With the fuel scare over the last week, we saw how a few people in power can shift peoples’ expectations radically and drive them in large numbers to take the same actions. In technical if graceless terms, we have seen how big players shift economic expectations to produce herding. Of course people are responsible for their own actions but politicians and officials influence how people think and therefore what they do. Now, with the release of the IEA’s short primer on public choice theory, we learn how and why government is bound to have its failures, whoever is in power.
Of course, the present Government is an exemplar of competence and virtue compared to the last one but the fact remains that the institutions of the state set up big players in society who can and do disrupt the course of peoples’ lives. Over the last week, Government ministers have caused people to take actions which have jammed traffic and started fights (in two locations in Wycombe last Friday). Diane Hill is critically ill in hospital with severe burns after decanting petrol in her kitchen.
This provides one recent and obvious example of cause and effect in the sphere of government. Less obvious but more damaging is the relationship between the actions of the central banks and peoples’ choices about saving and borrowing. The fundamental cause of the present economic crisis is that interest rates were too low for too long. That was a choice by the ultimate big players in the economy: the philosopher kings of the central banks. It’s widely reported that people don’t save enough for their retirement, but is it any wonder in an environment of low interest rates, open currency debasement and taxpayer-funded pension promises? I could go on.
It’s common for politicians and officials to discuss “market failure” before setting out how the government will correct those failures. However, government fails too and with widespread, profound consequences for us all. Why?
Dr Eamonn Butler’s Public Choice – A Primer explains:
- Public Choice applies the methods of economics to the theory and practice of politics and government. This approach has given us important insights into the nature of democratic decision-making.
- Just as self-interest motivates people’s private commercial choices, it also affects their communal decisions. People also ‘economise’ as voters, lobby groups, politicians and officials, aiming to maximise the outcome they personally desire, for minimum effort. Consequently the well-developed tools of economics – such as profit and loss, price and efficiency – can be used to analyse politics too.
- Collective decision-making is necessary in some areas. However, the fact that the market may fail to provide adequately in such areas does not necessarily mean that government can do things better. There is ‘government failure’ too. Political decision-making is not a dispassionate pursuit of the ‘public interest’, but can involve a struggle between different personal and group interests.
- There is no single ‘public interest’ anyway. We live in a world of value-pluralism: different people have different values and different interests. Competition between competing interests is inevitable. This makes it vital to study how such competing interests and demands are resolved by the political process.
- The self-interest of political parties lies in getting the votes they need to win power and position. They may pursue the ‘median voter’ – the position at the centre, where voters bunch. Government officials will also have their own interests, which may include maximising their budgets.
- In this struggle between interests, small groups with sharply focused interests have more influence in decision-making than much larger groups with more diffused concerns, such as consumers and taxpayers. The influence of interest groups may be further increased because electors are ‘rationally ignorant’ of the political debate, knowing that their single vote is unlikely to make a difference, and that the future effects of any policy are unpredictable.
- Because of the enormous benefits that can be won from the political process, it is rational for interest groups to spend large sums on lobbying for special privileges – an activity known as ‘rent seeking’.
- Interest groups can increase their effect still further by ‘logrolling’ – agreeing to trade votes and support each other’s favoured initiatives. These factors make interest group minorities particularly powerful in systems of representative democracy, such as legislatures.
- In direct democracy, using mechanisms such as referenda, the majority voting rule that is commonly adopted allows just 51 per cent of the population to exploit the other 49 per cent –as in the old joke that ‘democracy is two wolves and a sheep deciding who shall eat whom for dinner’. In representative democracies, much smaller proportions of the electorate can have undue influence.
- Because of the problem of minorities being exploited – or minorities exploiting majorities – many Public Choice theorists argue that political decision-making needs to be constrained by constitutional rules.
In my first two years in Parliament, I have seen most of the issues described in action. Armies of lobbyists are employed by rent-seeking interest groups. Chairmen steer agendas to achieve desired results, particularly in the case of the executive’s control of Parliamentary business. Voting does not reveal how voters truly feel about the issues at stake. There’s gaming, free-riding, logrolling (supporting each other’s proposals), rational ignorance and, notably, time-shifting: enjoying benefits today to be paid for by future taxpayers. Officials seek to increase their budgets and power while politicians struggle to restrain them.
Politicians and officials are disruptive big players subject to all these problems, not because of their personalities or party, but because of the way the world works. Scholars including Huerta de Soto and Kirzner provide the additional insight that life is a dynamic process of information discovery: so, much as politicians and officials may insist on “evidence-based policy”, the information they need to intervene successfully in our lives simply is not available. Often, as I revealed recently when the Transport Committee took evidence from the Office of Rail Regulation (see especially Q122-123), officials positively prevent the mechanisms of life in society from working, then wonder why they suffer apparently intractable problems.
The conclusion which comes from a robust understanding of society and of government as an institution full of real people with all their own failings is simple. Politicians and officials should be restrained from interfering in the lives of the people. Government should stick to those few things it is good at and politicians should be much more humble and realistic about what they can achieve.
I thoroughly recommend Eamonn’s excellent primer, which is available free to download or to buy here.
Tags: Big Players, Books, Butler, economics, Expectations, IEA, Koppl, Public Choice