The Importance of Public Choice Theory

By James Paterson

 

Events like ESSA’s Q&A is exactly what was missing from the undergraduate economics experience when I started as the Bachelor of Arts/Bachelor of Commerce student at the University of Melbourne in 2006.

As good as many of the university’s academics and lecturers are, there’s no substitute for a rigorous application of economics to current public policy issues. Too often, at least in my personal experience, economics is studied in a vacuum too far removed from the real world of applying it – particularly when it comes to public policy.

A classic example of this is the lack of attention paid to the field of public choice in the economics faculty. Public choice provides a vital insight into why politicians and bureaucrats behave the way they do, why governments look like they do, and why we are governed in the way that we are. This is a really great introduction to the school.

A better understanding of public choice would assist many frustrated economists and economic students, who are perfectly capable of designing an “ideal” solution to a public policy problem in an economics tutorial or paper, but are often exasperated when politicians and bureaucrats aren’t able to implement it. For many, this is a mystifying gap – they’ve diagnosed the problem and found the solution, why won’t those silly politicians just implement it? This was a strong theme to the questions on the night at the Q&A on immigration and the so-called “two-speed economy”.

A decent grasp of public choice would remedy this confusion. We should never expect perfect, ideal or even just generally good policy to be implemented by any government of any political stripe – the odds stacked against that are too large. For example, politicians and bureaucrats are just as self-interested as any other person.  Politicians want to be re-elected. Public servants don’t want to see their department’s funding cut. Members of parliament are sensitive to loud pressure groups. Government employees are much less sensitive to the demands of their “clients” or customers than any employee of a private business. And voters are behaving completely rationally when they are ignorant about politics!

If that last point sounds jarring, then I cannot recommend The Myth of the Rational Voter: Why Democracies Choose Bad Policies by Bryan Caplan highly enough. As Bryan explains, the marginal difference of one vote in an election almost never makes a difference. So for the individual voter, going to the time and effort to be educated about politics and policy in order to make a wiser choice at an election is completely irrational. This has profound implications for democracy, and helps explain why bad policies like generous middle class welfare for families exists – because they only way to earn the support of ignorant voters is through their self-interest.

Of course, I like public choice because it appeals to my philosophy. If we expect government to be generally incompetent, as most public choice theorists would argue, then we should probably trust it with less power, expect it to do fewer things for us and make it smaller than it is today in Australia. But even if you want to see a strong role for government in society and the economy, you would be well advised to recognise and understand its limits.

Sadly, the University of Melbourne never taught public choice as a standalone subject whilst I was a student (despite teaching other schools of economics like Behavioural Economics, which I would argue is a smaller, newer and less relevant field). Some aspects of it were taught in general economics subjects, but an economics graduate from the university will leave with a much better understanding of “market failure” than government failure, if they rely on their subjects alone for their economics education.

But perhaps that is the point of ESSA. My most practical career advice is do not rely on your lecturers, textbooks and required reading alone for your economics (or wider) education. You will leave university with a far narrower and less useful understanding of the world if you do. Instead, read much more widely, debate ideas and attend events like the ones organised by ESSA. You’ll be a better economist, employee – and you’ll have more fun!