In Chapter 26 we illustrated why individuals might choose to define certain rights to act in the constitution. The existence of these sorts of constitutionally protected rights is often regarded as an essential prerequisite for a free society. Such rights protect the liberty of all citizens and are associated with classic definitions of liberalism as put forward by John Stuart Mill (1859). In a short note published in 1970, Nobel prize-winner Amartya Sen (1970b) explored the notion of liberalism from a public/social choice perspective. This note proved yet another impossibility theorem of the Arrow variety, and precipitated a lengthy and often vigorous debate over both the implications of the theorem and the concept of liberalism itself.

In the previous chapter we documented how governments have grown around the world – until in Europe; they now generally absorb half the national income or more. What have been the consequences of this growth for the welfare of the citizens of these countries? What have been the consequences for the economic performance of the countries? The first question is, of course, the most relevant one. Since the end of World War II, the United States has spent over $8 trillion on defense. If these expenditures prevented a third world war, led to the collapse of Communism in East Europe and the Soviet Union, and thereby preserved democracy and freedom in the West, most Americans would probably say that the money was well spent. But if the same events would have transpired if the United States had spent only a tenth as much on defense, then more than $7 trillion would have been wasted, and Americans are that much worse off as a result.

The very “nonmarket” nature of many of the goods and services government supplies makes it difficult to measure their effects on welfare.

Public goods and prisoners' dilemmas

Probably the most important accomplishment of economics is the demonstration that individuals with purely selfish motives can mutually benefit from exchange. If A raises cattle and B corn, both may improve their welfare by exchanging cattle for corn. With the help of the price system, the process can be extended to accommodate a wide variety of goods and services.

Although often depicted as the perfect example of the beneficial outcome of purely private, individualistic activity in the absence of government, the invisible hand theorem presumes a system of collective choice comparable in sophistication and complexity to the market system it governs. For the choices facing A and B are not merely to trade or not, as implicitly suggested.

The cycling problem has haunted the public choice literature since its inception. Cycling introduces a degree of indeterminacy and inconsistency into the political process that hampers the observer's ability to predict outcomes, and clouds the normative properties of the outcomes achieved. The median voter theorem offers a way out of this morass of indeterminateness, a way out that numerous empirically minded researchers have seized. But the median voter equilibrium remains an “artifact” of the assumption that issue spaces have a single dimension (Hinich, 1977). If candidates can compete along two or more dimensions, the equilibrium disappears and with it the predictive power of the econometric models that rely on this equilibrium concept.

Whereas one can speak of the positive theory of public choice, based upon economic man assumptions, one must think of normative theories of public choice, for there are many views of what the goals of the state should be and how to achieve them. This potential multiplicity has been the focus of much criticism by positivists, who have argued for a “value-free” discipline. For the bulk of economics, it might be legitimate to focus on explanation and prediction, and leave to politics the explication of the goals of society. For the study of politics itself, in toto, to take this position is less legitimate; thus the interest in how the basic values of society are or can be expressed through the political process. The challenge that normative theory faces is to develop theorems about the expression and realization of values, based on generally accepted postulates, in the same way that positive theory has developed explanatory and predictive theorems from the postulates of rational egoistic behavior. Part V reviews some efforts to take up this challenge.

The Bergson-Samuelson social welfare function

The traditional means for representing the values of the community in economics is to use a social welfare function (SWF). The seminal paper on SWFs is by Bergson (1938), with the most significant further explication by Samuelson (1947, ch. 8).

We have already discussed several works that have assumed uncertainty over future position to derive a normative theory of social choice. Rawls's (1971) theory discussed in Chapter 25 uses uncertainty over future position to derive principles of justice to be included in a social contract; Harsanyi (1953, 1955, 1977) uses it to derive an additive SWF (see Chapter 23).

Buchanan and Tullock (1962) develop a theory of constitutional government in which the constitution is written in a setting resembling that depicted by Harsanyi and Rawls. Individuals are uncertain about their future positions and thus are led out of self-interest to select rules that weigh the positions of all other individuals (Buchanan and Tullock, 1962, pp. 77–80). Buchanan and Tullock's theory is at once positive and normative.

The postulate of methodological individualism underlies all public choice analysis. In trying to explain governmental actions, we begin by analyzing the behavior of the individuals who make up the government. In a democracy these are the voters, their elected representatives, and appointed bureaucrats. The postulate of methodological individualism has a normative analogue. The actions of government ought to correspond, in some fundamental way, to the preferences of the individuals whom these actions affect – the citizens of the state. This postulate of normative individualism underlies much of the normative analysis in public choice. It is quite understandable, therefore, that virtually all research in public choice has concentrated on the analysis of democratic governments, first because virtually all public choice scholars have lived in democratic countries and thus this form of political system has the most intrinsic interest for them, and second because they feel that all governmental systems ought to be organized as democracies.

In his book Exit, Voice, and Loyalty (1970), Albert Hirschman developed the useful distinction between processes in which individuals express their preferences via entry or exit decisions, and those in which some form of written, verbal, or voice communication is employed. An example of the first would be a market for a private good in which buyers indicate their attitudes toward the price-quality characteristics of a good by increasing or decreasing (entry or exit) their purchases. An example of the exercise of voice to influence a price-cost nexus would be a complaint or commendation of the product delivered to the manufacturer. A necessary condition for the effective use of exit is obviously that the potential users of this option be mobile: and full mobility of both buyers and sellers (free entry and exit) is an assumption underlying all demonstrations of market efficiency. In contrast, the literature focusing on voting processes, public choice and political science, has almost exclusively assumed (most often implicitly) that exit is not an option. The boundaries of the polity are predefined and inclusive; the citizenry is fixed.

In Chapter 4 we argued that the ubiquitous popularity of majority rule might be attributable to the speed with which committees can make decisions using it. This quickness defense was undermined considerably in Chapter 5 by the results on cycling. A committee caught in a voting cycle may not be able to reach a decision quickly, and the outcome at which it eventually does arrive may be arbitrarily determined by institutional details, or nonarbitrarily determined by a cunning agenda setter. Is this all one can say in majority rule's behalf? Does the case for the majority rule rest on the promise that quasi-omniscient party leaders can arrange stable trades to maximize the aggregate welfare of the legislature discussed in Section 5.13.3?

When asked to explain majority rule's popularity, students unfamiliar with the vast public choice literature on the topic usually mention justness, fairness, egalitarian, and similar normative attributes that they feel characterize majority rule.

Much attention in both lay and academic discourse has been given to the question of the proper size of government and the reasons for its growth. Public choice, the economic analysis of political institutions, would seem to be the natural tool for answering these questions, and it has frequently been employed in this task. A review of these efforts follows.

The facts

That government has grown, and grown dramatically in recent years, cannot be questioned. Total government expenditure in the United States in 1999 as a percentage of GNP was 28.3 percent, up from 23 percent in 1949 and 10 percent in 1929 (see Table 21.1). Moreover, this growth is confined neither to this century nor to the United States. Federal government expenditures as a percentage of national income in the United States were only 1.4 percent of national income in 1799. They rose to double that figure by the end of the nineteenth century, but were still only 3 percent of the GNP in 1929. Starting in the 1930s, however, federal expenditures took off, rising sevenfold as a percentage of the GNP over the next 70 years.

The government sector has also grown outside of the United States with this growth beginning at least as far back as the nineteenth century. Table 21.2 presents figures from Tanzi and Schuknecht (2000) for 16 countries in addition to the United States.

In Chapter 12 we discussed a model of political competition in which politicians provide policies or legislation to win votes, and citizens and interest groups provide votes. From the discussion up to this point, it seems reasonable to think that the legislation consists of either public goods with characteristics that appeal to given groups of voters or income transfers from one sector of the population to another. The latter might be a tax loophole benefiting a particular group coupled with a rise in the average tax rate to make up for the revenue lost through the loophole. Income can be transferred from one group to another by other, more subtle means, however.

The government can, for example, help create, increase, or protect a group's monopoly position. In so doing, the government increases the monopoly rents of the favored groups at the expense of the buyers of the groups' products or services. The monopoly rents that the government can help provide are a prize worth pursuing, and the pursuit of these rents has been given the name of rent seeking.