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Public Choice: The Economic Analysis of Public Law

Published online by Cambridge University Press:  24 January 2025

Neil Gunningham
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Extract

Law students, served a standard helping of textbook or case method analysis, could be forgiven for thinking that the “law” consists mainly of common law rather than legislation, and that cases, not statutes, are the central repository of legal knowledge. Even those who study legislation often end up with a court-centred view of law. For while legislators enact laws, it is the judiciary which actually interprets, and in some respects, enforces them.

Such a view is essentially inaccurate. Australia, like most other advanced western democracies, is an administrative state, shaped by explicitly adopted policies, incorporated in legislation and implemented by a large array of large regulatory agencies. The economy, the health and safety of the public and the work force, the environment, and a multiplicity of other social goals are all regulated (with varying degrees of success) by this means.

Type
Research Article
Information
Federal Law Review , Volume 21 , Issue 1 , March 1992 , pp. 117 - 135
Copyright
Copyright © 1992 The Australian National University

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Footnotes

*

An earlier version of this article appeared as Chapter 8 of S Bottomley N Gunningham and S Parker, Law in Context, (1991) Federation Press. The author acknowledges the valuable comments of Stephen Bottomley, Geoffrey Brennan, Maureen Brunt, Ian McEwin and Stephen Parker, none of whom are responsible for the final product.

References

1 This point is made in Rubin, E, “Law and Legislation in the Administrative State” (1989) 89 Columbia L Rev 369CrossRefGoogle Scholar.

2 Id.

3 McAuslan, P, “Public Law and Public Choice” (1989) 51 Mod L Rev 682Google Scholar. See also Borins, S, “Public Choice: 'Yes Minister' made it popular, but does winning the Nobel Prize make it true?” (1988) 31 Canad Pub Admin 12CrossRefGoogle Scholar.

4 For an admirable summary of the American literature and its applications see Farber, D A and Frickey, PA, Law and Public Choice (1991)CrossRefGoogle Scholar.

5 See eg McAuslan, P, “Public Law and Public Choice” (1989) 51 Mod L Rev 682Google Scholar; Self, “What's Wrong with Government? The Problem of Public Choice” (1990) 61 Political Quarterly 23.

6 Lynn, J and Jay, A (eds), Yes Minister: The Diaries of a Cabinet Minister (1981-1982)Google Scholar.

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9 As D Mueller, Public Choice II, (1989) 3 points out, public choice theorists often depict the preference-revelation process as analogous to the market (voters engage in exchange; via voting individuals reveal their demand schedules, etc).

10 Pigou, AC, The Economics o/We/fare (4th ed 1932)Google Scholar.

11 Welfare economics is the branch of economics which is concerned with defining economic efficiency, with evaluating the economic efficiency of particular systems of resource allocation, and with analysing the conditions under which economic policies can be said to have improved social welfare.

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14 One early study of public utility regulation, for example, found that it had little or no effect on the level of electricity prices or on the rates of return to investments in that industry. Similarly, purchasers of new stock issues were found to obtain few benefits from the regulatory oversight exercised by the Securities and Exchange Commission. See Stigler, G J and Friedland, C, “What Can Regulators Regulate: The Case of Electricity” (1982) 5 J Law and Economics lGoogle Scholar; Stigler, G J, “Public Regulation of the Securities Market” (l964) 2 J Business 117CrossRefGoogle Scholar.

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16 Buchanan, J M and Tulloch, G, The Calculus of Consent (1962)Google Scholar.

17 See generally D Mueller, supra n 9.

18 See eg Shepsle, KA and Weingast, BR, “When do Rules of Procedure Matter?” (1984) J Politics 207Google Scholar

19 Mercuro, N and Ryan, T P, Law, Economics and Public Policy (1984) 143Google Scholar.

20 In this way, each faction gains more from its own preferred policy than it loses in paying its share of other policies. See Tollison, RD, “Public Choice and Legislation” (1988) 74 Virginia L Rev 339CrossRefGoogle Scholar.

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22 Kelman, M, “On Democracy Bashing” (1984) 74 Virginia L Rev 1988 199,227CrossRefGoogle Scholar.

23 Niskanen, W, Blll'eaucraey and Representative Government, (1971)Google Scholar. For alternative public choice theories of bureaucracy, see Weingast, BR and Moran, M, “Bureaucratic Discretion or Congressional Cartel?” J Political Economy 765Google Scholar; Rowley, C K and Elgin, R, “Government and Its Bureaucracy” in CK Rowley, C K Tollison and G Tulloch (eds), The Political Economy of Rent-Seeking, (1988)CrossRefGoogle Scholar.

24 J Buchanan, supra n 7, 19.

25 Olson, M, The Logic of Collective Action, (1965)CrossRefGoogle Scholar.

26 lbid 2.

27 A free rider is someone who disguises their true preferences and (in large number situations) enjoys the benefits which are bought by other people's money. Eg one who refuses to contribute to defence spending, but who nevertheless benefits from the protection such spending (by others) brings.

28 Kahn, P L, “The Politics of Unregulation” (1990) 75 Cornell L Rev 290-291Google Scholar. (Footnote inserted by present author).

29 Wilson, J Q (ed), The Politics of Regulation, (1980) 367-370Google Scholar.

30 Rowley, CK, “Public Choice and the Economic Analysis of Law” in N Mercuro (ed), Law and Economics, (1989) 155Google Scholar.

31 Stigler, G J, “The Theory of Economic Regulation” (1971) 2 Bell J Economics 3Google Scholar; Pomer, RA, “Theories of Economic Regulation” (1974) 5 Bell J Economics 335Google Scholar; Peltzman, J, “Towards a More General Theory of Regulation” (1976) 19 J Law and Economics 211CrossRefGoogle Scholar.

32 G J Stigler supra n 31; Stigler, GI, The Citizen and the State: Essays on Regulation, (1975)Google Scholar. See also Macey, J, “The Myth of Deregulation” (1988) 45 Washington and Lee L Rev 1279Google Scholar.

33 W F Shughart, supra n 8, 38.

34 Id. See generally GI Stigler, supra nn 31 and 32; see also Macey, J, “The Myth of Deregulation” (1988) 45 Washington and Lee L Rev 1279Google Scholar.

35 J Macey, supra n 32, 1279.

36 See further Landes, WM and Posner, R A, “The Independent Judiciary in an Interest Group Perspective” (1975) 18 I Law and Economics 875, 877.CrossRefGoogle Scholar

37 W F Shughart, supra n 8, 41.

38 WM Landes and RA Posner, n 36,877.

39 Macey, J, “Public Choice: The Theory of the Finn and the Theory of Market Exchange” (1988) 74 Cornell L Rev 52Google Scholar (with omissions). Copyright by Cornell University. All rights reserved.

40 PL Kahn, supra n 28, 281 and references cited therein.

41 This might be achieved by imposing a rigid form of the non-delegation doctrine, by greater court activism to obstruct special interest deals, by adopting a more deferential standard of review of agency actions when the agency is removing regulations than when it is imposing them, or by the extension of federal antitrust law to prevent the regulation of economic activity by the states. P L Kahn, supra n 28, 282-286 and references cited therein.

42 N Mecuro and T P Ryan, supra n 19, 144 point out that the Chicago school's emphasis has been on altering political rules through the judicial and legal processes.

43 Brennan, HG and Buchanan, IM, The Reason of Rules, (1985)CrossRefGoogle Scholar. Curiously, this argument has some similarity with that of E P Thompson, concerning the virtues of the rule of law.

44 J Buchanan, supra n 7.

45 Rowley, CK, “Public Choice and the Economic Analysis of Law” in N Mercuro (ed), Law and Economics (1989) 149-150Google Scholar.

46 The most obvious of case is the Savings and Loans disaster in the USA which may cost US taxpayers between 500 billion and a trillion dollars. While many attribute the scandal directly to President Reagan's deregulatory measures, it must be acknowledged that political intervention also played an important role.

47 ff it does, this may be difficult to explain within a theory which assumes that private rather than public interest accounts for all legislative change. See for example, J Macey, supra n 39, and PL Kahn, supra n 28. Even so, the long term impact of public choice theory on political institutions is undeniable.

48 For broad-ranging critical analysis of public choice see Farber, and Frickey, , “The Jurisprudence of Public Choice”, (1987) 65 Texas L Rev 873Google Scholar; Debow, M and Lee, D, “Understanding (and Misunderstanding) Public Choice-A Response to Farber and Frickey”, (1988) 66 Texas L Rev 993Google Scholar. See also “Exchange on Public Choice” (1990) 57 U Chicago L Rev 834.

49 D Mueller, supra n 9, 5.

50 Posner, RA, “Theories of Economic Regulation” (1974) 5 Bell J Economics 349-350Google Scholar (with omissions). In respect of Posner's last paragraph it should be noted that sometimes the small group benefiting acts in a way that maximises overall welfare: some small group interests and the public interest are not divergent.

51 Pincus, J J and Withers, G A, “Economics of Regulation” in F Gruen (ed), Surveys in AIIStralian Economics Vol Ill, (1983) 52Google Scholar.

52 However, The Trade Practices Act has some exemptions, eg in respect of labour markets, agricultural marketing bodies, etc which can be explained from an interest-group perspective.

53 For studies employing empirical tools to test the economic theory of regulation, see McCormick, R and Tollison, RD, Polilicians, Legislation and tlu Economy: An Inquiry into the Interest-Group Theory of Government (1981)CrossRefGoogle Scholar; Olson, M, The Rise and Decline of Nations (1982)Google Scholar; Crain, WM, “On the Structure and Stability of Political Maikets” (1977) 85 J Political Economy 829CrossRefGoogle Scholar; Crain, WM and Tollison, R D, “Campaign Expenditures and Political Competition” (1976) 19 J Law and Economy 177CrossRefGoogle Scholar; Kalt, JP, “The Costs and Benefits of Federal Regulation of Coal Strip Mining” (1983) 23 Nat Resources J 893Google Scholar; Macey, JR and Haddock, D D, “Shirking at the SEC: The Failure of the National Market System” (1985) Uni Ill L Rev 315Google Scholar; Maloney, MT and McCormic, RE, “A Positive Theory of Environmental Quality Regulation” (1982) 25 J Law and Economy 99CrossRefGoogle ScholarPubMed; Pashigian, BP, “The Effect of Environmental Regulation in Optimal Plant Size and Factor Shares” (1984) 27 J Law and Economy 1CrossRefGoogle Scholar.

54 See further S Bouomley N Gunningham and Paiker, S, Law in Context (1991) ch 13Google Scholar.

55 See eg Jacobson, G, The Politics of Congressional Elections, (1984)Google Scholar; Mashaw, J, “Pro delegalisation: Why Administrations Should Make Political Decisions” (1985) J Law and Economy 1Google Scholar; Olson, J and Olson, E, “Economic Fluctuations and Congressional Elections” (1980) 24 American J Pol Sci 469Google Scholar. See also M Kelman, supra n 22, 199,237,238.

56 M Kelman, supra n 22, 213-214.

57 Fels, A, “The Political Economy of Regulation” (1982) 5 UNSW LJ 29, 40Google Scholar.

58 See further S Bouomley et al, supra n 53, ch 9.

59 Rubin, EL, “Deregulation, Reregulation and the Myth of the Market” (1988) 45 Washington and Lee L Rev 1249, 1257-1258Google Scholar.

60 Majoritarian democracy contrasted with constitutional democracy. The former admits of no limits on majority rule, whereas the latter does impose limits on what the majority can do.

61 M Kelman, supra n 22,199,268; P McAuslan, supra n 3,681, 701.

62 See further E Rubin, “What We Expect of Legislators and What Legislators Expect of Themselves: A Critique of the Public Choice Analysis of Legislation” (Paper presented al Law and Society Conference, Vail, June 1988).

63 M Kelman, supra n 22, 204.

64 E Rubin, supra n 62.

65 Ibid, 4.

66 M Kelman, supra n 22, 268.

67 M Kelman, supra n 22, 220. As PL Kahn, supra n 28, 286 further points out: “After all, why should the logic of deregulation differ from the logic which explains regulation? Why, then, do deregulatory movements succeed, if special interest groups oppose them? Either the successes of the deregulatory movement indicate that some public-regarding political outcomes succeed for reasons not explained by the model, or that the political environment must have changed so that deregulation now serves the same private interests which once sought regulation. And if this is so, self-serving behaviour on occasion coincides with the public interest. The success of the deregulatory movement demonstrates the limits of the model in prescribing policy.”

68 As P L Kahn, (1990) supra n 28, 308-9 points out, social regulation (environment, occupational health) is a particularly poor candidate for public choice explanations. “By its nature, it affects many industries at once; the involvement of numerous industries and, therefore, large numbers of affected shareholders and managers, poses serious free-rider problems for an interest group trying to elicit action from its members. It usually imposes substantial compliance costs, which fall on the very parties regarded as beneficiaries under a private interest interpretation. Indeed, the magnitude of those costs were widely cited by affected industries as a reason to remove social regulation. And social regulation is unlikely to be an entry-limiting device capable of awarding monopoly power to established firms; that explanation presumes that existing firms would have monopoly power but for the competitive pressure imposed on them by potential entrants. While some parts of American industry may indeed be noncompetitive, that surely is not the rule, and in any case those industries which are competitive would have incentives to resist the imposition upon them of compliance costs unrewarded by new market power.”

Stigler's theory in particular, has little to say when regulation takes forms other than the conferring of concentrated benefits on groups and the deferring of diffused costs.

69 See further M Kelman, supra n 22, 268, and references therein.

70 P McAuslan, supra n 3, 704.

71 Id.