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Ever wonder how a show-horse manager got put in charge of FEMA?

COMMENTARY | October 30, 2006

Public choice theory says that what motivates many politicians is their own personal greed. It’s a theory that explains some of the behavior in Washington in recent years, says Henry Banta, and it’s time to write the obit.

By Henry Banta

It is time for an obituary. Few ideas carried as much influence in the conservative revolution as the “public choice” theory. While hardly a widely recognized concept, it provided a sort of intellectual cover for the cynicism that pervaded our federal capital in recent years. 

What is surprising is that a set of ideas so useful to the greedy and villainous could fall so quickly into conspicuous irrelevancy. While important in conservative academic circles and among “movement” Republicans, the theory never got a lot of public recognition. 

Journalists may be the last ones to find out about public choice theory. How else to explain why so many of them stenographically repeat even the most outrageous statements made by politicians?

Political theories matter; keeping them out of sight does the public no favors. Public choice is not a theory likely to get a lot of approval if it were paraded around in the daylight. For example, how would the people of Louisiana like being told it was all right to have a horse show manager in charge of FEMA because a lot of people in Washington believed that government should not be counted on to do anything useful? And all of us may ask if that mind set resulted in a hopelessly unqualified 28 year-old political type being placed in charge of reopening the Iraqi stock market.

Public choice theory in its most fundamental form is based on the notion that government policies are made by people who act in their own economic interests and not in the interest of the public they purport to serve. That is, they act like the “rational economic man” so loved by economists: they do what is good for themselves in economic terms. Altruism, in any form, is a delusion of the weak-minded. Hence whatever the government undertakes is doomed to failure, since those responsible for the task will promote their own ends rather than attempting to accomplish public goals.

[Click here for a report on public choice theory by Jane S. Shaw, a former Business Week columnist.]

Selfish bureaucrats are not the only villains. Also high on the list of those responsible for the inevitable failure of government are the voters. Voters, like politicians and bureaucrats, also act in their own economic interests. Therefore, when it comes to voting they couldn’t care less since there is no chance of any individual vote making a difference. With perfect economic rationality they refuse to waste their valuable time on the effort necessary to vote intelligently. Their choices reflect an ignorance of and indifference to politics and government generally. This can be demonstrated, for example, by the fact that half of all voters cannot name their congressman.

All this is in contrast to how voters behave when acting in the private economic sector. For example, when buying a car or a refrigerator the indifferent voter will make the effort to chose wisely. The result of this voter indifference is that politicians and bureaucrats respond only to well organized interest groups with very specific economic wants, and not to any broader concept of the public interest. A policy that benefits mere voters will not produce many rewards for politicians and bureaucrats.

Public choice people have a great devotion to the “invisible hand” of the free market. While politicians and bureaucrats can access and misuse taxpayers’ money and resources, businessmen are constrained by the discipline of the market which can be relied on to make everyone, producers and consumers, behave rationally – at least in economic terms. 

From these premises, the public choice people postulate the inevitability of governmental failure in virtually everything it would undertake. As Ronald Regan put it: “The government is not the solution; the government is the problem.” The appeal of this political theory to a “conservative” government is enormous; its appeal to a government flirting with corruption is overwhelming.

It must be conceded that, once its premises are granted, there is a certain logical elegance to the public choice theory. It has spawned a considerable academic industry: books, journals, articles, even a Nobel prize or two (economics, of course). And, most pretentious of all, mathematical models. All this has produced some useful insights, particularly into the relations between feckless bureaucrats and powerful private interests.

The problem is not so much with the public choice logic as with the massive amount of ideology built into its premises. Unfortunately much of this ideology has been translated into public policy – with virtually no media comment or even notice. But the events of the last few years have been most unkind in exposing the amount of this ideological content lurking in government policy and the serious dangers it brings.

First came 9/11. If nothing else, 9/11 demonstrated that we not only need a government, we need a government with dedicated public servants. We expect firemen and policemen to do things that no economically rational, profit-maximizing person would do, including taking the job in the first place. And we certainly need an immigration service, customs agents, airport security, not to mention an intelligence service, and an FBI. All staffed by people whose motivation must go beyond a paycheck. Worse, we want them to do their jobs well. The government is not always the problem; sometimes it is the solution. Somewhere out there, there must be people whose devotion to the public good we can all trust.

What about the Iraq war? Soldiers work for the government. We expect them to be dedicated and courageous. But what “rational economic man” would go to war? Not only do we expect our soldiers to be brave and dedicated, we expect them to be competent. We expect their generals and civilian leaders to be competent. Who would suggest that we are not asking more from the men and women of the 3rd Infantry Division than from Halliburton and its minions? 

Hurricane Katrina demonstrated what can happen when the government refuses to consider competence an important value.

But by far the nastiest thing to befall to the public choice theory was the collapse of Enron. The drive behind the public choice movement was never just an academic theory, there was always a political agenda. The real front-line warriors of public choice were not the academic theorists but the Tom DeLays, Grover Norquists and Jack Abramoffs. Their role was to translate the public choice creed into policies that benefited their corporate clients. The creed was simple. Less should be done by government, more by private enterprise. There is almost nothing the government does that private enterprise could not do better, and a lot of what is left should not be done at all. From the public choice perspective, business leaders are seen as efficient, innovative, and imaginative; bureaucrats are dull, stodgy, and wasteful. Business leaders are driven to pursue the goals of their corporations which in turn must meet the demands of the market or perish. Government bureaucrats, insulated from the forces of the market, can pursue their own ends. 

Then came Enron. The most imaginative, freewheeling entrepreneurs on the planet (by their own account) engaged in a massive campaign of personal pillaging and looting. Worse, they got away with it for a very long time, and it was not the market that triggered their downfall. It was a nosy reporter.

If Enron were a single aberration it would have done a lot less damage. But, on the crucial issue of whom do corporate managers work for, it was no aberration. The explosion of management compensation across the corporate world must give pause to even the most committed free market advocate. It has become clear that corporate managers are capable of pursuing their own ends at the expense of their firms. Indeed, for large corporations it appears managers can pursue their own interests with even less accountability than government bureaucrats. Shareholders are no more alert to their interests than voters. As for financial experts, if Enron does nothing else it establishes their vulnerability to twinkle dust.

What is clear is that all large organizations have an agency problem. There is always the possibility that employees will seek their own gains at the expense of their organization. Government is vulnerable but so is private enterprise.

There is no cheap and easy way of keeping our managers, public and private, honest and well behaved. In the end we will get the kind of leadership, public and private, that we demand. The free market is often a useful device of social control, but it is not a magic formula that justifies public complacency. Nor, it must be added, does it substitute for a vigilant free press, as demonstrated by the Enron affair. 

On a practical level, the choice between what is best done by government and what is best left to the market is often not easy. It is a legitimate subject for debate, and ideology has a role to play in that debate. But hiding the ideology behind a weak economic theory is misguided at best; and using it to advance the cause of a greedy few is dishonest. 

Of course the public choice disciples will not disappear. They will always be seen as useful by the rich and powerful and will therefore be well financed. They will tinker with their theories, they will write their articles and books, hold their meetings, give their speeches, and congratulate each other for being clever. But their day is over.

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