Public Choice Theory and Regulation

The New Political Economy: Public Choice and Regulation

Public Choice: Contemporary Political Economy

Modern public choice is a study of the political mechanisms or institutions through which taxes and expenditures are determined; that is, it is a study of the demand for and the supply of public goods. Further, public choice is the use of the simple analytics of competition to make positive statements con­cerning institutions and events in the public sector. Although the economics of the private sector has been well developed over the last two centuries, until recently an analysis of how social goods are supplied and demanded took a back seat to the central concerns of most economists.

Some classical and neoclassical writers, such as Alfred Marshall and A. C. Pigou, always paid attention to public finance. However, the Marshallian-Pigovian approach to public finance, antedated as we have seen by the French engineers, focused on "problem solving" in the provision of specific public goods. Moreover, its concern was almost exclusively on the tax side of the fiscal equation. The welfare and efficiency effects of various types of taxes were stock-in-trade for neoclassical (Marshall-Pigou) analysis; but it never oc­curred to writers in this somewhat insular Anglo-Saxon tradition that fiscal de­cisions were the result of choice on the part of both demanders and suppliers acting through a process of political filtration.

Modern research has demonstrated conclusively that intellectual efforts to place fiscal theory on more broad-based interdependencies were emerging in Italian and Scandinavian writings. James M. Buchanan, Nobel laureate and founder-pioneer of modern public-choice theory, investigated the classical, Italian tradition in public finance (1880-1940) and contrasted it to the Anglo-Saxon (Marshallian-Pigovian) development. Buchanan noted:

As early as the 1880s, Mazzola, Pantaleoni, Sax, and De Viti De Marco made rudi­mentary efforts to analyze the public economy within an exchange framework. Sax and Mazzola discussed the demand side of public goods by identifying collective as distinct from private wants. Pantaleoni extended the marginal calculus to apply to the legislator who makes choices for both sides of the budget. De Viti De Marco explicitly constructed a model in which the consumers and the suppliers-producers of public goods make up the same community of persons ("Public Finance and Pub­lic Choice," p. 384). In addition, the Swedish economists Knut Wicksell (1851-1926) and Erik Lindahl (1891-1960) were hard at work developing a holistic approach to the public sector, one that included a public budget determined within a political process rather than as the endogenous dictates of Platonic philosopher-kings. Contemporary movements among public-choice theorists to establish the en­tire fiscal sector of the economy within a general-equilibrium theory owe much to the efforts of these continental economists.

As a matter of doctrinal development, we must agree with Buchanan's as­sessment that the real surprise is not the emergence of continental contribu­tions to public-sector equilibrium—these could be expected as somewhat straightforward extensions of the emergent neoclassical (marginalist) theory of private markets in the 1870s. Rather, the riddle for the historian of thought is to explain "the long-continued failure of English-language economists to make comparative extensions of their basic framework or to acknowledge an interest in the continental efforts" ("Public Finance and Public Choice," p. 384). The bridge between these early continental contribu­tions and the emergence of modern public-choice theory is a long one that has, in the main, spanned the Atlantic and reached American economists. Contem­porary public-choice theory is essentially an ongoing American achievement, originating in the late 1930s and the 1940s. The content of this achievement is both extensive and detailed. Voting theory, for example, is an integral and complex part of public choice. Space constraints in a book such as this pro­hibit a detailed account of the entire field. We therefore confine our discussion to some simple concepts and areas of concern in public-choice theory so that we might provide the reader with an overview of this developing paradigm in contemporary economics.