Does Public Choice Theory Affect Economic Output?

Does Public Choice Theory Affect Economic Output?

Both on paper and in real life, there is a solid relationship between economics, public choice, and politics. The economy is one of the major political arenas after all. Because these issues are open to endless opinions from politicians who ultimately decide how the economy works, it is a naturally political subject. Among the ways that this relationship — economics and politics — manifests is through public choice and its impact on economic output.

Public Choice Theory

The public choice theory was developed by James Buchanan and Gordon Tullock as a result of their studies on taxation and public spending. Public choice works around the very principles used by economists to analyze market behavior. It uses these principles to shape and understand people’s decision-making.

Public choice experts believe that, while people often act out of concern for others, the more common reason they behave how they do in the marketplace is to take care of themselves first. This is regardless of the role they play, whether as employers, workers, or consumers. While people in their political marketplace consider other people’s welfare too, their main reason for behaving how they do is self-interest.

Economic Output

Economic output is simply the number of goods and services produced by a country, industry, or business within a specific period of time. This output is traded, consumed, or used in future phases of production. The concept behind national economic output is crucial to economics because for economists, what really makes a nation rich is not how much money it has, but rather how much national output it is producing.

Analysts and economists often use the words “output” and “gross output” when referring to economic output, but it is important to note neither is synonymous with Gross Domestic Product (GDP). GDP is the value added to the national figure. Locally, this is usually referred to as gross regional or gross area product. While both GDP and output seem similar at the outset, they are rather fundamentally unique from one another. But both do assess a nation’s economic productivity throughout a certain timeframe.

How Public Choice Affects Economic Output

We view a lot of economic issues from a political perspective. For instance, some people are highly doubtful of government participation and would prefer to minimize government intervention in the economy. This includes supply economics, which is focused on deregulation, privatization, and tax breaks. In contrast, economists may campaign for more equality in society and encourage government interference to achieve their goal.

When different economists are asked to create a policy on tax breaks for the wealthy, for example, they are likely to come up with different proposals, depending on their political positions. While there will always be evidence of the benefits of tax breaks, there will also always be proof supporting higher taxes. On the other hand, while quite rare, some economists may be suspiciously neutral and not manifest any political biases.

For a politician though, economists and economic research can be useful in supporting their political perspectives. Let’s take the example of former US President Ronald Reagan. He was a follower of supply-side economists like Keith Joseph and Milton Friedman. As Reagan tried to “roll back the frontiers of the state,” as many economists there were who tried to justify the bold move, there was an equal amount who didn’t believe in the idea. Still, some economists are promoted by political sponsors, so they are usually the ones who are heard loudly.

Economics Separate From Politics

In some cases, economists remain as objective as possible instead of lingering on positive statistics. They come up with proposals or recommendations that aren’t always in line with preconceived political issues. For instance, a lot of economists may generally favor the EU and European cooperation, but scientifically speaking, the Euro single currency has led to several economic complications, such as low growth and trade imbalances.

Politics as a Backbone of Economics

In the world of economics exists the Pigovian tax. This tax demands that people pay the entire social cost of a good rather than strictly its private cost. The premise behind this is that the polluter (consumer) should pay congestion charges, tobacco tax, carbon tax, etc. However, this tax can only be implemented with political support. Referendums can also defeat new charges and taxes if they are unpopular.

Regardless, no matter how sound a charge or tax may be to an economist, if it has no political or public support, it will not prosper. Economic output as a whole is evidently and ultimately influenced by politics.

Austerity: Yes for Politics, No for Economics

Another interesting relationship between public choice, politics, and economic output is austerity. When a country goes through a credit crunch, there is often an economic necessity to expand monetary policies as a compensatory measure.

Politically, it’s difficult to promote a policy that puts the government deeper into debt. Economists definitely understand demand management in a recession, but a politician convincing the public to save in order to control debt is easier than explaining the ‘multiplier theories of Keynes,’ for instance. No wonder we question if it’s not really the economists running a country — they’re the ones who understand all the theories!

Yet another curious case is the relationship between fiscal policy, which is set by the government, and monetary policy, largely determined by independent Central Banks. Given the current state of the economy, the US fiscal policy has been strict. One result of this is the challenge the Federal Reserve currently faces to fill in the gaps of fiscal policy with monetary policy.

Plucking Politics Out of Microeconomics

Certain aspects of economics, supply and demand, for example, are politics-free. However, when it comes to economic output right down to the micros of it, we cannot deny that politics plays a role. Privatization alone, for instance, is highly political. There is the never-ending push and pull between the government and the private sector in terms of controlling major industries. The diversity of the private sector creates allows for the proliferation of multi-tiered economies with robust agencies facilitating market flows. Whereas the government acts as an agency itself without need for profit as a counterbalance.

Market Output Prioritization

Another problem with economics is when politicians and economists promote economic output and overall economic health over human and environmental health. Given this scenario, a politician who advocates environmental causes may completely reject the principle of macro-economics. The question for them is not which method is the best in promoting economic output or growth, but rather whether society should work towards maximizing economic output and growth in the first place. It’s just another blatantly political issue.

What is political in any context is a matter of public choice. It ultimately affects economic output by design.