Thursday, August 09, 2007

PUBLIC CHOICE THEORY

Often times, when it comes to environmental protection or any other issue of social interest, government intervention is justified on the basis that markets are dominated by businesses and wealthy individuals that are motivated by profit and greed. As a result, their incentives are perverse, and their actions will not be in the best interest to society. Laws and regulations must therefore be implemented to curb their behavior, and achieve a responsible outcome.

The problem with this logic is that for probably close to 30 years now the area of economics known as Public Choice has demonstrated that government decisions can be viewed as rational choices made by individuals to maximize their well being. They may not focus on profits or share prices, but people in government do focus on budget maximization, personal benefits, and power. As the power of the federal government has expanded, the role of big business in influencing government through these channels has been magnified. ( this is referred to as ‘rent seeking’ )

Public Choice Theory allows us to be more precise in evaluating public policy alternatives by looking at the incentives of government and big business and the institutions that influence their behavior.

2 comments:

Troy said...

You have very rightly said that Government seek their interest in making public decisions e.g., to remain in power etc. There are no incentives for government officials to work hard (directly), so they in pursuing their interest indulge in corrupt activities or at least unethical one. Therefore, there is a need that those person should come in power who are pious and some criteria needs to be devised for their election. Alternatively, the system of government should be so strong that it becomes next to impossible to do corrupt activities remaining in government.
Thus, government officials have to have some significant "Ideology" which should be more important than themselves to them and importantly in the interest of larger masses.

agEconomist said...

Troy, I agree. I think you may have just defined what it means to be a 'true statesman.' The ideology should be one of a strict constructionist view of the constitution, similar to Ron Paul's.

The separation of powers, and limited powers delegated in the consitution actually provide for this. Unfortunately, our politicians ignore this, and our supreme courts do not generally rule with strict constructionist interpretations.

It is what economist Thomas Sowell has referred to as the 'quiet repeal of the American Revolution.'