I’ve been thinking a lot about public choice theory lately. Public choice theory attempts to explain why government actions generally work to the benefit of special interests rather than to maximize public good. Here’s a brief description from Wikipedia:
One of the basic claims that underlie public choice theory is that good government policies in a democracy are an underprovided public good, because of the rational ignorance of the voters. Each voter is faced with an infinitesimally small probability that his vote will change the result of the elections, while gathering the relevant information necessary for a well-informed voting decision requires substantial time and effort. Therefore, the rational decision for each voter is to be generally ignorant of politics and perhaps even abstain from voting. Rational choice theorists claim that this explains the gross ignorance of most citizens in modern democracies as well as low voter turnout.
While the good government tends to be a pure public good for the mass of voters, there exists a plethora of various interest groups that have strong incentives for lobbying the government to implement specific inefficient policies that would benefit them at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures. The costs of such inefficient policy is dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a very small special interest group, who has very strong incentives to perpetuate the policy by further lobbying. The vast majority of voters will be completely unaware of the whole affair due to the phenomenon of rational ignorance. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies.
This is basically a fancy, academic explanation of a phenomenon that is easily observable in just about every public policy debate. Of course, there are incentives that temper self-interest, if there weren’t, then nothing good would ever come of democracy, and we know that democracy, while imperfect, is better than the alternatives. People who would recommend government action to address various problems are obliged to consider the public choice implications of that recommendation. (One need only look at the Medicare prescription drug benefit to see how this works out in practice.)
What I wonder, though, is how public choice economists account for the governance of publicly held corporations. It seems to me that in large part, the same sorts of problems that plague governments apply here as well. Most corporate shareholders do not hold a large enough stake in the corporation to care about its day to day governance, and executives of the company are certainly special interests. How many companies do we see with ineffective, massively overpaid management. Can’t this problem be seen as an expression of public choice theory? No shareholders have enough of a stake to care about management salaries, while the executives themselves have every reason to pay themselves outrageous amounts.
Obviously these effects are variable, just as they are among governments. I do wonder what public choice economists see as the optimum level of human organization, because it seems like organizations of all kinds can manifest these problems.