Friday, February 1, 2013

Steven Pressman on Public Choice Theory

With the passing away of James M. Buchanan, some remarks on public choice theory seem timely.

As it happens the Post Keynesian Steven Pressman has written a lucid and interesting critique of public choice theory, which I use in what follows (see Pressman 2004).

So what is wrong with Public Choice Theory? This is the question that Steven Pressman asks and answers, and the results do not augur well for that fashionable theory.

Let me summarise Pressman’s critique below:
(1) Public Choice Theory cannot explain why people even bother to vote. Curiously, some Public Choice theorists – such as Hardin (1982) and Downs (1957) – have accepted this charge (Pressman 2004: 4). For Buchanan (Brennan and Buchanan 1980: 187), it is not even rational for the self-interested person to vote (Pressman 2004: 6). Brennan and Buchanan (1980: 191) simply regard voting as non-rational and habitual behaviour.

Since the fundamental purpose of Public Choice Theory is to invoke the economic idea of “individual rationality” to explain politics, this inability of the theory to explain voting is a major defeat for the theory.

(2) Nor can Public Choice Theory explain why, for example, in the US voter participation rises and falls historically. Nor can it explain why people would vote for fringe parties or give their hard earned money to such parties or candidates (Pressman 2004: 7–8).

(3) Public choice views politicians as motivated by the desire to maximise their political power. Their main concern is simply re-election.

Politicians are thus almost driven to “bribe” the electorate by increasing subsidies, welfare, government spending, and other measures that benefit various people or groups.

How, then, does it explain politicians who have run for smaller government and who have cut the government’s policies that benefit people or groups? Pressman charges that Public Choice Theory does not have the ability to predict the behaviour of politicians (Pressman 2004: 9).

Pressman concludes:
“Overall, public choice fares badly when attempting to explain and predict political behavior. It cannot explain why politicians would vote against the interests of their constituents. It fails to explain why politicians would advocate higher taxes, fewer benefits, and less government. And it fails to predict or explain why wealthy individuals would seek public office.” (Pressman 2004: 11).
To take one example here, Pressman points out that many third party candidates make extreme sacrifices – both financial and personal – to run for office. Multimillionaires run for office at considerable personal expense, but how would such candidates – especially fringe candidates – ever get back their money even if elected? The reason is that they do not care about the money they sacrifice, but are convinced (rightly or wrongly) that they advocate policies that are right.

(4) Public Choice Theory tells us that politicians will engage in a continual increase in public spending (Pressman 2004: 11) to gain their power maximising aim through re-election. Yet a look at the empirical data on government spending as a percentage of GDP (the proper measure here of the level of government spending in an economy) demonstrates that Public Choice Theory is wrong (Pressman 2004: 13, Table 1). The data is mixed and significant examples contradict Public Choice.

Paradoxically, in the golden of age capitalism (1946–1973) – the “age of Keynes” and the height of the welfare state – many nations saw government spending as a percentage of GDP remain the same or even decline slightly, e.g., Japan, the UK, and France. From the 1970s to the 1990s, there have been instances of government spending declining (e.g., the US) or remaining the same (e.g., the UK). While some nations have seen a rise in government spending as a percentage of GDP over many decades, the exceptions are not trivial and Public Choice Theory does not explain the data.

Moreover, the turn to neoliberalism has seen an assault on real policies that benefit the economy and its citizens, such as public investment and welfare. The underlying reason was the revolution in economics: the change from Keynesianism (in varying forms) to revived neoclassical economics and neoliberalism.

In reality, many political leaders merely act in what they think is the common good or public interest – though often badly since the 1970s when their economic advisors have been enthralled to the neoliberal theology of the market.

(5) Pressman notes that the Public Choice Theory idea of the “political business cycle” has little empirical evidence to support it. Rather, in many cases politicians have run economic policy not for self-advantage, but through clear policies that did benefit the long-run macroeconomy of a nation (Pressman 2004: 14).

(6) Pressman puts his finger on the conflict between rational expectations and Public Choice Theory:
“There are also a number of problems with the public choice view that politicians create business cycles. These problems, too, are both of a logical nature and of an empirical nature. First, the public choice perspective assumes that voters do not understand the economy and how it is being manipulated by politicians. Rational expectations macroeconomics, which assumes the rationality of all economics agents, points out this will not be so. Public choice shares the rationality assumption with rational expectations, so it is hard to understand why they would think citizens are continually duped on macroeconomic issues that affect their well-being.

Public choice cannot really have it both ways. Either citizens are rational and understand the economic manipulations of politicians (and then vote them out of office for creating business cycles), or they are dumb and not rational, in which case there is no reason to study public choice.” (Pressman 2004: 14).
This is a crucial point. You cannot accept the truth of both rational expectations and Public Choice Theory. It is not difficult to demonstrate that rational expectations is wrong, and once one recognises that rational expectations is false, so much of modern macroeconomics collapses with it – the macroeconomics that Public Choice Theory itself is reliant on!

In reality, only an empirically-grounded Keynesianism tells us how modern capitalist economies really work. The modern theories that do explain how capitalism works are Post Keynesianism, (old) American Institutionalism (in the tradition of John Kenneth Galbraith), and to some extent Post Walrasianism. The old neoclassical synthesis Keynesians and their successors the left-leaning New Keynesians – when they do not let their flawed neoclassical ideas get in the way of common sense – have a reasonably good understanding too.

As for the electorate in general, it is made up of people who might have a good knowledge of economics, a savvy and intuitive grasp, a poor grasp, or simply mistaken ideas (and many positions in between these) – the real world is far too complex for a neat generalisation.
(7) I find myself in complete agreement with Pressman’s conclusion:
“At bottom, the problem is that public choice begins with an ideological aversion to government and a religious worship of the market. This antigovernment ideology has blinded the entire public choice school. It has become the study of government failure, a set of assertions that governments are too big, and a criticism of all political decision-making. These biases keep public choice advocates from seeing the self-refuting and self-contradictory nature of its arguments.” (Pressman 2004: 15–16).
I can end with another observation, for the sake of levity.

One of the most witty British political comedies was “Yes, Minister” and “Yes, Prime Minister,” a BBC television program made between 1980 and 1984. I am sure those in the UK or Ireland will know this program (Americans less so).

The TV series was based on books written by Antony Jay and Jonathan Lynn. I personally happen to enjoy “Yes, Minister.”

But it is no secret that Antony Jay was inspired by Public Choice Theory and used it in the writing and plots of “Yes, Minister” (Blundell 2008: 97). In fact, Antony Jay is reported to have said the following: “I learnt my Public Choice economics from James Buchanan via the IEA” (Blundell 2008: 97). Now I do not want to suggest that all of “Yes, Minister” was silly Public Choice propaganda, as it was a complex show: the co-writer Jonathan Lynn, it appears, was less cynical about government and sympathetic to the Labour party. Nevertheless, the program does contain a quite obvious anti-government mentality in some ways.

Basically, the plot of “Yes, Minister” is the career of a British politician called Jim Hacker. He is a government minister in a recently-elected British political party (although this is a fictional third party, and not called either Labour or Conservative in the series). Hacker is a likable and affable figure, and I have always thought there was a touch of the Old British Labour Party about him, given that his character and background (e.g., contempt for fine arts and a degree from the LSE) seem most un-Tory like to me (even though at one point he is portrayed as an enthusiastic advocate of Monetarism!).

Hacker rises to be Prime Minister, but is faced with the opposition, cynicism and bureaucratic obstruction of his “Civil Service” Permanent Secretary, Sir Humphrey Appleby. Ideas that are quite obviously from Public Choice theory influenced the program, such as in the following video.

In this clip, Sir Humphrey Appleby (the Civil Service Permanent Secretary) talks to Bernard Woolley (Hacker’s Principal Private Secretary and another Civil servant) about how greater democracy and decentralised decision-making would rob the Civil Service of its power, importance and prestige: this is obviously Public Choice Theory applied to the British government bureaucracy, portrayed (accurately or not) as composed of class conscious snobs often educated at Oxford and Cambridge (the only two “real universities,” as Humphrey Appleby says) and contemptuous of ordinary British voters and even politicians.




The general point I want to make here is that I still enjoy “Yes, Minister,” not because it is informed by Public Choice Theory or because the latter is true, but because it is a witty parody or caricature of the political process. The lesson is that Public Choice Theory is mostly a fiction, but can be made a funny one.


BIBLIOGRAPHY

Blundell, John. 2008. Margaret Thatcher: A Portrait of the Iron Lady. Algora Pub., New York.

Brennan, G., and Buchanan, J. 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press, Cambridge.

Downs, A. 1957. An Economic Theory of Democracy. Harper & Row, New York.

Hardin, R. 1982. Collective Action. Johns Hopkins University Press, Baltimore, MD.

Pressman, Steven. 2004. “What is Wrong with Public Choice,” Journal of Post Keynesian Economics 27.1: 3–18.

7 comments:

  1. Probably also deserves an obligatory mention: Quiggin (re-)re-posted an older article of his arguing that Public Choice Theory is actually a right-wing version of Marxism-Leninism's theory of the state.

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  2. "this is a fictional third party, and not called either Labour or Conservative in the series"

    During much of that period, the center-left Social Democratic Party was numerically as important as Labour, no?

    When I first learned public choice theory at 19, it seemed quite sophisticated, and seemed to explain everything. I now wonder how I got taken in. Probably the lack of Post Keynesians and Old Institutionalists in the department to point out the obvious.

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    1. Yes, I suppose that the Social Democratic Party (SDP) may well have been an inspiration behind Hacker's third party. At one point, Hacker has a scene when he's elected wearing a white rosette, and the Labour and Tory candidates are shown with the red and blue rosettes behind him - so he is obviously not Tory or Labour.

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  3. Ugh... public choice theory. What a silly fad that was.

    I think that some neo-Marxians like Shaikh have a good understanding of capitalism. And the Latin American structuralists, although they're basically Post-Keynesians.

    Oh, and 'The Thick of It' was a better show than 'Yes, Minister' if you don't mind the language. I think it captures the chaos of the political process a lot better than the wink-wink cynicism of 'Yes, Minister'; a cynicism that embraced both the right and the "counter-cultural" left:

    http://en.wikipedia.org/wiki/The_Thick_of_It

    Also, for the influence of public choice on Thatcher and 'Yes, Minister' see:

    https://www.youtube.com/watch?v=izjs0UV12fo

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  4. Public choice cannot really have it both ways. Either citizens are rational and understand the economic manipulations of politicians (and then vote them out of office for creating business cycles), or they are dumb and not rational, in which case there is no reason to study public choice."

    > Public choice cannot really have it both ways. Either citizens are rational and understand the economic manipulations of politicians (and then vote them out of office for creating business cycles), or they are dumb and not rational, in which case there is no reason to study public choice."

    What "public choice theory" is this guy talking about? Public choice is worth studying because:

    - You get to think about where "analytic symmetry" (between the analysis of politicians and the actions of voters) takes you. I don't think there are many good arguments why "asymmetry" is very plausible.

    - Everyone's knowledge is imperfect and (nearly?) everyone maximizes personal gain. Very applicable to low-trust societies, even ones with lots of people are "fashionably egalitarian."

    - Even if many actors understood that the politicians were misbehaving, we could easily have a Nash equilibrium where it doesn't make sense to do much about it. There is huge opportunity cost to finding good candidates and promoting them. Maybe better to structure the institutions so that there is less discretion and more rules.

    - I think public choice is difficult for some people to understand for the same reason that game theory is difficult for people to understand: it's complicated, and learning the theory (why things are complicated) does not provide us with an "oracle game-solver" / winning-strategy.

    - It's very possible that the spread of PC ideas has changed the terrain in which the participants can maneuver. For example, politicians now need to at least *project* that they care about the deficit. So rather than a rapidly increasing defict, followed by crisis, we had a period where the deficit increased more slowly and a crisis has not (yet?) hit.

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    1. "Everyone's knowledge is imperfect and (nearly?) everyone maximizes personal gain. "

      This just isn't true though, as the article and as other theorists (such as Leif Lewin) have demonstrated. PVT isn't difficult to understand (and neither is game theory - students tend to score much higher on it than they do other modules); it's just wrong.

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  5. Someone just directed me to this posting. (Alas, I have been out of the loop for the past 6 months working on the third edition of my book Fifty Major Economists). But I wanted to thank you for both the good publicity and for getting my argument right. I especially like the clip from "Yes, minister" and your relating it to public choice.

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