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Pratap Ravindran

THE Kelkar Committee consultation paper on tax reforms and the subsequent Union budget for 2003 which pretty much ignored it have occasioned much earnest debate in diverse public fora about the primacy that has been accorded by the BJP-led coalition government at the Centre to politics over economics. The public choice theory people must be having a quiet laugh. After all, the dismal science does not have to be dismal all the time...

Public choice theory is an area of economics that grew out of the study of taxation and public spending in the 1950s. It gained traction when Mr James Buchanan, one of the leading exponents of public choice theory (the other being his colleague, Mr Gordon Tullock) was awarded the Economics Nobel in 1986.

Basically, the proponents of public choice theory transposed the principles used by economists to figure out the behaviour of people in the marketplace to study their actions in the context of collective decision-making. These principles, derived from observation of the functioning of the private marketplace, rested on the assumption that people are motivated mainly by self-interest.".

It followed that voters, politicians, bureaucrats and so on, who are also people, the evidence to the contrary notwithstanding, are motivated by self-interest. This insight was a distinctly disruptive one as far as the political (and economic) establishment was concerned in that it invalidated the notion that government action corrects market failures. Now economists had to deal with government failures as well.

According to the proponents of public choice theory, government failures take place because, among other things, voters cannot be depended upon to monitor governments effectively. Mr Anthony Downs, in An Economic Theory of Democracy, explained this distinctly unsettling idea most satisfactorily. According to Mr Downs, voters are usually quite ignorant of political issues, and this ignorance is rational. But how could this be? The answer is that although the result of an election may be extremely important, an individual's vote did not matter very much. In other words, seen from the point of view of the individual voter, it is as if there is an incentive to be ignorant. Interestingly, one does not come across this incentive to be ignorant in the private sector. Let us say somebody wants to buy a house. He or she will spare no time or effort in trying to understand the intended transaction. This is attributable to the fact that a house buyer's choice and the actions arising from this choice are decisive: that as, if the transaction is right, the buyer will benefit. And if it is wrong, he or she will suffer directly.

The problem is that voters hardly ever get to experience that kind of a direct result. Inevitably, they feel that it is perfectly fine if they don't give much thought to the positions of the people for whom they vote. And, after the voting is over, they pay no particular attention to what their elected representatives — let us say legislators — do except with regard to certain highly charged issues which hit them where it hurts: in the hip pocket. This is why the Union Budget in India, for instance, is dealt with by the media as if it is concerned solely with taxes.

As for the legislators, their actions too, however bizarre, can be explained satisfactorily by public choice economics. The fact is that although legislators are expected to pursue the "public interest", all their decisions are based on the use of other people's money and not their own. Legislative decisions of demonstrable benefit to the voters need not confer on them any benefits. In other words, legislators cannot expect any direct reward for being virtuous and community-spirited. Even re-election is no big deal as the preceding paragraphs have shown that, according to public choice economists, voters do not pay much attention to the actions of their representatives.

On the other hand, interest groups are important because they are put together by people who stand to gain considerably from government intervention. Thus, they provide politicians with campaign funds and other forms of support and, in return, anticipate the help of the legislators in securing their objectives. The economist, Mr Paul Starr, in an essay, The Meaning of Privatisation, wrote: "Public choice (is) ill-named because the only choices it recognises are essentially private, is both a branch of microeconomics and an ideologically-laden view of democratic politics. Analysts of the school apply the logic of microeconomics to politics and generally find that whereas self-interest leads to benign results in the marketplace, it produces nothing but pathology in political decisions. These pathological patterns represent different kinds of `free-riding' and `rent-seeking' by voters, bureaucrats, politicians, and recipients of public funds.

Coalitions of voters seeking special advantage from the state join together to get favourable legislation enacted. Rather than being particularly needy, these groups are likely to be those whose big stake in a benefit arouses them to more effective action than is taken by the taxpayers at large over whom the costs are spread. In general, individuals with `concentrated' interests in increased expenditure take a `free ride' on those with `diffuse' interests in lower taxes.

"Similarly, the managers of the "bureaucratic firms" seek to maximize budgets, and thereby to obtain greater power, larger salaries, and other perquisites. Budget maximisation results in higher government spending overall, inefficient allocation among government agencies, and inefficient production within them.

In addition, when government agencies give out grants, the potential grantees expend resources in lobbying up to the value of the grants — an instance of the more general `political dissipation of value' resulting from the scramble for political favors and jobs." Mr Starr may well have been writing about India.

Public choice theory has a whole lexicon of delightful words which describe various aspects of the behaviour of politicians, law makers, the bureaucracy, lobbyists and so on: Rent-seeking, for instance, is defined as the act of obtaining special treatment by the government at the expense of the rest of us. Or log rolling a.k.a. vote trading. Log rolling occurs when, by way of illustration, a legislator with an urban constituency supports a rural project to obtain another legislator's vote for a city subsidy. As for bureaucrats, public choice economists point out that they are "captured" by special interests. The capture theory, incidentally, was first enunciated by the late Mr George Stigler, a Nobel Laureate who was not a specialist in public choice theory.

According to public choice economists, a capture occurs because bureaucrats do not have a profit goal to guide their behaviour. Instead, they usually are in government because they have a goal or mission. This is, of course, far from evident. Be that as it may, they rely on the voted representatives of the people for their budgets. As it happens, interest groups have the "ear" of the representatives and are, as such, of importance to bureaucrats. Interrelationships inevitably lead to bureaucrats being captured by interest groups.

So what, according to public choice economists, are the options available to the people to correct government failures? To begin with, they say that if government action is required, it should take place at the local level, whenever possible. And then again, they advocate rule changes that reduce legislation catering to the needs of special interests and leading to ever-expanding government expenditures. They point to the work of Mr James C. Miller in the late 1980s. Mr Miller, a public choice scholar who headed the Office of Management and Budget during the Reagan Administration, helped pass the Gramm-Rudman law, which set a limit on annual spending and backed it with automatic cuts if the ceiling was not met. The law had at least a temporary effect in slowing sending.

Finally, two public choice economists, Mr Rodney Fort and John, Baden have suggested the creation of a `predatory bureau' whose mission will be to reduce the budgets of other agencies, with its income depending on its success! An excellent idea, indeed — but one which is not likely to have any takers among those who set the agenda in our country.

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