ANTONY DAVIES: Public choice economics is
a field in economics in which we take what we understand about how humans behave, which
is normally applied to humans in the private sector, and we apply this knowledge to humans
in the public sector. What emerges is an interesting dichotomy between
how we imagine government works and how it actually works. For an example, suppose we take some problem
that we face. Here, as we think about government, let's
imagine government in the broadest terms. Three groups of people: voters, politicians
and bureaucrats. We, as a society, encounter this problem that
we want to solve, and the problem, let's suppose, is that some workers don't earn a living wage. The way we imagine government works when we
say to the government, "Fix this problem.", is the following. We have the voters, whose goal it is to help
all people earn a living wage. The way they go about doing that is by voting
for politicians who support living wage laws. Then we have the politicians. We imagine that their goal is to do what's
in the best interest of society. How do they go about doing that? By enacting and voting for living wage laws. Then finally we have the bureaucrats, who
we call the public servants. Their goal, we imagine, is to serve the public. The way they go about serving the public in
this instance is by executing these living wage laws for the good of the poor. What we imagine happens is unicorns and rainbows. All these wonderful things that will occur
if we simply say to the government, "Fix this problem." Now let's look at the government through the
eyes of a public choice economist. A public choice economist looks at these three
groups, voters, politicians and bureaucrats, and understands that these are human beings
who face limitations and they have desires. Let's start with the voter. In the view of a public choice economist,
the public choice economist says, "Here's a voter. He's a human being. What's his goal?" The goal of all human beings is to maximize
their happiness. Some people's happiness comes from consuming
things, collecting lots of money, lots of stuff. Other people's happiness comes from helping
others, from doing good. Economists don't make any judgment as to what
it is that makes you happy. We simply say that people pursue the things
that make them happy. Here are the voters. Their goal is to maximize their happiness. How do they go about doing that? They will become informed and they will vote
if the benefit of doing so exceeds the cost. Now we have the politicians. The politicians also are human beings, which
means their goal is to maximize their happiness. How do they go about maximizing their happiness? By attracting at least 50% of the voters. If the politician does not attract 50% of
the voters to vote for him, he's no longer a politician. He's now something else. The politicians that persist will be the ones
that attract, whose goal it is to attract 50% of the voters. Finally we have the bureaucrats. The bureaucrats are human beings. Just like the rest, their goal is to maximize
their happiness. How do they go about doing that? I will argue that the way the bureaucrats
go about maximizing their happiness is by crafting their jobs to satisfy their needs. What actually emerges is not the unicorns
that we imagine when we say the government should do "this". You might say, "Yes, but we live in a democracy,
and the whole point of a democracy is to guard against this selfish behavior. All we have to do is vote in better people,
and if we vote in better people, we can have our unicorns and rainbows back." Let's think this through for a moment. Think about voter behavior in a democracy. Suppose we have two groups of people, a large
group of people over here, we'll call this Group A, and a smaller group of people, Group
B. I'm going to propose a law for this group of people. The law goes like this, "We will take $10
from every person in Group A, burn half of it, and whatever's left, we'll give to the
people in Group B." The question is, how are people going to vote on this proposed law? Let's start with a simpler question. Who wants to vote at all? If I ask the people in Group A and Group B,
"Would you like to vote for or against this law?" all of them would raise their hands
and say, "Yes, we would like to vote." What's the outcome of the vote? The outcome of the vote is the proposed law
will be defeated. It will be defeated why? Because although it's great for the people
in Group B, they'll all vote for it, they're a small number of people. The people in Group A, this law is bad for
them. They outnumber the people in Group B. They're
going to vote against it. Consequently, the law will be defeated. That raises another question, which is, "Is
this good for society?" Clearly it is. This is a stupid law. It should be defeated. In defeating it, society is better off. This thought experiment is normally how people
imagine voter behavior in democracy working. In fact, it's missing an important point. The important point missing is what economists
call the information and voting cost. In information and voting cost is the cost,
maybe in terms of money, maybe in terms of time and energy or effort, but it's the cost
of first being aware that there's a vote pending. Two, reading up or investigating or finding
out what it is that's under consideration. Three, reading this proposed law and deciding
whether, in the end, you think this is good for you or bad for you. Deciding how you're going to vote. Finally, getting up out of your chair, going
to the voting place, voting, coming back home. All of that is costly, sometimes in terms
of dollars, sometimes in terms of money, but it's costly. In our thought experiment, what we'll do is
simulate this information and voting cost with a $20 fee. I'm going to propose the same law for society. We're going to take $10 from everyone in Group
A. We're going to burn half of it. We're going to give what's left to Group B.
The people can vote, for or against. I don't care how they vote, but to vote at
all, you must pay $20. That $20 represents the information and voting
cost. Now, ask yourself, "Who is going to want to
vote in this instance?" The people in Group B clearly are going to
want to vote. They stand to gain a lot from this law. Although they have to pay $20 to vote, what
they stand to gain exceeds the $20 they have to pay. Therefore, they will be interested in voting. Look at the people in Group A. The people
in Group A each have to pay $10 if this law is passed. But the cost of fighting the law actually
exceeds the cost of living with it. The people in Group A have a strong incentive
not to vote at all. What happens? What happens is in our thought experiment,
this law passes unanimously. The only people who turn up to vote are the
people in Group B, and the people in Group B unanimously vote for it, and the law passes
unanimously. Is society better off? No. Society's actually worse off. This is a bad law, yet this is something that
has emerged from the democratic process once you understand that an information and voting
cost is a real thing. This is just a thought experiment, but you
see this all over the place. Take, for example, sugar. There is a sugar tariff. All sugar that comes into the United States
has a tariff attached to it. Therefore when you buy sugar, you pay more
than you would otherwise. Who benefits from this? The people who benefit are American sugar
producers. It turns out sugar requires an equatorial
environment to grow, so to grow sugar in the United States, you have to build these large
buildings and simulate an equatorial environment. This is all very costly. When you're done, the cost of growing sugar
in the United States ends up being much higher than the cost of growing sugar in more equatorial
environments. Consequently, when American sugar producers
try to compete with foreign sugar producers, they can't. Foreign sugar producers can produce sugar
at a lower cost. The American sugar producers have an incentive
to go to Congress and say, "Would you please impose a tariff on imported sugar so we can
compete?" Congress, made up of politicians who are looking
to get elected, turn to the electorate and say, "Hey. What do you think about this?" What the politicians see are basically two
groups of people. A large group of people who are not sugar
producers, who have other concerns in their lives, can't be bothered with reading the
minutiae involved in a proposed law, find the idea of tariffs boring to begin with. When the politician turns to them and says,
"What do you think about this law involving tariffs?", a lot of them just tune out. The information and voting cost for these
people tends to be higher than the benefit that they perceive they would get by paying
attention. Meanwhile, the sugar producers of the United
States are very interested in this law because they stand to gain a lot. When the politician says, "What do you think
about this?", all the sugar producers and the people who work for them and the people
they buy things from, all stand up and say, "Yes. This is a good idea. Let's pass this law." I, as the politician, see then this sea of
voters, one group of whom isn't even paying attention because they don't think it's worth
their time, and another group who is intensely paying attention, is interested in my passing
this thing. I have a strong incentive now to pass this
law. Therefore we end up with a sugar tariff. That's just in the case of tariffs on sugar. Multiply this by all sorts of industries and
all sorts of special interest groups that are looking for benefits from legislation,
and all of a sudden you find that this information and voting cost is more than simply just a
trick in a thought experiment. It's something that actually pervades all
of the democratic process. What you're observing here is something economists
call concentrated benefit and dispersed cost. In this case, the benefit of the law, taking
the $10 from everybody in Group A and giving it to Group B, the benefit from this law is
concentrated in the hands of small number of people. That's the people in Group B. The cost is
dispersed over many many people. Those are the people in Group A. Consequently,
the way we imagine lawmaking works, is that we look at the law and if the benefits of
the law exceed the costs of the law, the law gets passed. In fact, that's not the way it works. We look at the law and if the benefit per
capita, benefit per person who's benefited is larger than the cost per person, the cost
per person on whom the costs are imposed. If that benefit per person exceeds the cost
per person, then the law gets passed even if the total benefit is small and the total
cost is large. The way voters end up behaving is that they
exhibit what we call rational ignorance. Rational ignorance means simply that the voters
are ignorant of the law and it is perfectly rational for them to be so, because it doesn't
make sense that they would spend their effort figuring out what this law says and fighting
it. To do so is actually more costly than living
with the bad law in the first place. You might say, "Yes, but we live in a republic,
not a democracy." The whole point of a republic is to get around
this information and voting cost. The way we get around it is by electing representatives. We understand that the voters don't have the
time or the energy or the knowledge to study legislation. The information and voting cost is high. Therefore the voters will hire somebody to
do that for them. We call this person a representative. You could imagine the people in Group A hiring
representatives to represent them, and the people in Group B hiring representatives to
represent them. These representatives, then, will hash out
whether this law is a good idea or not and vote on behalf of the people in the way the
people would vote if they had the time and the energy to study the law themselves. That's an interesting idea, but it raises
a problem of its own, which is how do we divide our populace into districts and assign representatives
to them? What we would like is that we assign representatives
in an electorally fair way. Here's what I mean by that. Let's suppose we have 60% of the population
who likes green stuff and 40% of the population who likes red stuff. If we were to establish representatives to
represent this population, we would want the representative body, the Congress, to be comprised
of 60% green representatives and 40% red representatives. That is, we want the Congress to look like
the population. One way to do that is something like the following. We put these 10 households in a district and
we say, "You 10 households. You get to elect a representative. What kind of representative would you like?" These 10 households are all green, so if you
ask them they will say, "We would like a green representative." Then we put these 10 households in a district
and we ask them. They're green. They would also like a green representative. As will these 10 households. Now these 10 households are all red. If we ask them what kind of representative
they would like, they'll say, "Give us a red representative." Similarly with these 10 households. When you're done allocating representatives
to the people, you end up with fair representation. 60% of the population is green, 40% red. 60% of the representatives are green, 40%
red. That works. Maybe. What happens when these people you have elected
have the ability to re-draw the Congressional districts? For example, suppose instead of dividing the
Congressional districts like I showed you, we do it differently. We put these 10 households in a district. We ask them, "What sort of representative
would you like?" These people would like to have a green representative,
these people would like to have a red representative. This district is mostly green, so if we ask
this district, they will say, "Give us a green representative." If I put these 10 household in a district,
they will also elect a green representative, as will those 10 household, those 10 and those
10. Notice what's happened now. By altering how we define the Congressional
districts, we have completely silenced the minority. The red households now have no representation
in Congress at all. If you think that's perverse, look at this. Suppose we were to put these 10 households
in a district. These 10 households are mostly red, so if
we ask them, "What kind of representative would you like?", they will say, "Give us
a red representative." If we put these 10 households in a district,
they'll similarly elect a red representative. If we put those 10 households in a district,
they're almost entirely green. They'll elect a green representative, as will
those 10 households. Finally, here's our last district comprised
of these 10 households. They'll elect a red representative. Look what's happened. We have taken the same population we had before,
redistricted it, and now we have a majority representation in Congress of a minority of
the population. The moral of the story is the information
and voting cost means that we will have a tendency to pass laws that are bad for society
because they benefit a small group of people and the cost is spread out over so many people
that it's not worth the large number of people's time to figure out what this law is and to
fight it. We think maybe we should have instead a representative
government. The problem with the representative government
is, depending on how we draw our district lines, we can have fair representation, which
is fine, or the problem is we could completely silence the minority, or give the minority
majority representation. This is an example of what many consider to
be the most gerrymandered state in the country. Gerrymandering is, of course, altering Congressional
district lines to benefit the party in power. This is North Carolina. You can see the Congressional districts. Clearly someone has taken the time to think
very carefully how to draw these Congressional district lines to give more representation
to whatever party it is that was in power. In a democracy, voting results in worse outcomes
for society. In a republic, gerrymandering can silence
the minority or give majority representation to a minority of the population. That's voters, only one of these groups that
we mentioned when we talk about government. Let's talk about politicians' behaviors. Remember, politicians are human beings just
like everyone else. Picture the voters. Suppose the voters are thinking about a level
of government service. This might be something like the military
or public education or public transportation. Something like that. You can imagine, amongst all the voters, there
is a lot of people who would like a low level of this government service. You could imagine as well there's another
large body of voters who would like a high level of this government service. You could imagine perhaps there is a smaller
number who would like a low to medium level of this government service, and a smaller
number who'd like a medium to high, and then finally you might imagine that the fewest
number of voters of all would like a medium level of this government service. Now, not all preferences for government service
look this way, but a lot do. Here's an example. Think about the military. There are a large number of voters who believe
that the United States has no business intervening militarily in foreign countries. We should have a small military that's devoted
strictly to defending our borders. Then we have a large number of people who
believe that we should bomb democracy into everybody on the planet. What we tend not to have are many people here,
who believe we should have a military that's large enough to be expensive, but not large
enough to be effective. What you typically get with government service
is this binary split of the voters between those who would like a small amount of the
government service and those who would like a large amount. Superimpose on top of these voters a couple
of politicians. There's this guy. He's running for office. Remember, his goal is to get elected. He says to the voters, "If you elect me, I
will provide you with this level of government service." His opponent comes along and the opponent
says, "Elect me and I'll provide you with this level of government service." What do the voters think as they look at these
two politicians? These people like the guy on the left because
the guy on the left has promised to deliver exactly the level of government service they
want. These people like the guy on the right. He's promised to deliver exactly the level
of government service they want. These people over here, they don't like either
one of them, but of the two, they consider the guy on the right to be the lesser of the
evils. He's going to provide a level of government
service that they don't like but is better than the level of government service the other
guy's offering. When I ask these voters, "who are you going
to vote for?", these people vote for the guy on the left and all of those people will vote
for the guy on the right. What happens? What happens is the guy on the left is aware
that this is how the voters are perceiving the two candidates. He will alter his position. He'll come out and say, "I have been consistently
misrepresented in the media. I have never been for a low level of government
service. I have always been for this level of government
service." Now what happens? The voters rethink their positions. These people think that this guy is going
to offer the level of government service they like the best. These people think this guy's going to offer
the level of government service they like the best. What does the guy on the left do? The guy on the left holds a press conference
and says, "If you elect me, I promise you I will provide this level of government service." Now what happens? All these voters like this guy. These voters like this guy. You end up with each of the candidates getting
about 50% of the vote. What level of government service do we get? We get the level of government service that
the least number of people wanted. This effect occurs so frequently, economists
have given it a name. It's called the median voter theorem. The median voter theorem says majority voting
will yield the median voter's preference even if the median preference is the thing that's
liked by the least number of people. You see here, for example, why if you pick
any American at random and ask them, "What do you think about public education in the
United States?" Invariably they will say, "We have a serious
problem with public education." Almost all Americans will say that. They'll say it for two different reasons. Half of them will say it because they believe
that we're spending too much on public education. We should be spending a lot less. The other half of them are going to say it
because they believe we're spending too little on public education and should spend a lot
more. What we're actually doing is spending the
amount that satisfies the median voter, which tends to be the amount that the least number
of people are interested in. The conclusion with politicians is, "They
don't seek the common good." They seek to get elected. That's not to say that there are no politicians
who care about the common good. It's to say the following. If you give me two politicians who are equal
in every way except one, this guy's primary motivation is to seek the common good, where
this guy's primary motivation is to get elected, on average, this is the guy who's going to
win. Consequently, on average, the politicians
that you will get are politicians whose primary duty is to get elected. Seeking the common good is something further
down the list. How do politicians go about getting elected? They seek to satisfy the median voter, even
if the median voter is a small portion of the population. We've seen how voters behave through the eyes
of a public choice economist. We've seen how politicians behave through
the eyes of a public choice economist. Let's now think about how bureaucrats behave. This is the county courthouse in the town
I live in. If you have any business with the county,
you go here. If you want a dog license you go here. If you want a variance to put up a fence you
go here. You deal with these people. This is in western Pennsylvania, and in western
Pennsylvania it rains all the time except when it's snowing. You'll notice here this dark area is an underground
garage, which is quite nice because if it's raining or snowing, you can go in there to
park and your car doesn't get wet or snowed on. There's an elevator you can go up to where
you need to go and do whatever business you need to do, and come back down. If you're ever in this town and you have business
with the county government and you go here and you go down the street and you turn to
go into this parking garage, you'll see inside there a sign. The sign says, "Parking for courthouse employees
only." If you're there as a citizen to do business
with the county, you have to park somewhere else. Where? I don't know. There are a couple of places here. You can go down the street there. This parking, the nice stuff, is reserved
for the people who work in the building. Think about this. Have you ever gone to a store and seen that
all of the prime parking out front close to the door is reserved for the people who work
at the store? Typically not. Typically these spaces are reserved either
for the handicapped or a good manager will tell his workers, "Don't park near the building. Park as far away as you can to reserve as
many spots as we can close to the entrance for the customers, the people who are going
to come here." Why do they do that? This is very different behavior from what
you see at the county courthouse. Businesses do that not because the manager
of the business is somehow more altruistic than the people who work at the courthouse. It's not because the manager of the business
is smarter than the people who work for the courthouse. They're the same brand of homo sapien in both
instances, the public sector or the private sector. The difference is one of motivation. In the case of the business, if I don't make
it as easy as possible for you to come to my store and to transact business with me,
you will go elsewhere and I'll lose your business. That's not the case for the county courthouse. With the county courthouse, if I want a dog
license or I want a variance to put up a fence or whatever, I have to go here. I can't go to the county courthouse in the
next county over. They'll send me away. If I have parking tickets I have to pay I
have to go here. I can't go to some other county courthouse. In fact, I don't even have the option to not
go at all. They will send a nice gentleman with guns
and handcuffs and force me to come and do business with them. The reason you get things like this, the prime
parking reserved for the people who work here, is because of the difference in incentives. The people in the county courthouse do not
have to make me the center of their lives because I have no choice but to deal with
them. The people in the private sector have to make
me the center of their lives because I have the ability to go elsewhere. I had to renew my license recently. In Pennsylvania you get this thing in the
mail and it says, "Pennsylvania's driver's license services are now online." They give me this web address. The web address they couldn't even be bothered
to buy something neat like renewyourlicense.com. It's dmv.state.pa.us. Fine. Whatever. This is a nice web address. I can go here. I can renew my driver's license. I go to a browser. I type this thing in. What do I see? I see this. There are 36 links on this page. I spend about five minutes clicking and backing
out and clicking and backing out and clicking and backing out before I discover that this
the link I want, "Driver's license, photo ID". Fine. I'm going to click on this thing. I'm going to renew my driver's license. You click on that link and you go here. Here you have another 25 or 30 links and again
another five minutes of clicking and backing out and clicking and backing out and clicking
and backing out before I discover that this is the link is want, "renewing your driver's
license". Okay, good. I'm going to click on this. My driver's license will be renewed. You click on that link and you go here. This says, "Renewing your non-commercial driver's
license" ... I don't know what all that means, but we have step number one. This is good news. This means something's happening. Step number one. "Receive an invitation to renew DL60A/DL60R,
or obtain form DL143." I don't know what that means. Imagine that you have to buy a screwdriver
and you go to Home Depot. What normally happens? What normally happens is you walk into Home
Depot. You walk up to the person. You say, "Hello. I'd like to buy a screwdriver." If they're not busy, they'll often come out
from behind the counter and say, "Come with me this way. The screwdrivers are over here." If you need screwdrivers, maybe you need screws. "We have screws. We have 50% off on hammers this month." Maybe you want to buy a hammer. They will do everything they can to make it
as easy as possible for me to conduct business with them because if they don't, I will go
elsewhere. Imagine what would happen if you need to buy
a screwdriver and you go to Home Depot and you say, "Hello. I'd like to buy a screwdriver." They say to you, "You'll need to fill out
form DL60A/DL60R or obtain form DL143." What do you do? You leave. You go somewhere else. Pennsylvania can do this because if I want
a Pennsylvania driver's license, I have no option except to deal with these people. All right. I still don't know what DL60A/DL60R is. I'm going to hope it's that piece of paper
they sent me in the mail and just skip step number one and go to step number two. Step number two. "Return the complete application with a check
or money order made payable to PennDOT", that's Pennsylvania Department of Transportation,
"in the amount indicated on the form." Here we have in red, "Cash or credit/debit
cards cannot be accepted." They want a check. I have a checkbook. I write a check maybe once every five years
to these people. I get out my check and I'm writing the check. My son, who's in high school, walks by. He says, "What are you doing?" I say, "I'm writing a check." He says, "What's a check?" Anywhere else on the planet, when you want
to buy something online, what do you do? You go there and they'll take your credit
card or a debit card or you could pay with PayPal. You can even find some places that will take
things like bitcoin. These people want a check. Fine. I'll write them a check. Step number three. A camera card will be mailed. You should receive it in seven to ten working
days after the form is processed. Once you receive your camera card, you take
it, with appropriate identification, to the driver's license center where they give you
a new driver's license. Step back and imagine what just happened here. They sent me in the mail a piece of paper. I go to a browser and I type in this web address
and I get a whole bunch of links. I click and I back out and I click and I back
out and I click and I back out. Ten minutes later I figure out what it is
I need to do, and I write a check. I write a check. I put it in the envelope. I put a stamp on the envelope. I use stamps once every five years to mail
the check that I write once every five years to these people. I then take this envelope to my mailbox, put
it in, go back to the house, wait seven to ten working days, come back to the mailbox. In there is another piece of paper. I then take it to my car. I drive to the photo license center. I sit in the chair. They take my picture. They give me the license. Total time to transaction, seven to ten working
days. Imagine if these people faced competition. How would this transaction work? I'd get a text. Ring. "It's time to renew your driver's license. Click here." I would click. It would say, "We have your credit card on
file. Do you want to use the same credit card or
do you want to change it?" I'll use the same credit card, so I click. "Put your face in the camera." Click. "Do you like the picture?" Yes. "Hit print." It would print on my printer. Total time to transaction, 30 seconds if I
don't know what I'm doing. How do I know that this is how it would work
if a private business were handling licenses instead of the government? This is the way it works everywhere else. If you would like to buy, God knows why, "The
Best of Bowie", you can go to amazon and type in "The Best of Bowie" and you will get this. It says, "Buy now with one click." All you do is click. You click here and they'll send you a CD. Even better than that, you click, you could
download the thing. Thirty seconds later you've got this music
that you wanted. This isn't even the latest technology. The latest technology is this. That's a magnet. It goes on your washing machine. When you are running low on laundry detergent,
you push the button. That's all you do. You just push the button. It's pre-registered with your credit card
and your address and all of that stuff. You push the button. Three days later a box of Tide shows up on
your doorstep. Why the difference in behavior between the
bureaucratic organization and the private sector organization? The difference is not because the people over
here dumb, the people over here are smart, or the people over here are selfish and the
people over here are altruistic. The difference has nothing to do with the
people. They're the same brand of homo sapien. The difference is in the incentives. The people over here in the private sector
have an incentive to put me at the center of the lives because if they don't, I will
walk away. The people over here do not have the incentive
to put me at the center of their lives. Therefore they do what any human being would
do, what those human beings would love to do but can't. They put themselves at the center of their
lives. So you get things like arcane descriptions
of forms that have to be filled out and parking spaces that are reserved for the people who
work here. The problem here is fundamentally, bureaucrats
behave the way they do for two reasons. One, there's no profit motive. If they behave well, they don't get increased
profits in which they get to share. If they behave poorly, they don't incur losses
that now cause their stockholders to come down on top of them. There's no competition. There's nowhere else for people to go. Therefore you get this natural behavior that
the economist would predict. Does this mean, ultimately, the government
can't make good decisions? That, I believe, is the wrong question. The right question is because humans in both
the public and the private sector are fallible, they will make errors. The right question is not, "Who's going to
avoid making errors, markets or government?" The right question is, "When they do make
errors," because they will, "who has the greater incentive to identify and correct those errors?" An economist will argue that often, perhaps
all of the time, the answer is people in the private sector, because they must respond
to profit and loss incentives, because their customers can walk away. The moral of the story is be careful what
you wish for. When you see a problem and you say, "If only
the government would," because in reality we face all kinds of problems like rational
ignorance, gerrymandering, the median voter theorem, and a bureaucratic monopoly. Because of that, these wonderful things you
imagine that will happen when you say, "If only the government would," often don't happen
at all. What you get is something very different.
