No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fourteen: Decision-making in Democracy: Public Choice 324 INTRODUCTION The possibility of market failures identified in the last chapter suggests that government action may improve on market outcomes. Consider the following apocryphal story/ analogy : 1 A king in days gone by called for singers to be brought in to sing for him. The king’s servants brought two singers forward to sing for him, with the one favored by the king to receive a coveted palace position, singing for both the king’s personal pleasure and official functions. The first singer was brought forward to give a rendition of the country’s national anthem. As she sang, the notes were often unrecognizable, with the king listening in unbelief. Before she had even finished the song, the king declared the contest over. He immediately awarded the position to the second singer. In his mind, the 2nd singer couldn’t possibly do worse. Markets often face the same criticism (such as this one by Nobel Laureate Joseph Stiglitz). When market outcomes result at less than some level of hypothetical efficiency, they are condemned as unacceptable. The default answer is for the government to step in to address the problem, without any careful analysis of whether the government action will actually lead to an improved result. An improved result is simply assumed. In any meaningful comparison of different institutional arrangements (e.g., government regulation or free market process), we must compare theory to theory, or reality to reality. It is inappropriate, for example, to compare the reality of free markets with a theoretical possibility of what government action might be able to do. In this chapter we will “let the second singer sing.” We will provide an analytical process to consider alternative institutional arrangements—public choice analysis. Public choice analysis models collective choice problems with one overarching assumption: individuals make decisions primarily based on their perception of their own self- interest, whether they are in the private or the public sector. Why is that a reasonable assumption? Let’s talk about it. WE’RE ALL FALLEN NOW… When we look around the rest of the world, Americans typically understand the reality of corrupt and autocratic rulers. We have no problem believing that Hitler, Stalin, and Mao literally killed millions of their citizens to gain and maintain power. Or more recently, we have no problem believing that Fidel Castro and Hugo Chavez stole elections to maintain power, or that Chinese autocrats keep political prisoners, or that most Islamic states rule with an iron fist (or try to preserve their power with an iron fist, such as what Public choice analysis models collective choice problems with one overarching assumption: individuals make decisions primarily based on their perception of their own self- interest, whether they are in the private or the public sector. Public choice analysis (theory): a study of political behavior using the analytical techniques of economics, with individuals maximizing their own utility according to self-interest.