John Goodman Bio PicBy John C. Goodman

Public Choice is a field of economics that tries to explain politics, using the tools economists have traditionally used to explain markets. In a word, it applies economic theory to political science.

The single most important idea in all of Public Choice is the idea of political equilibrium. It is analogous to an equilibrium price or an equilibrium quantity in economics. In the political sphere, the idea is that there is a single platform that can defeat all other platforms in a majority vote. If there is such a platform, then a politician must endorse it or risk losing an election to an opponent. That being the case, there will be a natural tendency for both candidates in two-party elections to gravitate to the same set of policies. Failure to do so will invite defeat.

The idea of an equilibrium platform to which all candidates are inevitably pushed is absolutely devastating to the liberal conception of government. Remember that the liberal case for government intervention in the economy is the idea of market failure. Markets fail, it is alleged, because there is imperfect information, imperfect competition and imperfect other things. Government, in principle, can correct these imperfections. But government cannot correct anything if the decision makers have no choice about the decisions they make. The equilibrium platform, not the platform that corrects markets, is the platform that will ultimately prevail.

[Notice that in groping toward the winning platform, the political system is also characterized by imperfect information, imperfect competition and other imperfections — on a larger scale than what we ordinarily find in the private sector.]

What if there isn’t a winning platform? Then regardless of what a ruler does, a challenger will be able to find an alternative set of policies that will defeat her in the next election. This is the paradox of voting. It implies unstable government; and that is even more devastating to the liberal view of government than the idea of an equilibrium platform.

How do we know that the equilibrium platform and the platform that corrects market failures are not one and the same?

Consider any political decision and consider the political pressure the decision maker faces. Whether it is a price or a level of output or a decision about spending, a change in the variable will always create benefits for some people and impose costs on others. Here is the condition for equilibrium: the additional political support offered by those who benefit from a higher level of the variable must be equal to the additional loss of support from those who are made worse off.

Marginal political support for a higher level of the variable has two components: the political price people are willing to pay for a dollar of gain times the marginal benefit a higher level would create. On the other side, the marginal political cost of increasing the variable is the political price people are willing to pay to avoid a dollar of loss times the marginal cost an increase in the variable would create for them.

Now here is the bottom line. Optimal government is government that gives us a set of policies for which marginal social benefit equals marginal social cost. But that can happen only if the political prices various groups of people are willing to pay are exactly equal on both sides of every issue.

What is a “political price”? By that I mean the sum total of all the efforts a group is willing to make (per dollar of expected benefit) to support the election of the candidate it prefers. These include votes, campaign contributions, get out the vote efforts, etc. Now it might seem that just about everybody would be willing to make a dollar’s worth of effort to gain a dollar from the political system. However, the election of a candidate or the passage of a law is a public good for all those who prefer it and a public bad for all who are opposed. Every political change, therefore, has a free rider problem.

Since people who benefit from a change will realize benefits whether or not they help bring it about, their incentive is to contribute nothing and become free riders on everyone else’s efforts. In politics, therefore, people inevitably understate their preferences and in most cases they understate them a great deal. That by itself does not create a problem. The problem arises because the degree to which preferences are understated is not the same for every group.

The condition for optimality requires that political prices be the same on both sides of every issue. When that condition does not hold, we get non-optimal policies.

That leads to:

Goodman’s Theorem: Since the conditions for optimality will almost never hold in any political system, optimal government is in principle impossible.

If the political price milk producers are willing to pay is greater than the political price offered by the consumers of milk, we will get milk price supports. If the price sugar growers are willing to pay is higher than the one offered by sugar consumers, we will get sugar quotas. We get bad government — or if you like, we get government failure — not because of bad leaders. We get bad government because of inequality in the pressures put on elected officials.

Furthermore, Phil Porter and I discovered that small differences in political prices lead to large welfare losses – much larger than what we would ordinarily expect to find in the private sector.

Historians and political scientists traditionally have focused on people in leadership positions — on their personalities and even their political parties. It wouldn’t be unusual, for example, to hear one give Franklin Roosevelt credit for our Social Security system. Many economists also tend to view the world in this way.

However, by the last decade of the 20th century, 95% of all the countries in the world had a social security system that looked structurally identical to ours. If you stop and think about that for a moment, it’s hard to conclude that social security owes much to the personality or leadership of any one politician in any particular country. It would appear that forces are at work that are independent of individual leaders. Similarly, the fact that 30 countries have fully or partially privatized their social security systems in the past 20 years suggests that countervailing forces are now at work — again, independent of individual personalities.

In the idealized public choice model, candidates don’t matter. Who is elected doesn’t matter. All that matters are the tradeoffs that the economy permits and the willingness of interest groups to reward politicians for manipulating those tradeoffs.

What are the public policy implications of all this? There is government failure as well as market failure. In deciding how much power to give to politicians, we must compare the likelihood and magnitude of the two. In the last analysis, prudence is going to suggest that we constitutionally limit the types of decisions politicians are allowed to make.