The Next Twenty-Five Years of Public Choice || The Next Twenty-Five Years of "Public Choice"

The Next Twenty-Five Years of "Public Choice"Author(s): Akihito UdagawaSource: Public Choice, Vol. 77, No. 1, The Next Twenty-Five Years of Public Choice (Sep.,1993), pp. 197-202Published by: SpringerStable URL: http://www.jstor.org/stable/30027220 .

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Public Choice 77: 197-202, 1993. © 1993 Kluwer Academic Publishers. Printed in the Netherlands.

The next twenty-five years of Public Choice

AKIHITO UDAGAWA Faculty of Economics, Meikai University, 8 Meikai Road, Chiba 279, Japan

1. Introduction

I re-read two founders' papers on the methodology of the theory of public choice, before I got my ideas in order. One is by Buchanan (1972). Another is by Tullock (1972). Both papers were written five years after the first volume of Public Choice was published.

In these papers Buchanan and Tullock pointed out the methodological fea- tures of public choice. As is well known, Buchanan stressed that the aim of public choice study is to turn welfare economics or political economics from the open system to the closed system commonly based on the same rational in- centives and behaviors of people. Tullock made an expectation that when public choice study has advanced to the study of the open system, social sciences will be classified into two categories, that is, one the science of choice and the science of tastes.

Recently, social choice theory has been advanced alongside public choice theory. It is impressive to me that Buchanan (1992) clearly delineates the fea- ture of public choice in comparison with social choice. He says that public choice and social choice take the common assumption of Homo oeconomicus. However, public choice conceptualizes politics as the exchange. Therefore public choice theory does not find in politics the best or unique result. Following the guidance by these two leaders, many works have arisen among public choice scholars. It is also very interesting to find that modern political science has changed. These three books by Arrow (1963) Downs (1957) and Buchanan and Tullock (1962) should be considered as the starting point for further study of politics.

In conjecturing the advancement of public choice in the next 25 years, the first important element is that the system of democracy, which is a familiar ob- jective of public choice theory, will expand globally. Not only countries which are advanced in terms of history and established institutions of democracy, but also those which recently have become democratic entities, including Asian countries and East European countries, will present a variety of working units of the democratic policy, and challenge public choice theory with new materials for analysis. In these countries, of course, the fundamental framework is com- posed of principal and agent.



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Various problems will arise; for example, choice of constitutional rules, formation of political party, reform of power of bureaucracy, political competition for the government, scraping and building of regulations leading to the reallocation of rent. These are not new, but they are still interesting subjects for the public choice researchers, because the relative strength of agents will show the different patterns of power formation compared to those in an established democracy. Hence we can observe where and how the bargaining solu- tion is settled in practice in these new institutions. Facing the process of these new institutions, scholars might succeed in finding out a new theory in public choice.

Here, however, I will confine myself to expressing my opinion on the future direction of public choice analysis, rather than the extension of the field of application. Of course, my opinion is subjective and may be biased in favor of economics.

2. Identification of outcome in political process

In public choice theory, politics are considered as a kind of transaction among people and agents. For example, policies presented to the ballot by competing political parties are assumed to give a particular pay-off to each group of voters in the construction of the model. Voters adopt these alleged outcomes as their bases of decision. Then voters choose an alternative according to their prefer- ence order. Or, in the game theoretical framework of politics, political parties propose their policies as strategies of the game to be taken simultaneously. Then, the winner or the loser is revealed through voters' calculations of their pay-offs. However, the real problem is that it is very difficult for voters to identify true amounts of costs and benefits obtainable from each proposal or policy of the competing parties. In the game theoretical framework, the pay-off to the competing parties cannot be easily determined, particularly where objectives of political decision belong to the field of economic policy. In this case, the long-term benefit and cost to the players - all individuals, firms, industries, political parties - cannot be easily defined. I think the aspect where some economists are doubtful of public choice theory is that the outcome to each players is endogenously determined by complex economic transactions and repercussions among all people and agents, and cannot be treated as a direct or first-round effect. As a simple example, we can assume that, in the period of election, some political party makes an appeal, to capture the majority of votes, that they will raise the corporation tax rate and reduce income tax rate for middle-low income classes. In this case, the true pay-off to the majority of citizen is not clear because of the ambiguity of the incidence of corporation tax. People will vote on the basis of "perceived pay-off". However, the amount of



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perceived pay-off depends on the amount of the true pay-off and the share of the hidden part of the true pay-off. Few people would believe that the propaganda of the party would offer a real economic outcome for them. Hence, a public choice economist should try to find out about the true pay-off and the difference from it, that is the perceived pay-off. The perceived pay-off seems to be the function of the true pay-off, as well as its complexity and its degree of diffusion. In this sense, to try to identify the true pay-off of any proposal is the important task for the public choice economist.

We can take another example. Suppose that a political party proposes a plan to impose heavy tax on the land in large cities, and spend these tax revenues to extend public facilities for the comfortable life of citizens in large cities. In contrast to this propaganda, an increase in tax rate on the land might result in the rise of housing price, hence the decrease in the level of welfare of the citizen. Here the question is, what is the true pay-off of this party. Again, in this case, the perceived pay-off seems to be the function of the true pay-off and other factors.

The reason why I want to say these things is that I hold the standard assumption that all subjects are rational in their political decision-making. The assumption of rationality must be applied to individuals, firms, industries and political parties. Rational individuals and agents, if necessary, will use quantitative analysis by experts. Even an average individual can get some analytical knowledge about the economic effect of proposed policies from newspapers or television.

Hence, we can expect that the next generation will obtain more quantitative- ly exact knowledge about their pay-off from the policies on which they will make their political decision.

3. Cost-benefit outcome of policy

Because people will vote on the basis of the perceived pay-off to them, identification of the outcome needs to be adequately made. The description of the economic outcome in terms of a macro-economic variable is not adequate. The main subjects responsible for political decisions are individuals and agents. Hence it is desirable to express the consequence of policies as benefits and costs attributed to each subjects. Specifically, in the case of outcome for individuals, the consequences need to be attributed to three classes of low, middle and high income. Also, economic consequences need to be evaluated in terms of the size of the national budget which is necessary to complement policies. From the point of view of bureaucracy, policies that necessitate large budget of their own bureaus will be welcome. Also, policies easily leading to the intervention of politicians will be evaluated negatively from the side of individuals and posi- tively from the side of politicians.



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4. Future important areas for study of public choice

From the point of view above, I think we can pick up some fundamental policy areas in democracy in the future where the allocation of benefits and costs to people critically affects the well-being of citizens in the long run. Here I will only refer to domestic policy areas.

In all countries we will have a society of advanced-age people. In such a society, social security programs are a fundamental element which influences the allocation of fruits of economic growth. Since this will be the most serious politico-economic problem in all countries, naturally it will be a proper area at which public choice studies in the next 25 years must be directed.

The second problem which faces public choice study is related to the ag- glomeration of population and economic forces into the large city or capital. This can be immediately associated with the problems of the environment and land value. They directly influence the level of benefits and costs to principals and agents. Wealth differences among the people due to the rise of land value bring the notion of social justice. These are specifically serious in the develop- ing countries.

The third problem seems to be the government regulation of banking activi- ties, the stability of which in every country is obtained through government protection and regulation which exclude competition. They are more under bureaucratic control than manufacture. This control, of course, brings com- prised huge rents and rent-seeking to the government. The plan to reform the structure of the banking industry has been proposed in many forms. This will be the most interesting field to be studied thoroughly by public choice ap- proach.

5. Outcome identification and political competition

In the previous section I expected that the true consequence of economic measures will be revealed and categorically allocated among individuals and agents as pay-offs to each by public choice analysis. In that case, political competition to capture the notes under the majority rule will take the simplified pattern. If the cost-benefit allocation to the principals and agents is identified or perceived at the level of nearly close to the true values, each competing party will

arrange their policies in the direction to the preferential position of the median voter. In other words, the platform of each party will converge at the median point. However it does not mean that the political competition ceases. The competition will take the form of competition among individual politicians for the seat of congress, rather than competition among the party for winning. In- dividual voters will face the question of which candidate to be chosen. Inside



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the political party, each potential politician will compete for the domination of his party as the candidate for the congress. Each political party seeks the per- son who is qualified for the position of candidate in terms of making the policy. In turn, individuals who want to enter the political circle will endeavor to strengthen the relation with the leaders of some political parties.

6. Conclusion

I have stressed in this article that the perceived basis on which each voter evalu- ates alternative platforms facing him will be identified in terms of true costs and benefits to each voter. As a result of these developments, political parties will examine net effects of their policies and focus this platform on the position of the median voter. This will bring the convergence of each party's platform. However, each agent, rather than each individual, has an intrinsic interest in the process of preparing and comprising policy. This process includes the decision as to which bureaus should take the authority to affect the measures, or which bureaucratic regulations should be continued or abolished. Therefore, in the process of finally making up the policy, interactions seeking self interest among politicians, political parties, bureaucracy and interest groups are expected to remain as the main field of study of public choice. Each agent will try to capture the large share of the surplus left after the allocation of outcome of the policy to the individuals.

It seems to me that many analyses which focus on the specific aspect of the whole process of transactions will be continued in the next 25 years. However, at the present period of 25 years after the starting of public choice theory, I think we should start with the creation of a grand model of public choice. In this grand model, the following phases will be contained as consistent and in- terrelated parts;

from the transaction in the process of preparing policy among the agents to the making up of proposal put on the ballot; the same process on the part of opposing party; the results of voting, which party is the winner; in the process where the loser makes up new policy, how the transactions among agents be changed, how pay-off allocation among agents be changed; how and where the policies of competing political parties converge; when converge arises, how pay-off allocated among the citizen; how this stationary equilibrium shifts to other point;

The reason why we need such a grand model is that only when we can obtain such a model, partial analyses of the specific process can be checked for logical



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consistency. Another reason is that when we have a grand model, each scholar will find that specific study by public choice group will be complementary to each other.

References

Arrow, K.J. (1963). Social choice and individual values, 2nd ed. New York: Wiley. Buchanan, J.M. (1972). Toward analysis of closed behavioral systems. In J.M. Buchanan and

R.D. Tollison (Ed.), Theory of public choice, Ann Arbor: The University of Michigan Press. Buchanan, J.M. (1992). Better than plowing and other personal essays. Chicago: The University

of Chicago Press. Buchanan, J.M. and Tullock, G. (1962). The calculus of consent. Ann Arbor: The University of

Michigan Press. Downs, A. (1957). An economic theory of democracy. New York: Harper and Row. Tullock, G. (1972). Economic imperialism. In J.M. Buchanan and R.D. Tollison (Ed.), Theory

of public choice. Ann Arbor: The University of Michigan Press.



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The Next Twenty-Five Years of Public Choice || The Next Twenty-Five Years of "Public Choice"