties that never met. But, likewise, there cannot be friendship. Contact is necessary for forming relationships but irrelevant to what form those relationships take.
Jon Murphy
Apr 8 2024 at 7:05am
You should check out any of the books I listed in my original comment to you. They deal with precisely these questions you raise. See also Edwin van dee Haar’s book Human Nature and World Affairs.
If you spend just a few minutes perusing classical liberal works (indeed even just the pages of this website), I think you’ll find the very issues you say we have “no idea” about we have written extensively about.
Pierre Lemieux
Apr 8 2024 at 9:04am
Laurentian: Institutions are not organizations. They are rules or complex of rules that people follow and that structure incentives. Think, for example, of the family, the independence of judges, étiquette, contract, just to name a few examples. It is impossible to understand old political economy or most modern economics without being aware of this definition. Similarly, it is impossible to understand the usefulness of this definition without reading works in political economy or economics. What I just said also applies to contemporary political science (or most of it).
Laurentian
Apr 9 2024 at 8:02am
My mistake. Institutions can be organization.
Think, for example, of the family, the independence of judges, étiquette, contract.
Mactoul
Apr 8 2024 at 12:01am
That the princes are only human was well-known to Machiavelli and surely to unknown others.
Put not your trust in princes was written 2000 years ago.
Even in the modern times, very penetrating analysis of the ruling elite was made by Pareto, Mosca, Sorel an others of the same school.
One may wonder precisely what insights as to the politicians and bureaucrats have been brought into open by the public choice theorists.
Jon Murphy
Apr 8 2024 at 7:01am
When one looks at the pronouncements of various groups such as nationalists, socialists, democrats (ie people who think everything should be decided by voting), meritocraists, and really any idealized political system advocate, we see lots of powerful insights from public choice. It is politics without the romance, after all.
To adapt a phrase from Hayek, the curious task of public choice is to demonstrate to men how little they really know about what they imagine they can design.
Jon Murphy
Apr 8 2024 at 7:26am
Here’s an important insight from public choice as it applies directly to your comment:
The statement “Put not your trust in princes” is incorrect. Rather, the incentive structure princes face matters. Good institutions encourage good behavior, bad institutions encourage bad behavior.
That people are self-interested does not mean you cannot trust them. Adam Smith famously addressed this point back in The Wealth of Nations (although it also appears in Theory of Moral Sentiments):
My local grocery store is self-interested, but I still trust them to deliver high quality food. My local judges are self-interested, but I still trust them to deliver just rulings.
Institutions and incentives influence behavior. This is true of princes as it is of anyone else.
Mactoul
Apr 8 2024 at 12:09am
Astonishing that the astonishing achievements of the politics and the state are ignored in favor of abstractions of anarchists– have they taken part in the running of a apartment block or housing association even?
The enormous modern states with a billion plus populations don’t come into being by themselves. And are one of the supreme achievements of mankind.
One may walk from one end of a continent to another without carrying a weapon– what anarchy would give such a freedom?
Jon Murphy
Apr 8 2024 at 7:54am
This post isn’t about anarchy, so I am not sure what the relevance is of your first sentence.
But the rest of your comment does have to do with Public Choice: how do states come about, how do different constitutional structures affect outcomes and public goods, etc. All these things have been written about at legnth.
And your final claim provides an important example of public choice reasoning. You write:
Strictly speaking, this statement is incorrect. I do not know of a single continent one can walk through and not be assailed. Parts of continents, yes. But whole? No.
So, here is the public choice question: why the variation? Why are things relatively safe in the US and Canada but less so in Mexico? Size of government and size of police forces do not seem to matter. It is not merely the presence of a government that determines. What, then, does matter? The institutional framework!
Dylan
Apr 9 2024 at 9:56am
I feel pretty confident on Antarctica. Probably Australia too, at least if we’re only referring to human assailants, I make no claims about being able to avoid a Koala attack, is that government failure?
Jose Pablo
Apr 8 2024 at 7:33pm
The enormous modern states with a billion plus populations don’t come into being by themselves. And are one of the supreme achievements of mankind.
I am sure that some royalists in 1776 New York (and there were a few), were making pretty similar arguments in favor of the King’s rule and against the very dangerous republican “experiment”.
“The British Empire represents the supreme achievement of mankind“, they said, and rightly so.
“We are doomed without a king taking care of us“, they screamed. And they were, at least, 50% right, a pretty similar experiment had nefarious consequences … in France. These poor French republicans did have to bring back a king.
But, you know, I am glad the American Republicans went ahead despite the fears and lack of imagination of those simple-minded royalists. The liberal democracy was a much better way of organizing collective affairs “in theory”, but it has never been tried before. Not a place for the faint of heart. But sure worth a try.
And maybe you are right and the tattooed simple-minded gorillas storming Congress that we, humankind, are, do need a “government” taking care of us.
Or maybe you are wrong and the future of mankind is made of the cosmopolitan artists and scientists who despise those gorillas and sure don’t need a politician telling them what to do. Or don’t need borders and flags to define themselves.
Don’t lose all faith, Mactoul, there is still hope that we don’t need to be slaves protected by government masters to be happy and prosperous.
Or maybe “we” do. But, you know, in theory, much better if we don’t. Like it was the case in 1776 New York.
Don’t falter, comrade!
Anders
Apr 8 2024 at 12:08pm
Let me nominate a few honorary public choice heroes: Aristotle, Rousseau, Marx, Pigou, Keynes, Foucault, and Noam Chomsky. It is an age old issue, and an obvious one. We all recognize it if we frame the question right: ask Democrats supporting massive increases in public spending how confident they are that the US politics and public sector would be excellent at spending that money efficiently and judiciously, and I doubt anyone would respond with a resounding yes. Add the role of lobbying and campagne financing to the framing, it is unimaginable.
So the question of why basic public choice considerations are so often overlooked even by those of a liberal bent sympathetic to its conclusions must lie much deeper than obtuseness and ignorance. It is perhaps much more an outgrowth of our atavistic suspicion to profit. We can imagine someone doing good and someone seeking to make money. Just not both.
Pierre Lemieux
Apr 8 2024 at 3:29pm
Anders: I can’t see how Aristotle, Rousseau, Marx, Pigou, or Keynes could be seen as public choice theorists or even vague sympathizers. I am pretty sure this is also true of Foucault and Chomsky. In fact, none of these people had the methodological basis necessary to understand anything close to public choice theory. Public choice is a precise theory, or a related set of precise theories, on how democratic states behave. All these theories are solidly grounded in methodological individualism.
Roger McKinney
Apr 8 2024 at 3:41pm
Great points! The problem ancient. In the Bible, Israel had an Anarcho-capitalist government. After 450 years of liberty, they opted for a monarchy despite God’s warning of the tyranny to come.
The world didn’t witness similar liberty again until the Dutch Republic rebelled against Spain. The great economic historian Angus Maddison wrote that the Dutch established the first regime with real property rights. The Dutch got their principles of government from the theologians at the University of Salamanca who distilled them from natural theology and the Bible.
Laurentian
Apr 9 2024 at 8:32am
https://iea.org.uk/book-review-the-capitalist-manifesto-why-the-global-free-market-will-save-the-world-by-johan-norberg-part-2/
Jon Murphy
Apr 9 2024 at 9:09am
Yes. See my paper in the October 2020 edition of Economic Affairs for a summary of the literature.
Jim Glass
Apr 11 2024 at 3:45am
To the extent people made this error (and many did) it was the classic mistake of confusing an empirical observation with a natural causal process.
Douglas North observed the fact that to develop a rich and innovative “first tier” economy requires a huge growth of independent-of-the-state-regime organizations (local governments, businesses, unions, banks, media, non-profits, churches, schools and universities, social clubs, whatever.) These operating freely and independently provide the innovation and productivity a first-tier economy requires, *and* their growth in number increases the distribution of political power, driving the growth of democracy.
North qualified this. In 2000, nations with over $20,000 per capita income ($37,000 today) had 83% of the world’s total of such organizations against 17% of population … those with income from $5,000 to $20,000 had 10% versus 24% of population … those with income under $5,000 had 7% versus 59% of population. [See: Violence and Social Order] China’s per capita GDP today is about $12,700.
Every first-tier economy has gone through this process, most recently Taiwan, South Korea, Japan, Germany, etc. Therefore many people assumed that since economic growth naturally would drive China to become a first-tier economy this would happen there too, QED. (After all, from 1990 it circa 2014 it looked like it was happening). But North never said *that*.
He said that initially authoritarian regimes reach a point where they choose to allow the increase of these independent organizations, and weaken their own power, or not. Some choose to do so, happy with the tradeoff of more economic wealth (and tax revenue) for less power. Some choose to keep their power, stifling the independent organizations, and the economy stagnates. Some choose to become *more* authoritarian — unions become ‘state’ unions, businesses and banks become ‘state owned enterprises’, Boy Scouts become the Aryan Youth and Young Pioneers, etc. You get the picture. Their economies go backwards.
Our mistake as rich Westerners was (is) assuming that all regimes naturally want their nations to become rich. That is far, far from the truth. Most regimes want to keep power. We think most second- and third-world nations have inept, ignorant, corrupt leaders. But there is nothing inept or ignorant about people capable of controlling a nation.
As to China, our policy was both right and wrong. We wanted China to go the course of becoming developed and democratic — welcoming them into the world economy was a necessity to have a chance of it. And 400+ million Chinese rising from abject poverty to middle class or better in half a lifetime is biggest-fastest increase in human welfare ever. So good for that!
OTOH, most of us were extremely naive in assuming the CCP would go the “democratic” course, and not remain a Leninist regime just as fundamentally hostile to “the West” as all the others were. During his opening of the economy Deng openly said it was all just China’s post-Cultural Revolution version of Lenin’s New Economic Policy — which put 80% of the Soviet economy back under private control *temporarily*, post the chaos of the Russian Revolution, until the Party could get strong enough to take full control again. As to our hopes that economic development would lead to democratization, Deng also said: “The Western countries are waging a third world war without gunsmoke. By that I mean they want to bring about the peaceful evolution of social countries towards capitalism.” And CCP was going to have none of that. They said these things. We didn’t hear. That was bad of us.
The gods know, we should have learned by now to listen when authoritarian and predatory regimes announce in advance what they are going to do. But somehow, it still always comes as a surprise. Stephen Kotkin, author of the definitive biography of Stalin and maybe our top expert on Leninism, says Xi’s crackdown on the economy, which clearly is sandbagging it, is forced and a virtue not a bug by the Party’s values, and so will continue. Leninist regimes don’t cede power (“Reform is counter-revolution” – Brezhnev). But in the last 30 years we’ve all gone blank on Leninists. Nobody under age 50 remembers them.
What are they saying now? Xi is condemning Khrushchev for “betraying Stalin”. Putin said the fall of the USSR was a tragedy, but only as to Russian prestige and power — he also said anyone who wants communism to return “has no brain”. But Xi says the fall of Soviet Communism was a tragedy caused by the “weak” Communists who betrayed Stalin’s legacy — and that is never, ever going to happen to the CCP. Xi has laid out a set of guiding principle for the CCP that are right out of 1984. Why not? Orwell well-knew Leninism.
Never trust anything about China that doesn’t have Chinese language sources. Here’s a good one on the above with quotes from Xi: Lessons from Chinese Communist Party documentaries on the fall of the Soviet Union — talk about The Ministry of Truth. And a parting quote from one of Xi’s favored minions in it…
Hmmm … one wonders what those “fundamental strategic objectives” may be.
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