Five Essential Books on Public Choice

Earlier this pandemic year, I shared a post on five great books to read first if you want to start learning about public choice economics. Looking back at that list, I’m still pleased with those selections, and think they hold up as “must-reads” for anybody with an interest in public choice. Now, I’d like to build on that list by sharing five contenders for most defining, most impactful, most essential books in public choice economics.

My focus here is on works that I’ve personally found most useful in being able to use public choice as a framework for conducting applied research. There is of course much that gets left out here, and no doubt I have colleagues working in the field of public choice who would come up with completely different lists. Those more influenced by the Rochester than the Virginia or Bloomington approaches to public choice would come up with the most different set of selections. While the Virginia and Bloomington approaches are closely linked in that they are both embedded within political economy and heavily invested in questions of constitution-building and rule formation, the Rochester approach tends to place more emphasis on modeling political coalitions and voting behavior. But that’s an over-simplification; for those interested in more detail on the relationship between these three approaches, I highly recommend William C. Mitchell’s article “Virginia, Rochester, and Bloomington: Twenty-five years of public choice and political science.”

So, with caveats in place, here are five essential books in public choice economics that belong in every library:

 

Calculus of Consent: The Logical Foundations of Constitutional Democracy

James M. Buchanan and Gordon Tullock

The theory at the core of this book is about why people form governments and how particular decisions and areas of life are deemed either in or out of the bounds of public influence. Although the dividing lines between public and private can be easily taken for granted at any particular moment in time, the answers to these questions are actually quite varied across societies and can change radically over time. The book’s approach to these fundamental questions is deeply democratic in that it roots collective action in individuals pursuing their plans and interests while remaining keenly aware of the limits of large scale collective action. This balancing act between optimism about the coordinative power of rules and skepticism about the high potential for abuse and misuse of political power, which can be traced back to the constitutional debates at the time of the American founding, is still a defining feature in public choice today. The importance of this book to the development of the field is a big part of why Buchanan won the Nobel Prize in Economics, and why Richard Wagner called Calculus of Consent the “Ur-text” of the Virginia political economy approach to public choice.

 

Bureaucracy

Gordon Tullock

This volume is actually a mash-up of two books by Tullock, The Politics of Bureaucracy and Economic Hierarchies, Organization and the Structure of Production. The vision that brings them together is the desire to understand behavior within political organizations from the perspective of those on the inside. By providing a framework for understanding political behavior as a function of what it takes to advance within a particular system, Tullock offers a way forward for those seeking to better understand the incentives and constraints facing decision makers within bureaucracies.

 

The Logic of Collective Action: Public Goods and the Theory of Groups

Mancur Olson

Olson’s enduring contribution to public choice economics is perhaps best remembered for its presentation of the free rider problem, and the implied difficulties that any group of significant size will face when trying to work together. Seeming to have a shared goal is not always enough—differences in strategy, priorities, and the trade-offs faced by individuals raise the possibility of shirking and conflict. By exploring the internal politics of groups, Olson’s Logic of Collective Action gives us another useful way to look under the surface of collective action in order to really understand the ways that what people want out of their associations—governments, unions, lobbies, corporations, NGOs, clubs—might differ from what they are likely to get.

 

Governing the Commons: The Evolution of Institutions for Collective Action

Elinor Ostrom

This book is the culminating presentation of the first thirty years of theoretical and applied research into local public goods and community problem solving by Elinor Ostrom and her colleagues in the Workshop in Political Theory and Policy Analysis. The big idea here, in a sense, is to turn Olson on his head. Instead of focusing on the ways groups might fail, Ostrom’s emphasis in this book is on the ways groups might succeed. (Though admittedly the contrast is overblown, because both find cooperation among groups to be most successful when power is scaled down to the level of local actors with the most relevant information and incentives.) In additional to providing a theoretical framework, the book catalogs extensive case studies of local populations working together to resolve seemingly insurmountable problems and analyzes them for common threads.

 

The Political Theory of a Compound Republic: Designing the American Experiment

Vincent Ostrom

This may be the least orthodox choice on the list, but in my view, Vincent Ostrom’s work here is an integral part of the big picture of public choice. In this book, Ostrom engages in a careful analysis of Alexander Hamilton’s and James Madison’s contributions to The Federalist in a return to the great question of the American founding: is it possible to design a better government through reflection and choice? Or are we doomed to the vagaries of history and tyranny? All the books above can be seen as addressing versions of this question. And it is a critically important one. Understanding what can and cannot be accomplished in a political setting is critical to avoiding missed opportunities, yes, but also the excesses of power (and the abuse, oppression, and waste that accompany them) that are the greater problem in the modern world.

 

 

These five books are essential reads for anyone wanting to get the full picture of public choice. Taken together, they represent a holistic and adaptable approach to understanding political and economic systems that takes seriously the great power of working together—for better and for worse. There are many more works that deserve a place on this list, too many more to even name here. Share your picks in the comments below and we’ll all get to reading.

 

 

Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.

 


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Cost and the Agony of Choice

I recently had cause to re-read part of James Buchanan’s Cost and Choice, which remains one of the most important treatments of the idea of cost in the history of economics. Chapter 3 of the book is the core of his argument and it lays out an important distinction that is often overlooked in other treatments of cost.

 

Buchanan starts with a methodological distinction between what he calls the “predictive theory” of orthodox economics and the “more general theory of choice.” In a move that can be found elsewhere in his work, Buchanan understands the predictive theory to be the equilibrium models that populate much of formal economics. Those are based on two key assumptions. First, humans are homo economicus, concerned with maximizing utility or profits. Second, they have all of the relevant knowledge necessary to engage in that maximization process. That is, meaningful uncertainty is absent.

If all of the conditions of the predictive theory hold, we can, indeed, predict what people will do facing a particular set of data. As Buchanan notes, in this world, “Individuals do not choose; they behave predictably in response to objectively measurable changes in their environment.” Another way to put this is that if an actor is assumed to maximize utility and that person knows all that is necessary to fill in their utility function, what they will “do” is not a choice. It is simply implied by the maximization assumption combined with those particular data. As we teach in intro, when you know your cost curves and your revenue curves, and are assumed to maximize profits, you don’t “choose” the price and output combination in any meaningful sense of the word. That combination is the logical implication of the location of those curves. Utility and profit maximizers in the predictive theory stand there and can do no other.

The simplest way to see the distinction between the predictive theory and the more general theory of choice is a bit of introspection. When real humans actually make choices, we feel the “agony of choice” that is utterly absent from the predictive theory. Which entrée should I order at the restaurant? Which college should I attend? Which medical treatment should I adopt? All of these choices involve an internal struggle over assessing the costs and benefits and thinking through alternatives, and imagining future regret. The discomfort we experience when facing genuine choice is the result of conflicting goals we might have and the structural uncertainty that is the human condition. Those are all absent in the predictive theory where there are no alternatives to the outcome implied by the data given the maximization and knowledge assumptions.

In the more general theory of choice, human actors are not assumed to only care about pecuniary concerns and they face genuine uncertainty about the future. As Buchanan puts it, in the predictive theory, “cost is reckoned in a commodity dimension” while in the theory of choice it is “reckoned in a utility dimension.” The assumptions of orthodox theory allow us to attach a financial or physical dimension to our understanding of cost, as represented by the marginal cost curves of basic microeconomics. But once we put those assumptions aside, we can only understand cost in utility terms.

This is where Buchanan’s core contribution comes in. What does cost look like in a world where people have multiple goals and are dealing with true uncertainty? Cost in such a world is the actor’s “own evaluation of the enjoyment or utility that he anticipates having to forego as a result of selection among alternative courses of action.” (I would note that it would be more precise to say “want satisfaction” rather than “enjoyment or utility,” especially if “utility” is understood in hedonic terms.) He lays out six implications of what he calls the “choice-bound conception of cost:”

  1. Most importantly, cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others.
  2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else.
  3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
  4. Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed.
  5. Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed.
  6. Finally, cost can be dated at the moment of decision or choice.

 

I don’t want to walk through each of these, as I’ve covered many of them in a previous contribution. What I do want to note is that all of these implications derive from the absence of homo economicus and the presence of real uncertainty. This combination makes cost subjective and anticipation-driven. We don’t know for sure whether the steak will be better than the salmon, or whether standard drugs will be better than chemotherapy. Cost is the hurdle we must get over in order to choose. We have to decide that the want we anticipate satisfying by one option is more valuable than what we anticipate from the next best option. That process of weighing those anticipated outcomes is the agony of choice, and it is what is absent from the predictive theory and the standard neoclassical models that emerge from it.

Standard theory might allow us to make predictions about behavior, given its assumptions, but it fails us as a way to understand choice.

Another way to see Buchanan’s contribution is to think in terms of the Austrian idea of discovery and markets as processes of social learning. In the predictive model, there is nothing to discover and there can be no regret. Behavior is implied by the assumptions and the data, and the maximizing combination is always chosen. There is nothing to learn. In the theory of choice, we are always in a process of discovering whether or not the various options in front of us can satisfy our wants in the ways we anticipate. If we choose the steak and it’s not very good, we have learned something for next time we eat at that restaurant. We can experience regret and it can inform future decision making. We learn from our choices and we improve ourselves in the process.

The relationship between cost and real choice Buchanan outlines in his description of the general theory of choice depicts humans who are much closer to the kind of people who inhabit the world of the humanities, and especially the creative arts. They are richly understood humans who experience that agony of choice and face uncertainty about the future. And they are humans who are capable of regret, learning, and improvement. In his essay “Natural and Artifactual Man,” Buchanan writes that “Man wants liberty to become the man he wants to become.” This is a description of the choosing person who inhabits the general theory of choice. The automaton in the predictive theory cannot be understood in those terms.

Whatever the value of the predictive theory, and it certainly has value as a preliminary exercise for understanding economic relationships, it cannot help us to understand genuine choice in a world of uncertainty. And it therefore cannot help us understand the very human experience of the agony of choice, the regret of error, and the joy of learning.

 

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