There is a political marketplace in which individuals transact with each other to produce public policy, but access to the political marketplace is limited because high transaction costs prevent the masses from participating. This divides the population into two groups: the political elite and the masses. Many people have observed this division, but often have gone on to advocate giving more power, and eliciting more participation, from the masses. That is wishful thinking. This volume explains not only why that division exists, but why it must exist. Because political power necessarily rests with an elite few, the only way it can be constrained from being abused is within an institutional structure that requires elites to compete among themselves for power, so some within the elite check and balance the power of others.

One way that citizens can become involved in public policy issues is to join interest groups that share their interests. By accumulating a large membership of voters, and by amassing resources in the form of dues, interest group leaders influence public policy. Individual members face the same incentive problems with interest groups as they do as voters. Each individual member will have negligible influence over the interest group’s activities. They can either choose to join and contribute, or not, but members are still excluded from the political marketplace. Their collective contributions convey power to the leaders of those interest groups, who are able to transact with the political elite in the political marketplace. As individuals, members of interest groups remain powerless. The leaders of those groups gain the bargaining power to enter the political elite.

Institutions of organization are designed to lower transaction costs. Transaction costs tend to be prohibitively high when large numbers of people would be required to engage in a transaction, so those transactions will not occur. Classic cases of externalities, such as when large numbers of people in an area suffer from air pollution from nearby industries, are good examples. Large numbers prevent those suffering from pollution from negotiating with those who are causing it. One way that market institutions deal with the problem of large numbers is to reduce those large number cases down to bilateral exchanges. With two parties engaged in transactions, transaction costs are lower, which facilitates mutually advantageous exchange. That works well for institutions of organization, but is difficult to apply to institutions of governance because one set of rules is designed for the entire population. Transaction costs are necessarily high, which means that only an elite few will be able to negotiate in the design of those institutions of authority and governance.

While elites cooperate with each other, transacting in the political marketplace for their mutual benefit, they also compete with each other in other ways. They often have different policy agendas, but more significantly, they compete with each other for power. Those lower on the hierarchy of power work to displace those above them, and a division of power within government leads them to try to increase their scope of power, often by infringing on the power of other members of the elite. A system of checks and balances helps control the abuse of power by those who have it. The masses have little power, and the powerless cannot constrain the powerful even if the powerless far outnumber the powerful. The most effective way to constrain the abuse of power by the ruling class is to maintain institutions that facilitate competition among elites.

This chapter focuses on academic models of collective choice. It discusses voting models and models of social choice to show that the link between instrumental preferences and collective choice outcomes is broken once one recognizes that the political preferences of citizens and voters are expressive, so do not represent the outcomes they most prefer. The models themselves are not wrong, in that they describe the way that expressed preferences are aggregated to make collective decisions. But the interpretation of the models often is mistaken. There is no clear relationship between outcomes of collective decision-making processes and the outcomes that would be preferred by those whose preferences are being aggregated.

While the policy preferences of the masses are purely expressive, the political elite actually make public policy, so the preferences they act on do have instrumental effects. If the masses adopt the policy preferences of the elite, that points to the question of what public policies the elite advocate to the masses. In the same way that economists simplify the motivations of firms to say that firms are profit maximizers, the political elite are power maximizers. That motivation starts with the recognition that politics is adversarial. In elections, some people win while others lose. The same is true in public policy issues. Some win while others lose. The motivation of the political elite is to keep the power they have, and to gain more. In most societies, the political elite is not a monolithic entity. Rather, there are competing members of the elite, with competing public policy ideas. Thus, the masses have a choice of anchors, but once they choose an anchor, most of their policy preferences are derivative of their anchors.