One debate over economics has been centred on the division between those who would adhere to the philosophy of the ‘invisible hand’ and those who point to the weaknesses in the assumptions that underlie the belief in the power of the free market. Public choice theorists are part of the debate about the extent to which government should intervene to correct market failure. If government does intervene, then public choice theory suggests that the results are not always going to be positive. There is thus a balance required between the extent to which government should intervene in the economy and measures put in place to reduce the issues that public choice theorists have identified as contributing to government failure.
In many western economies since the late 1960s, the role of the state in the economy has changed. Many countries have pursued a programme of privatization which has transferred former state-run assets and business activity to the private sector. In some countries, welfare systems have been reformed to try to promote the incentive to work and not rely on benefits handed out by the state. Europe will have to deal with the aftermath of the decision by the UK to leave the EU. That decision was promoted in part by the belief that the political influence of the EU in UK economic and political life was too strong.
In unravelling the thinking behind the change in the way the state is viewed in the economy, some economists have noted that public choice theorists may be basing their analysis on the idea of homo economicus, that humans act as self-interested rational beings albeit that the context of being in politics may be different from those beings who are not in politics.
Abby Innes, an Assistant Professor of Political Economy at the London School of Economics, has noted that early public choice theorists based their analysis of government failure on the assumptions of neo-classical economics. This, she argues, gives some in society the basis to view politicians as individuals seeking to gain the benefits of monopoly power. Equally, bureaucrats and civil servants will similarly act in a self-interested way and the outcome will be economic inefficiency. This could mean that arguments to roll back the power of the state to reduce the instances of government failure gain some momentum and results in the processes witnessed in many developed countries since the late 1960s.
However, Innes points out that if the base assumption is incorrect, then the argument for reducing the power of the state might also be flawed. Innes suggests that market failures might have existed regardless of government intervention, so the argument that state intervention is at the root of market failure could be fallacious. Hence there is no empirical argument to roll back the power of the state.
The consequences of these types of debates in economics can be extensive. Innes relates the debate on philosophical assumptions to the decision by UK voters to leave the EU. Those who voted to remain may have been persuaded that the status quo was acceptable and had been something they had benefited from, and the leave voters were those who felt the state had abandoned them, did not understand them and had left them behind by the way the economy and political processes had changed.
Critical Thinking Questions
1 Given what you have read about public choice theory in this chapter, to what extent would you agree that the base assumption made by public choice theorists is in homo economicus?
2 If the assumption of self-interested rational agents is at the heart of public choice theory, do you agree that this is a motivation behind policy suggestions that government intervention in the economy should be limited or, at the very least, monitored carefully?
3 To what extent would you agree that the result of the referendum in the UK to leave the EU was decided by the ability of self-interested agents (politicians in this case) persuading sections of the public of government failure on the part of the EU?
4 How possible do you think it is to separate out market failure and government failure in assessing the performance of economies in developed countries such as those across the EU and the UK?
5 In a blog, Abby Innes comments:
Brexit militants have offered no precise strategy for free-market greatness because it exists in no realisable place: the days of the British Empire are mercifully finished, a democratic free market is a fantasy.
For its leadership, Brexit is the last opportunity to radically dismantle the state-as-economic-referee as the window on the popularity of neoliberalism starts to close.
Comment on this quote in the context of public choice theory and market and government failure.