The Public Choice Revolution

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3. Like markets, unconstrained political democracy has deficiencies. The special interest effect and rent-seeking are particularly important sources of political inefficiency. Political officials have a strong incentive to deliver concentrated benefits to well-organized interest groups at the expense of the vast majority of voters. Typical voters have little incentive to invest the time and effort necessary to inform themselves on many issues because they recognize that their vote will not be decisive. In contrast, organized interest groups often feel strongly about policies that serve their interests and are therefore willing to provide supportive politicians with campaign contributions and other political resources. As a result, elected political officials have a strong incentive to support the position of special interests, acquire political resources from them, and then use the resources to solicit the support of the largely uninformed electorate. This will be the case even if the programs favored by the special interests are counterproductive. The empirical evidence is highly consistent with this analysis. Tariffs, quotas, business and agricultural subsidies, ethanol mandates, targeted tax breaks, and bailouts of specific industries and highly unionized firms are largely a reflection of the special interest effect.

Favoritism provides politicians with something they can trade for political support. In turn, businesses and other interest groups will seek to obtain more government favoritism via lobbying, campaign contributions and other forms of schmoozing political decisionmakers. Economists use the term “rentseeking” to describe such actions designed to secure the windfall gains and above normal profits generated by government favoritism. Rent-seeking is a natural outgrowth of government activism. When the government is heavily involved in the granting of contracts, subsidies, tax credits, low-interest loans, regulatory favors, and other forms of government intervention, business firms, labor organizations, and other well-organized interests will compete for the government favors. The result will be a shift of resources away from productive activities and into rent-seeking. Economic inefficiency will increase and growth and prosperity will slow. Rather than the ideal outcomes of the naïve mainstream models, rent-seeking, crony capitalism, and political corruption will emerge.

The tools of economics enhance our understanding of both the market and political processes. They indicate that both have various types of shortcomings — that there is both market failure and government failure. Most mainstream principles courses cover market failure in the form of economic instability, monopoly, externalities, and public goods. Potential ideal solutions to market failures are also provided. But coverage of government failure is absent. Government failures resulting from the shortsightedness effect, the special interest effect, and rentseeking are ignored. Instead, government action is treated as a corrective device. The real world of markets is always compared with idealized government action. In the world of mainstream economics, market failure is a likely possibility, but there is no such thing as government failure. This asymmetric and imbalanced coverage leaves students with an unrealistic view of how the political process works and the potential of government activism to allocate resources efficiently.

The imbalance of the mainstream approach also deters understanding of the current economic situation. Economics provides considerable insight on the structure of the institutional and policy environment consistent with growth and prosperity. Stable and predictable policies, rule of law, and economic freedom establish the foundation for gains from trade, private investment, and innovation, which are the key sources of the growth process. In contrast, persistent policy changes, temporary tax-and-spending policies, and discretionary regulatory action generate uncertainty and play into the hands of the rent-seeking special interests. Public choice analysis highlights both of these points. However, because of its omission of public choice, mainstream economics misses the fundamental causal forces underlying the excessive debt, constant policy changes, and crony capitalism that are undermining prosperity throughout the world.

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