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Contest Essay

A Matter of Incentives: Public Choice and the Great Fiction


     
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The 2010 Sir John M. Templeton Fellowships Essay Contest

Third Prize, Student Division

“The State is the great fiction through which everybody endeavors to live at the expense of everyone else.”
—Frédéric Bastiat, The State

The citizens of a country are the key to freedom’s survival. Without the mindset of liberty, economic freedom has no chance of survival; with the mindset of liberty, economic freedom flourishes. Freedom only lasts as long as the people understand the dangers of government and impose protective limits on the power of the state.

Today, the mindset of liberty has largely vanished from the political and economic sphere. Most Americans are consumers, not policy changers. When they do vote, a majority of Americans have supported candidates that vie to enlarge the powers of the state. More than one-third of Americans say that they have a positive image of socialism, and, thus, accept Bastiat’s “great fiction”: living at the expense of the state while ignoring the fact that the state desires to live at their expense.[1]

For better or worse, the future of economic freedom still rests in our hands. What can be done so Americans realize that the tendency of all human governments is to increase their power, size, and importance? The answer lies in understanding the incentives that drive personal and government actions and discovering how to change those incentives.

Personal Incentives and Public Choice

Perhaps most famously explained by James M. Buchanan and Gordon Tullock in The Calculus of Consent, public choice theory examines people’s political decisions based on a single premise. The premise—that individuals act in rational self-interest—forms the basis for both economics and public choice theory.[2] Ultimately, the principle of rational self-interest signifies that people respond rationally to perceived costs and benefits (incentives) when making choices. The voter, as part of rational self-interest, seeks what can bring the most benefit to him or her with the least personal cost. As a result, public choice theory dictates that citizens will only invest effort to become informed if they believe they will receive a net personal gain.[3]

Because political choices are collective, the probability that one vote will be decisive is nearly statistically impossible. Thus, the perceived personal benefit of voting is low. Unless they are members of a special interest, most voters do not perceive enough benefit to overcome the opportunity cost of time spent gathering civic information. Instead, public choice theory follows the economic premise that people will direct their time to more efficient uses. The collective choice system increases the incentive for rational ignorance,[4] which occurs when the cost of obtaining information is greater than the benefits achieved from the effort.[5] Rational ignorance leads to two key consequences: ignorance of the role of government and failure to see the unseen.

First, Americans no longer accept the role of government that Thomas Paine defined in Common Sense: “Here too is the design and end of government, viz., freedom and security.”[6] Rather, Americans today look to government as a means to accomplish collective economic progress. A March 2009 Gallup poll of 1,012 randomly selected American adults found that a majority trusted government rather than private enterprise to solve the economic crisis, and a similar survey in April 2009 found that a majority of Americans accepted government growth in a bad economy.[7] Concerning the survey, Dr. Frank Newport stated,

There is no evidence of any trend toward Americans saying either that government is doing too much that should be left to individuals and businesses, or that government has too much power. If anything, there has been a slight movement in the opposite direction. In short, there is no sign to this point that Americans overall have become more worried that government is gaining too much power or attempting to do too much.[8]

In addition, rational ignorance removes the incentive for people to see the unseen. Free market economist Henry Hazlitt stated, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”[9] Because tracing the hidden effects of a policy requires effort beyond the incentives of rational ignorance, voters only see the immediate benefits portrayed by politicians and the media. Often, they do not—and cannot—connect government action with added expense, both indirectly with the dead weight loss of foregone economic exchanges and directly with increased inflation and taxes. The temporary benefits of the great fiction outweigh the cost of combating it.

Government Incentives

Just incentives lead voters to embrace rational ignorance, incentives encourage government growth. Although government is often referred to as a collective entity, public choice theory proclaims that government is in reality composed of humans following the same basic premise of rational self-interest.[10] The tendency of government officials is no different from the tendency of their constituents to seek what can bring them the most benefit with the least personal cost. Thus, the incentive of government is ultimately to increase its own power and importance rather than to serve the public good.

Government expansion thrives on the citizens’ rational ignorance. In The State, economist Anthony de Jasay stated, “Self-imposed limits on sovereign power can disarm mistrust, but provide no guarantee of liberty and property beyond those afforded by the balance between state and private force.” When citizens—the private force—are rationally ignorant of the government’s encroachment on their natural rights of life, liberty, and property, Jasay claimed, the state’s powerful ambitions ultimately lead it to ignore constitutional limits.[11] The greater the size of government, the more information is necessary to make an informed choice, and the more people become rationally ignorant.[12] Thus, rational ignorance destroys real government accountability.

Secondly, and most prominently, government officials face the political incentive to stay in office. Under public choice theory, candidates take the role of suppliers and voters become consumers. To stay in office, politician-suppliers must offer what voter-consumers demand: government action.[13] Because the political term is much shorter than the economic term, the short-term benefits of policies like price fixing or business bailouts are seen and the long-term benefits are unseen. For example, when prices are fixed, voters immediately see cheaper commodities; they do not see erased profit margins, shortages, lost jobs, foregone exchanges, and discouraged production.[14]

The immediate benefits of government expansion make it politically advantageous to create voter demand. Jasay stated, “At the outset, [the State] positively provoked its subjects to make demands upon it, as a vendor might drum up custom for his wares by passing out samples and testimonials, in order to create a political market in which consent could be earned in exchange for state provision of utility and equality.”[15] Increasing demand for government services due to rational ignorance encourages the perpetuation of ignorance and the expansion of government power. In “Our Enemy, The State,” Albert J. Nock described how rational ignorance perpetuates to the next generation:

New generations appear, each temperamentally adjusted—or as I believe our American glossary now has it, ‘conditioned’—to new increments of State power, and they tend to take the process of continuous accumulation as quite in order. All the State’s institutional voices unite in confirming this tendency; they unite in exhibiting the progressive conversion of social power into State power as something not only quite in order, but even as wholesome and necessary for the public good.[16]

In summary, the government’s incentive is power. Rational ignorance encourages expanded government power, which encourages continued ignorance. Ultimately, government desires to live at everyone’s expense because it can.

The Road to Change

Removing rational ignorance is the beginning of hope for limited government. Yet do the incentives that drive rational ignorance leave any hope that someday the majority of citizens will realize government lives at their expense? Or are we doomed to conclude with Albert Nock that, “far from encouraging any hopeful contemplation of the unattainable, the student of civilized man will offer no conclusion but that nothing can be done”?[17]

Although public choice theory would indicate Nock was correct, the opposite is true. Even the authors of The Calculus of Consent admitted the theory’s foundation of rational self-interest is not always correct.[18] Not all people respond the same to information and incentives, and not all politicians seek power or even well-intended government expansion. Despite the incentives that encourage rational ignorance, a minority of citizens continue to seek information. The minority who think, study, and learn the dangers of government have the power to change the future.

Like the hope that resided in the bottom of Pandora’s Box, public choice theory presents one benefit: the power of special interests. In Public Choice and Constitutional Economics, James Gwartney defined a special interest as a group that lobbies for interests that “generate substantial personal benefits for a small number of constituents while imposing a small individual cost on a large number of other voters.”[19] According to Gwartney, democratic systems are biased toward the adoption of special interest policies. While special interests often take advantage of rational ignorance to lobby for bigger government, their power can be reversed to lobby for the substantial benefit of liberty. Groups like the Tea Party Movement that desire to limit government power already exist. However, the special interest groups who desire to limit government must gain more power than the special interest groups who want to live at the government’s expense.

To gain influence, special interests must change personal incentives to combat rational ignorance. Two reforms have the potential to change the incentives that drive rational ignorance: decreasing the opportunity cost of gathering information and increasing the marginal benefit of becoming informed.

To decrease the opportunity cost of gaining knowledge, information must become widely dispersed and require very little effort to obtain. In George Washington’s farewell address, he cautioned his fellow citizens to realize role of knowledge in a free country, stating, “Promote then, as an object of primary importance, institutions for the general diffusion of knowledge.” As Dr. Ilya Somin stated, “Rational voters will make use of information acquired through ordinary daily-life interactions; such information is virtually ‘free’ since the activities that produce it would, by definition, be undertaken even in the absence of any political purpose.”[20] Somin argued that the daily information a voter encounters is not enough to become well-informed. Thus, dispersing free market principles through pamphlets, television commercials, and internet advertisements would reduce the initial opportunity cost of seeking information and increase the amount of civic knowledge available.

However, because applying information takes more effort than benefit, Somin stated that available knowledge is not enough to inform voters. To truly combat rational ignorance, the marginal benefit of information must be increased. Voters must have a personal stake invested in the political process that contributes to the high cost of being ignorant. Currently, the perceived benefit of voting is low because an individual vote has nearly no effect on the outcome. When the perceived value of a vote is higher, the benefits of becoming informed increase. For example, a neighborhood association proposal to increase yearly fees is likely to attract a greater percentage of the people affected than a government proposal to increase taxes.

Thus, the answer to rational ignorance is found in the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”[21] According to Somin, delegating more powers to state and local governments would give a greater percentage of citizens the incentive to become informed. Unfortunately, due to the immense pull of government incentives for power, such a change is very unlikely; and unless personal incentives are changed, government incentives cannot be changed.

By these standards, the future looks hopelessly caught in a vicious cycle. The fallacy Bastiat attempted to reveal over 160 years ago persists. Aside from a few bright spots in human history, people have seldom realized the destructive tendencies of human government. When they did, the realization often came from the bitter disillusionment of failure.[22]

Yet our generation has the potential to be different. Ultimately, all choices, even collective choices, begin with the individual. After all, the individual forms the foundation of the free market. The individual, not society, best controls production and manages the information closest to him or her. The individual drives the economic market, and, thus, the political market. Hope for the future is a matter of individual action: defying the shackles of rational ignorance and working to inform the people around us, one by one, of the reasons government power should be limited. The more the government attempts to live at the people’s expense, the greater the minority that will oppose such actions. The truth is in our hands, and only we can ensure the survival of freedom.

Bibliography

Bastiat, Frédéric. “The State.” Journal des Débats (25 Septembre1848). http://www.panarchy.org/bastiat/state.1848.html (accessed May 3, 2010).

Buchanan, James M., and Gordon Tullock. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Indianapolis, IN: Liberty Fund, Inc., 1999. http://www.econlib.org/library/Buchanan/buchCv3c4.html (accessed May 3, 2010).

Gwartney, James D. Public Choice and Constitutional Economics: Political Economy and Public Policy (v. 6). Edited by Richard E. Wagner. New York: JAI Press, 1988.

Clemson University. “The Theory of Rational Ignorance: Economic Brief No. 29.” Community and Economic Development Program, Fall 1997. http://www.strom.clemson.edu/teams/ced/econ/8–3N029.pdf (accessed May 3, 2010).

Hazlitt, Henry. Economics in One Lesson. 1946. Reprint, San Francisco: Laissez Faire Books, 1996.

Nock, Albert J. Our Enemy, The State. 1935. http://www.lewrockwell.com/orig3/nock1.html (accessed May 3, 2010).

Paine, Thomas. Common Sense. Philadelphia: W. and T. Bradford, 1791. http://www.bartleby.com/133/ (accessed May 3, 2010).

Somin, Ilya. “When Ignorance Isn’t Bliss: How Political Ignorance Threatens Democracy.” The Cato Institute. http://www.cato.org/pub_display.php?pub_id=2372 (accessed May 3, 2010).

Sowell, Thomas. Basic Economics. 3rd ed. New York: Basic Books, 2007.

U.S. Constitution: Tenth Amendment. FindLaw. http://caselaw.lp.findlaw.com/data/constitution/amendment10/ (accessed May 3, 2010).

Notes

[1] Frank Newport, “Socialism Viewed Positively by 36% of Americans,” Gallup.com, February 4, 2010. http://www.gallup.com/poll/125645/Socialism-Viewed-Positively-Americans.aspx (accessed May 3, 2010).

[2] James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Indianapolis, IN: Liberty Fund, Inc., 1999), 7, http://www.econlib.org/library/Buchanan/buchCv3c4.html (accessed May 3, 2010).

[3] James D. Gwartney, Public Choice and Constitutional Economics: Political Economy and Public Policy (v. 6), ed. Richard E. Wagner (New York: JAI Press, 1988), 3–28.

[4] The Concise Encyclopedia of Economics, 2nd ed., s.v. “Public Choice,” http://www.econlib.org/library/Enc/PublicChoice.html (accessed May 3, 2010).

[5] Clemson University, “The Theory of Rational Ignorance: Economic Brief No. 29,” Community and Economic Development Program, Fall 1997, page nr. http://www.strom.clemson.edu/teams/ced/econ/8–3N029.pdf (accessed May 3, 2010).

[6] Thomas Paine, Common Sense (Philadelphia: W. and T. Bradford, 1791), page nr., http://www.bartleby.com/133/ (accessed May 3, 2010).

[7] Frank Newport, “Americans OK with Short-Term Government Growth,” Gallup.com, April 15, 2009. http://www.gallup.com/poll/117523/Americans-Short-Term-Government-Growth.aspx (accessed May 3, 2010).

[8] Frank Newport, “On Economy, Republicans Trust Business, Dems Trust Gov’t: Americans Overall Not Increasingly Worried About Government Power,” Gallup.com, March 12, 2009. http://www.gallup.com/poll/116599/Economy-Republicans-Trust-Business-Dems-Trust-Gov.aspx (accessed May 3, 2010).

[9] Henry Hazlitt, Economics in One Lesson (1946; repr., San Francisco: Laissez Faire Books, 1996), 5.

[10] Thomas Sowell, Basic Economics, 3rd ed. (New York: Basic Books, 2007), 385.

[11] Anthony de Jasay, The State (Indianapolis, IN: Liberty Fund, Inc., 1998), 25, http://www.econlib.org/library/LFBooks/Jasay/jsySttCover.html (accessed May 3, 2010).

[12] Ilya Somin, “When Ignorance Isn’t Bliss: How Political Ignorance Threatens Democracy,” The Cato Institute, http://www.cato.org/pub_display.php?pub_id=2372 (accessed May 3, 2010).

[13] Sowell, Basic Economics, 386.

[14] Hazlitt, Economics in One Lesson, 101–110.

[15] Jasay, The State, 26.

[16] Albert J. Nock, Our Enemy, The State (1935), http://www.lewrockwell.com/orig3/nock1.html (accessed May 3, 2010).

[17] Ibid.

[18] See The Calculus of Consent, Ch. 20, “The Politics of the Good Society.”

[19] Gwartney, Public Choice, 17.

[20] Somin, “When Ignorance Isn’t Bliss,” 9.

[21] U.S. Constitution: Tenth Amendment, FindLaw, http://caselaw.lp.findlaw.com/data/constitution/amendment10/ (accessed May 3, 2010).

[22] Sowell, Basic Economics, 365.


Alicia Constant is an undergraduate student pursuing a degree in journalism at Patrick Henry College in Purcellville, VA. She was awarded Third Prize, Student Division, in the 2010 Sir John M. Templeton Fellowships Essay Contest.






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