Social Education 58(1), 1994, pp. 20-22
1994 National Council for the Social Studies

Public Choice Theory and the Role of Government in the Past

Mark C. Schug and Jennifer Fontanini
Most United States history textbooks describe conventional ideas about the interactions between government and the economy. They stress themes like the following: Authors of history textbooks devote much space to discussions about various government-initiated reforms such as the control of corruption, regulation of business, protection of workers and farmers, extension of civil rights, preservation of the environment, and establishment of rules on money and banking. Government reforms in the twentieth century are often assigned titles such as Woodrow Wilson's New Freedom, Franklin D. Roosevelt's New Deal, Harry S. Truman's Fair Deal, John F. Kennedy's New Frontier, and Lyndon Johnson's Great Society.

We suggest that teachers and students are ready to take a fresh analytical view of the historical interaction of government and economic life. Although economic analysis is most often applied to the study of private markets, economists in recent years have begun to apply economic analysis to other aspects of life. Prejudice, marriage, family life, and altruism all have been subjects of investigation by ground-breaking economists such as James M. Buchanan, Gary S. Becker, and Gordon Tulloch. Similar extensions of economic reasoning can shed light on behavior within the public sector.

Public Choice Theory
Becker (1976) points out that what distinguishes economics from the other social sciences is not its subject matter but its approach. He observes that the economic approach is "uniquely powerful because it can integrate a wide range of human behavior" (1976, 5). Public choice theory-the application of economic analysis to the study of government decisions-exemplifies Becker's point. It assumes that governments consist of individuals. No government thinks or acts. Government actions are the result of individuals making decisions in their roles as elected officials, appointed officials, or bureaucrats. To understand how governments have worked in the past, we need to analyze how individuals in government choose and economize.

Decisions Based on Costs and Benefits
Individuals in government, like those in the private economy, select options that represent the best set of costs and benefits. Their decisions are, in this sense, self-interested. This is not to say, however, that people in government are selfish or motivated by rampant greed. This confusion is the crux of a great deal of misunderstanding about economics.

Economic theory does not assume that people are materialistic, shortsighted, or irresponsible. What "self-interested" means depends upon what people consider to be in their own interest, and people have wide ranges of interests. A politician may be devoted to expanding access to national parks for the physically disabled. To gain support for her national park initiative, she may need to support a colleague's desire to build a museum as a tribute to a popular musician. An appointed official, in another example, might be willing to endure staff shortages, low pay, and cramped offices because he enjoys having an influence on how environmental policy is shaped in his state.

Although an economic perspective can account for altruistic behavior, it remains true that material incentives matter-that most people prefer more money to less, for example. This preference, however, need not imply insensitivity or greed. Instead, money enables people to advance their interests and gain new alternatives. As economist Paul Heyne (1987) says, "Even Mother Teresa does better with more money."

Public choice theory holds that individual behavior within the political system is motivated by incentives similar to those motivating behavior in the private sector. Monetary rewards, to be sure, play an important role in the decisions of public officials; many of them do get rich. Elected officials, like other people, also consider many other incentives, including family security, recognition, travel, access to information, and satisfaction derived from performing community service. Similarly, bureaucrats consider incentives such as expanding budgets for favored projects, gaining promotion, obtaining more and more highly skilled staff, and expanding influence with decisionmakers. Because such incentives influence political leaders' decisions, we can predict actions they might take.

We typically think of competition as a defining characteristic of the private economy. It is, however, a key feature of the public sector as well. Government officials face scarcity: candidates for office compete to gain scarce nominations. This competition entails finding ways to gain the support of voters, finding volunteers, raising funds, and allocating scarce time in the most effective way. Once elected, officials compete to acquire staff, office space, and the support of colleagues for policies favored in the campaign. Nonelected officials also compete for staff, budget increases, power, and promotions.

Important differences that exist between the private economy and the political system add complexity to the study of the history of public life. Two key differences stand out. First, the private economy depends on voluntary exchanges between producers and consumers. Although the exchanges between voters and government officials are often voluntary, governments can use force in regulating economic affairs. Governments can expropriate property if taxes go unpaid. Ultimately, governments can invoke due process of law to remove people from society for noncompliance with its wishes.

Second, decisions expressed by the electorate through voting are different from the decisions expressed by "dollar voting" in the private economy. The political system adds up votes, and the majority rules. Eventually, a majority decides whether new schools will be built, whether the right to an abortion will be protected, or whether millions of acres of timber land will be set aside for a national park. The private economy, however, is run by proportional rule: a minority does not need to yield to a majority. Relatively few people, for example, may be interested in spending a week fishing on a secluded lake or in purchasing the latest computer software. The market, however, does not require majority approval in order for anglers to seek out quiet lakes or computer buffs to buy the most sophisticated program. They may go ahead, each as a majority of one. Citizens as consumers and producers need to make far fewer compromises than citizens as policymakers.

Applications to Teaching U.S. History
Public choice theory sheds new light on old content. Here are some ideas around which you can develop a full lesson, using public choice theory. We begin with a summary of content often found in textbooks and then present a mystery that poses a problem related to the traditional content. To solve the mystery, the next step would be to apply principles of economic reasoning in an effort to deduce a solution. Here we consider the first four principles of economic reasoning from the Handy Dandy Guide for Solving Economic Mysteries (see Wentworth and Schug in this journal, page 10-12):

1. People choose.

2. People's choices involve costs.

3. People respond to incentives in predictable ways.

4. People create economic systems that influence individual choices and incentives.

Lesson Starter 1: Regulation of the Railroads
History. Increasing industrialization in the late 19th century created many new problems for U.S. farmers. Farmers blamed many of their problems on the railroads. They argued that railroads charged low prices on long-haul shipments where there was competition and high prices on short hauls where there was no competition. The high prices hurt farmers.

Mystery. The farmers' concerns about railroad pricing led eventually to government regulation of railroads. By the 1920s, however, railroads were legally able to charge prices that farmers thought should be illegal. Why did government regulators permit railroads to charge prices above competitive levels?

Public Choice Theory. Two principles of economic reasoning are that the rules of the economic system influence incentives and that people respond to incentives in predictable ways. These principles suggest that government agencies will have difficulty in serving the public interest in the long run by regulating business. Why? If a government agency has control over an industry practice (like setting prices), people in that industry have a strong incentive to watch closely over the agency's actions. Over time, representatives of business and employees have stronger incentives to try to influence the actions of a regulatory agency than do members of the public. These representatives seek favors by supporting political campaigns of members of Congress who, in turn, influence the appointment of regulators. The industry will attempt to influence the agency's decisions by seeking to influence who is appointed to serve in the agency. Conversely, individual consumers have little incentive to watch over the agency. Its deliberations will seem remote and technical. Consumers tend to assume, moreover, that once a government agency has been appointed to watch over a business, the victory has been won and things will be fine. This is how an agency like the Interstate Commerce Commission could become captured by the railroad industry and give its approval for prices set above what competitive rates would be.

Lesson Starter 2: Setting Agricultural Prices in the New Deal
History. Politicians did not react passively to the Great Depression. With leadership from the administration of Franklin D. Roosevelt, the Congress enacted several new laws-referred to collectively as the New Deal-aimed at stimulating economic recovery. One of these was the Agricultural Adjustment Act of 1933. Its purpose was to reduce the supply of farm products in order to boost farm product prices and reduce the suffering of farmers. It also contributed to slowing the economic recovery.

Mystery. Laws providing for price supports seemed tailor-made to aid recovery from the Great Depression. How could they have had unintended consequences?

Public Choice Theory. The new legislation changed the rules within which the economy operated. The change created new choices, new incentives, and new disincentives. Higher prices for farm products discouraged consumers from purchasing these products since higher prices are disincentives to consumers. Lower individual spending contributed to lower levels of national income. At the same time, farmers were encouraged to produce more agricultural products that would need to be stored in government warehouses, given away as food aid, or left to rot. How could such a thing happen-not once but many times, up to the present? Sometimes good politics is not wise economic policy. Imposed higher prices for agricultural goods are spread out among many people, so that no one individual has to bear a large cost. If the price of pork chops increases by 5 cents a pound, consumers will not stage a boycott. Meanwhile, the benefits are shared only by a few people in a direct way. In this example, those people are the farmers who receive higher prices for their production. They will be very willing to work hard to re-elect lawmakers who voted for the policies that benefitted them.

Lesson Starter 3: The U.S. Government and Free Trade
History. In the years following World War II, the United States was the leader in encouraging free trade among nations. As trade has expanded, the world economy has grown, and living standards worldwide have improved. Like all other nations, however, the United States has had certain protectionist practices that interfere with free trade in a variety of ways.

Mystery. Why does the world's leading proponent of free trade not consistently practice it?

Public Choice Theory. Economists generally agree that free trade makes good economic sense. But good economics is not always good politics. Some groups always profit from protectionism, and their gains tend to be immediate and concentrated. To secure those gains, they participate actively in the political process. The losses that follow from protectionism are more apt to be diffuse or spread out over a large number of consumers. These consumers are not likely to engage in political activity aimed at preventing the price increases caused by protectionism. In some cases, they might not even notice the increases, or they might discern them only vaguely, without linking them, say, to a U.S. quota or subsidy. Politicians who write protectionist legislation have a strong incentive to be responsive to organized groups that participate actively in the political process. They have less incentive to be concerned about unaffiliated, politically inactive consumers.

Why Introduce Public Choice Theory into U.S. History?
Public choice theory should be taught, first, to encourage students to think critically about the real economic problems of the past and to apply their understanding to the present. It can help students describe what is happening, and it can help them explain events that otherwise seem baffling. Public choice theory is especially useful in the study of history because it presents an explanation of how a special interest group, which represents a small number of constituents, can decisively influence legislation that benefits only a few while imposing a relatively small cost on many. For example, why is it that, in the 1980s, the federal government spent more than $25,000 per farm on programs of the U.S. Department of Agriculture? Or why are some business and government leaders in the United States today insisting on protection against dumping by such nations as Japan, Poland, Russia, Sweden, Mexico, Britain, Romania, and Italy?

A second reason for teaching about public choice is that the key ideas are simple and yet powerful. This is a rare combination in history. To say an idea is simple is not to damn it with faint praise. The power of the economic perspective is seen in its application to new situations. In this sense, learning to apply an economic perspective is like learning how to play an American folk song on the guitar. You begin by learning a few simple fundamentals such as how to finger and strum three chords. This is simple. Then you learn many new applications of the basic chords. You learn to play new songs. Similarly, in using economic reasoning, growth involves applying a few fundamental rules to new, puzzling situations. Once the new application is understood, the potential power of the rules becomes increasingly evident. Practice with new cases, not merely learning rules, develops skill in economic reasoning.

Becker, Gary S. The Economic Approach to Human Behavior. Chicago: University of Chicago Press, 1976.Heyne, Paul. The Economic Way of Thinking. Chicago: SRA, 1987.Mark C. Schug is Professor of Curriculum and Instruction at the University of Wisconsin-Milwaukee. Jennifer Fontanini teaches social studies at Wauwatosa East High School in Wauwatosa, Wisconsin.