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Public Choice Theory

[Paul Levy © 2019]

James Buchanan, a key Libertarian economist in the Movement (see Democracy in Chains) won a Nobel Prize in Economics in 1986 for his formulation of Public Choice Theory.  Much of what follows is a summary of his 2003 description of Public Choice (PC).[1]


The Background.  Buchanan says that, in the 1900s, America and Europe had become concerned with major social problems (e.g. retirement, discrimination, poverty, health care, pollution, education, and housing) and looked to government to solve them.  Citizens as well as politicians and social scientists developed an uncritical trust that government could do this, what Buchanan terms a “socialist ideology.”  As a result, by mid-century, a third to a half of GDP passed through government.

The Challenge.  Nonetheless, economists continued to focus on analyzing private markets (often on “market failures”) and not on this large public sector of the economy.  Some economists (he mentions Friedrich Hayek and Ludwig von Mises) voiced serious concerns about this sector but were generally ignored.  By the 1970s and 80s, however, people had begun to see that many government solutions weren’t working, yet they continued to expand.  This provided an opening for economists to apply their analytic tools to governmental decisions, to seek to explain this public sector failure and to imagine ways to address it. 

Economists try to understand how decisions are made in economies and to assess the effectiveness, efficiency, and fairness of those decisions.  PC is simply the application of those sorts of critical assessments to government and the public sector of the economy.

An initial insight – rules v. decisions.  Initially Buchanan was concerned with the capacity, in democracies, of majorities imposing their preferences on minorities.  He says his concern then and later, was the prevention of discrimination against minorities…; and the question, from an economist’s perspective was how to obtain a combination of efficiency and justice under majority rule.

To a liberal, this may sound like a concern about such things as racial discrimination, but Buchanan had in mind minorities such as rich people and corporations that were regulated and taxed involuntarily by government.  How, in a democracy, can such minorities be protected?  

A Swedish economist had looked at this question and proposed super-majorities (like 5/6ths votes) as a solution.  Buchanan believed that supermajorities were superior to majorities and that full consensus would be ideal, but he saw both as impractical.  He began to look at the problem initially by distinguishing two types of decision-making in government, the legislative level which dealt with program decisions and the constitutional level that dealt with the rules by which legislative decisions could be made. 

He reasoned that, if some people (the minority) were to be harmed by a government decision, they would lose their allegiance to the government unless they felt that the rules for making that decision were fair – the Constitutional rules.  If they agreed with the rules, they could accept losing (being in the minority) and still support their nation.


Decision-making – democracy without romance.  Buchanan and PC went on to look at the nature of political decision-making, looking critically instead of with the prevailing enamor.  He referred to the PC approach as “democracy without romance.”  He felt that, if you looked critically rather than romantically at government, most insights were obvious – once the emperor’s nakedness was pointed out, everyone would be able to see it.

Economists believe that people and companies act primarily in their own best interests, not in pursuit of some public interest.  PC applies this vision to voters, politicians, bureaucrats, and others who may gain something from or through the government.  Voters are greedy and want more – more money, health care, etc.  They eagerly (greedily, jealously) look to rich taxpayers for that, preferring that to taking personal responsibility for living within their means.  Politicians, who want to be elected and re-elected, play to these interests of voters.  They also pay attention to big campaign donors to get elected, and they may be influenced as well by such things as the promise of a lucrative job after they retire from politics.  Bureaucrats seek more money to expand their power and perhaps increase their salaries.

Some others have an additional route to private gain.  They persuade government to provide them with some sort of advantage – a lucrative contract, a monopoly, publicly paid interns, a tax exemption, etc. – that increases their profits.  They typically do their persuading through campaign contributions and lobbying.  If the potential profits are large enough -- as they might be, for example, with a major reduction in their tax rate or an increased exemption on estate taxation or a multi-billion dollar defense contract or the easing of a costly environmental regulation – the money and effort they pour into persuasion can be huge.  The effort to obtain these sorts of gains in wealth (ones without equivalent increases in production) is called “rent-seeking” by economists and has become a sub-field of PC.

Conclusions.  Buchanan sees PC’s contribution this way:

…  Armed with nothing more than the rudimentary insights from public choice, persons could understand why, once established, bureaucracies tend to grow without apparent limit and without connection to initially promised functions.  They could understand why pork-barrel politics dominated the attention of legislators; why there seems to be a direct relationship between the overall size of government and the investment in efforts to secure special concessions from government (rent seeking); why the tax system is described by the increasing number of special credits, exemptions, and loopholes; why balanced budgets are so hard to secure; and why strategically placed industries secure tariff protection.

In a larger, ideological way, Buchanan sees PC as re-establishing a Libertarian worldview:

The essential wisdom of the 18th century, of Adam Smith and classical political economy and of the American Founders, was lost through two centuries of intellectual folly.  Public Choice does little more than incorporate a rediscovery of this wisdom and its implications into economic analyses of modern politics.  




 [1]   James M. Buchanan.  (2003).  What is Public Choice Theory? See:

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