Public Choice

Mankind soon learn to make interested uses of every right and power which they possess, or may assume. The public money and public liberty...will soon be discovered to be sources of wealth and dominion to those who hold them; distinguished, too, by this tempting circumstance, that they are the instrument, as well as the object of acquisition. With money we will get men, said Caesar, and with men we will get money. Nor should our assembly be deluded by the integrity of their own purposes, and conclude that these unlimited powers will never be abused, because themselves are not disposed to abuse them. They should look forward to a time, and that not a distant one, when a corruption in this, as in the country from which we derive our origin, will have seized the heads of government, and be spread by them through the body of the people; when they will purchase the voices of the people, and make them pay the price.
Thomas Jefferson, Notes on Virginia, 1784

Since sterile and inappropriate rent-seeking is possible through political means, this brings us to the issue of Public Choice theory, centered on the Virginia School of Public Choice and the Nobel Laureate economist James M. Buchanan (b. 1919). Buchanan and Gordon Tullock collaborated in creating the theory of both rent-seeking and Public Choice. Public Choice theory is about the different incentives and processes that operate when goods are sought through political means rather than through purely economic means. The essential point is about the distribution of costs and benefits. The political appropriation and distribution of goods is attractive because it concentrates its benefits and disperses its costs. Many people can be taxed only a small amount and then a small number of people can be given large sums. This means that the many hardly notice the wealth that they have lost, while the few become active partisans of their own benefits. Politicians hear nothing from the many and a lot from the few, who also have some money to contribute to the politicians, money that may actually be, or be freed up by, the benefits they receive -- like the money teachers' unions get from compulsory union dues, from the money paid by the government to teachers. Thus, constituencies and interest groups are created for each particular political benefit program, and it becomes nearly impossible to get rid of them. The rent-seeking aspect of this is that the beneficiaries receive rents on the basis of their participation in the interest group. They benefit because of who they are, not because of what they do or what they own in a more conventional sense.

Individually, these political rents are not damaging to the whole, but each group of people which sees another obtain benefits then seeks to create some program for itself. Such things are hard for politicians to resist, since it holds the promise of a group of dedicated voters beholden for their own program. The process then continues, piling one interest group upon another, until the many small taxes for each program begin to amount to a very large cumulative total: the many then begin to notice that they are damaged by the overall burden. Considerable anger and discontent will be generated, but the object of the anger is diffuse, and the many will have trouble identifying the source of their discontent. It is then in the interest of politicians to scapegoat someone whom they can blame for the whole problem but who actually is not a serious constituency, or who actually won't be harmed by whatever kind of pseudo-solution the politician proposes. The former case occurs with illegal aliens, who cannot vote and who thus are not a constituency at all.

The latter case occurs with respect to welfare, which for decades has been unpopular with most Americans. Welfare is actually a relatively minor expense and involves a relatively small number of people, compared to massive swindles like Social Security, Medicare, or Farm Subsidies; but Americans as a whole are particularly offended by it and are aware of the perverse incentives it creates that have resulted in the breakdown of inner city families and the spawning of several generations of sociopathic criminals and gangsters. The Clinton Administration "solution" for this in 1993, with tough rhetoric (the "end of welfare as we know it") was a classic case of misdirection: a job training program, which is the kind of thing that was seen to fail with its very first implementation in the Great Society, and then a Federal jobs program for those who don't get real jobs, which always creates meaningless, make-work button-sorting. The "solution" thus does nothing but provide for the same kind of unproductive dependency that angers people about welfare in the first place. In a classic Public Choice strategy, however, this may mollify the many, even while continuing to provide the political rents for its own constituency, a constituency that includes everyone who sympathizes with the "compassion" of welfare, even if they are not on it.

The economic distribution of benefits works in a fashion opposite from political rents. The benefits go to the many and the costs are concentrated on the few in the free market. The successful business provides goods or services that a large enough fraction of the public finds preferable that the business is able to turn a profit. The unsuccessful business, not providing anything relatively preferable to the other options available to the public, goes bankrupt and removes itself from the competition, also in the process freeing the capital and the labor that it had tied up in a relatively unproductive fashion. This is the very process that swept away subsistence agriculture, horses and buggies, whaling for lamp oil, slide rules, and countless other ancient, obsolete, and inefficient industries. The cost falls entirely on the owners and participants of those industries. They may be hurt and be mad as hell about their personal fate, but their loss is actually an unalloyed gain for everyone.

It is ironic that businessmen are often morally condemned for their "greed" at seeking profit, even though, as I have noted, profit is necessary if the wealth of a society is to grow and life is to get better, and profit cannot be obtained unless, in a free market, something is offered that people actually want. It is correspondingly ironic that labor unions and businesses (e.g. Lee Iaccoca's Chrysler) that seek to protect themselves and preserve obsolete, uncompetitive, and unprofitable industries, in the name of the jobs that they provide, are rarely accused of "greed" themselves, even though what they want is a benefit for themselves that must be directly withheld from the public, which is obliged to pay the monopoly rents created by protectionism. Because a few people want their jobs, the quality of life of the many is degraded in order to support the few in the manner to which they have become accustomed. If this trick could work for everyone, it might even be unobjectionable; but of course it cannot work. Not everyone can collect monopoly rents without ultimately destroying those profitable sectors that produce the wealth in the first place. Just as rapacious dictators (e.g. Ferdinand Marcos) destroy the wealth of their own countries by letting their cronies steal too much of it, a democracy can just as easily destroy itself when everyone gets the idea that they can acquire wealth and easy living through political means instead of through their own hard work and enterprise.

 <Copyright (c) 1996, 1999, 2002, 2007, 2008, 2010 Kelley L. Ross, Ph.D.>