Public choice is ‘politics sans romance’

A little-known economic theory called “public choice theory” explains why the Kejriwal-led AAP government retained power in Delhi. Public choice theory, which explains the application of economic concepts to the study of government decisions, argues that economic self-interest is the guiding force in politics.

According to it, people will vote for the party that they believe will give them the maximum access to benefits. AAP did give voters benefits in its five years in power — cheap electricity for households consuming less than 400 units of power a month and 20,000 litres of water free to every household in Delhi, not to forget free rides for women in Delhi Metro and DTC buses. Surveys also indicated that people were satisfied with the work in the health and education sectors.

Good politics is considered bad economics and the AAP government, too, had the usual armchair critics baying for its blood. But in a democracy, the majority rule. In fact, Benjamin Franklin described democracy as “two wolves and a lamb voting on what they are going to have for lunch.”

Public choice theory was developed by the libertarian economist James Buchanan in his seminal book “The calculus of consent,” which he co-authored with Gordon Tullock in 1964 (Buchanan was awarded the Nobel Prize in Economics in 1986, Tullock did not get to share it!).

Buchanan proposed an interesting distinction between two levels of public choice. The initial level at which a constitution is written and agreed upon by the founders of a country, and the second level — the post-constitutional level — where voters try to influence policy, politicians jostle for votes and bureaucrats try to hang on with the party in power. The first level, Buchanan contended, is like setting the rules of a game, while the second is like playing the game according to the rules.

Buchanan famously remarked that public choice is “politics without romance.” People, while casting their vote, are driven by self-interest, just as individuals are while buying goods and services. People, he argued, vote in their best economic interest. It is not just the voters but elected representatives (read politicians), the bureaucracy, consisting of civil servants and public officials, also try to maximize benefits and behave like consumers.

Politicians and bureaucrats are supposed to be agents of the public and act in its interest. It is naïve to expect the political class to be angels who work for “the greatest good of the greatest number.” Just like voters, politicians, too, are guided by self-interest and try to stay relevant and protect their turf. They may try to achieve other, less populist goals, but if these goals threaten their re-election, they will not have any qualms sacrificing them to preserve their empires. Buchanan’s fundamental proposition was, treat humans as self-interested actors, whether they operate in the marketplace or in a polity.

This relationship between voters and politicians is that of a principal-agent relationship. Agents, namely politicians, may not act in the interests of their principal (voters) if they do not get any benefits by doing so. They should be given incentives so that in pursuing their self-interest, the interest of the principal is also enhanced.

The politicians reward themselves with benefits and allowances — some of them for life — like pension, free train travel, etc. While doing that, the political class needs to understand the tradeoffs between self-interest and public service. They tend to act out of self-interest rather than public duty, which explains the increased reliance on populist schemes and subsidies over widening of the tax base to achieve the government’s goals.

In business, too, companies reward managers with employee stock options or ownership so that managers, to maximize the value of their shares, have a vested interest in working overtime and ensuring that the company’s good performance drives up its share price.

It is not so easy to find solutions to the love-hate relationship between the principal and agent. There is abundant evidence that governments throughout the world do not do what they are supposed to do. There is a notion that government employees do not do anything useful. It is also difficult to measure their performance, unlike that of an elected representative or a director in a company, who can be sacked for non-performance. As they have power, which comes with their post, they do not do their job unless they are paid a “bribe.”

In the ultimate analysis of self-interest, however, there is a difference between politics and economics. In economics, when a consumer makes an economic choice, like paying a certain amount to eat a meal in a restaurant, he experiences both the cost and the benefit. In public choices, by contrast, the people who reap benefits like cheap water or electricity are not always the people who bear the cost, that is people who pay taxes. In other words, when an individual votes (cost) and the benefits flow from the elected government, the individual experiences only the cost and some other individual enjoys the benefit.

(The writer is a CFA and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)