Public choice and market failure: Jeffrey Friedman on Nancy MacLean

Screen Shot 2017-08-09 at 23.25.50

Jeffrey Friedman has a well-argued piece on interpreting public choice in the wake of Nancy MacLean’s conspiratorial critique of one of its founding theorists, James Buchanan. While agreeing that MacLean is implausibly uncharitable in her interpretation of Buchanan, Friedman suggests that many of Buchanan’s defenders are themselves in an untenable position. This is because public choice allows theorists to make uncharitable assumptions about political actors that they have never met or observed. In this sense, MacLean is simply imputing her preferred own set of bad motives onto her political opponents. What is sauce for the goose is good for the gander.

I think Friedman’s arguments are a valid critique of the way that public choice is sometimes deployed in popular discourse. A lot of libertarian commentary assumes that those seeking political power are uniquely bad people, always having self-interest and self-aggrandisement as their true aim. Given that this anti-politics message is associated with getting worse political leaders who are becoming progressively less friendly to individual liberty, this approach to characterising politicians seems counterproductive. However, I don’t think Friedman’s position is such a good fit for Buchanan himself or most of those working in the scholarly public choice tradition.

Others, like Will Wilkinson, have already pointed out that public choice emerges not from assuming that politicians are uniquely bad but that they are the same as everyone else. If we respond to personal incentives, then it is foolhardy to assume that politicians are immune to them.

There is, however, a riposte to this initial insistence on behavioural symmetry: people have different motivations when acting in markets than when acting in politics rendering the economic model irrelevant. For example, voters have essentially zero probability of influencing an election yet more than half of the electorate typically turn out to vote. Each individual voter has no plausible way of personally benefitting from their vote. So on a classic homo economicus account, they are behaving irrationally. Instead, typical citizens act spontaneously to campaign and vote in elections all while knowing their personal efforts are ineffectual. Similarly, many politicians and public officials could seek fame or fortune in any number of careers besides politics, probably with greater chances of success. They must have public-spirited motivations to pick politics over the alternatives.

In response to this critique, I think we can narrow the scope of this symmetry claim to something more defensible while still maintaining the core public choice insight. In doing this, I am cribbing from chapter two of Mark Pennington’s Robust Political Economy and my article on robust political economy in Critical Review.

Public choice emerged partly as a response to market failure economics. Market failure theories explain the efficiency of markets through a model of perfect competition and complete, given information. In a market where there are sufficient potential buyers and sellers, and where everyone has perfect information, competitive prices will reflect their marginal products, thus driving resources to their most valued uses.

Of course, as market failure theorists point out, these conditions rarely ever hold in practice for most private goods, where information asymmetries and other forms of ignorance are virtually ubiquitous. The perfect competition model is rendered even more irrelevant when faced with externalities, where the social costs of producing goods are not appropriately reflected in the price; and public goods, where the benefits of production cannot be excluded from free riders.

In these cases, it is thought, only state allocation can produce efficient outcomes, because the state can account for the full social costs of production and compel everyone to contribute to the costs fairly. In order to make this move, traditional market-failure theories assume that people are narrowly rational, self-interested utility-maximizers.

This is where the public choice response is at its strongest. Market failure theory is used to suggest that areas of the economy currently or traditionally governed by private-property markets should instead be regulated or controlled by the state. Of course, if, as is often the case, these areas are important sources of private goods for some and profits for others, then there is a set of specific people with strong personal interests at stake. Unlike providing pure public goods or setting generally applicable laws, the more widely accepted function of the state, the direct provision of goods and services can impact on people’s personal wealth and satisfaction in much more pressing ways. Because the goods are partially or predominantly rivalrous, consumers will more easily feel deprived under some distributive scenarios, as one person’s benefit is another person’s loss.

Meanwhile, producers previously used to competing, albeit imperfectly, under an open market regime, will now set their eyes very carefully on the people tasked with commissioning their services: the public officials. Rather than competing for customers directly, in this new higher-stakes game, they will have to aggressively lobby officials for public contracts or employment. The result is that the same behaviour in the same sector of the economy that produces relatively efficient outcomes under market rules, produces inefficient, even predatory outcomes under democratic rules.

The features of some goods that make them comparatively (though seldom perfectly) well supplied in private markets is precisely what makes them harder to provide efficiently (and honestly) through the political process. The same considerations that make market failure a potential problem also suggest problems with the state regulatory alternative. Homo economicus need not be a starting assumption to get public choice off the ground. The only assumption is that if homo economicus is relevant to understanding behaviour in a sector under market rules, it is presumptively still relevant under democratic or administrative rules.

This is the essence of public choice. It requires no controversial assumptions about the nature of politics, just the character of incentives for the provision of some sorts of goods.

9 thoughts on “Public choice and market failure: Jeffrey Friedman on Nancy MacLean

  1. I’ll just repost a comment I made on a friend’s Facebook page about Friedman’s comments on uncharitableness and public choice, and why they’re a bad fit for Buchanan and any careful academic public choice theorist (although I agree with you that it might describe the way some popularizers talk about it):

    1) Public choice theory is not the same thing as scholarly interpretive intellectual history, it is the positive analysis of institutions. Therefore, what “charitable interpretation” constitutes is extremely different in the different contexts.

    2) Public choice doesn’t “impute bad motives on one’s political opponents,” it is indifferent to whether the self-interested incentives it points out are common to all human action (the whole point of behavioral symmetry) are”bad” or not because it, again, is a positive analysis of political actors and the incentives they face.

    3) If that positive behavioral symmetry is lacking in interpretive charity, than I guess so does mainstream economic theories of revealed preference which attempt to do the same thing–positive analysis of consumer choice–for market actors as behavioral summetry does for political ones.

  2. My view, which a ascribe to Adam Smith, is that most people are mostly selfish. There are some saintly people both who aren’t very selfish and probably some entirely selfish people too.

    Neoclassical economics, especially of the firm, usually goes with the rule of thumb that firms profit maximize, which would be almost exactly that the owners are entirely selfish. That is unrealistic.

    However, it seems consistent with explaining a good bit of actual market activity.

    The model isn’t fully realistic, but its justification is that the testable hypotheses fit the data.

    A good bit of public choice is done in a similar way.

    When a self-interested model does’t work (like lots of people vote, though not all and not many in many elections) then some modification is in order. Of course, the self-interest assumption plays a key role in making since of how people do vote–with rational ignorance generally and little concern with consequences. Not everyone always but most people most of the time.

    I think public choice reasoning applies to the protective state and the production of pure public goods as well. The like of a personal interest by any voter to keep track of these things provides room for politicians to be self-serving. It is just that the gains from political exchange here are very great.

    Another thought. Consider a entrepreneur confessing to his priest–yes, I would like to pay my workers more, but if I do, i will not be able to keep up with the competition. If I do what you tell me the Lord requires, then soon there will be someone else in this role. The politician says, I would like to promote free trade, but I have to get reelected. If I try to do what is really good for people as a whole, someone else will be in this role.

Please keep it civil

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s