Public Choice: Explaining Short term gains vs. Long term ...



Abstract

This literature review seeks to focus on the reason why governments would choose a solution in regards to short term over long term success and vice versa. The objective is to research the appropriate spheres and distinguish the best arguments by looking into the multiple different philosophies of economic success from discussions such as utilitarianism (rational choice theory) vs. Nihilism, government structure (short office term vs. long office term), Keynesian vs. Hayekian logic.

Utilitarianism, Rational Choice Theory, Nihilism, and Public Choice

While these schools are related to one another, they share the demeanor of seeking profit maximization. Originally conceived of as the “greatest happiness principal” where a mathematical equation could result if an action should be taken. That is, “Pleasure – Pain = Action” so long as the total amount of pleasure was greater than the amount of pain.[1] This obviously has problems ethically as if everyone in a coliseum enjoys watching a slave get eaten by lions, then it should be done. It is difficult to put a price on the actual life of a human. This view was then altered by John Stuart Mill who claimed that while utility should be maximized, same as Bentham, that human dignity cannot be trampled over.[2] JS Mill added an ambiguous gray area that was much needed to the prospect of theory maximization in order to prevent a tyranny of the majority. This human equation was further added to by Gary Becker, who is often credited with the transformation of utilitarianism into rational choice theory in his Nobel prize winning lecture of “The Economic Way of Looking at Behavior”. Essentially, people will make decisions based on what they perceive, rather than assume actors know, as most beneficial to themselves.[3] In this same coliseum people would be hesitant to throw a slave to the lions because they perceive that they themselves might be judged for the inhumane treatment, or worse, it is rational to assume that when society has run out of slaves to use who is to say that I won’t be next in line for the lions? Where Mill would reply that is correct, but more so out of fear of a tyrannical rule. Finally, Buchanan will challenge all of these thinkers to the morality of if public choice should even be allowed in the sphere of government. These four authors have contributed much to the discussion of decision making of actors; now let’s apply this to a state as a rational actor now, and later apply this theme and synthesize it with a structural and strictly economic perspective.

What does this have to do with short vs. long term decision making? State’s recognize that they do not have all the possible information needed to make the best possible decisions. That is why each year vast amounts of resources are used in order to predict the best possible outcomes for decisions. This is a very rational approach to decision making. In this scenario actors are more likely to choose decisions that have the most accurate information as well as the greatest outcome in order to attempt to maximize their outcomes. This tells us that actors prefer neither short term, nor long term results so long as the results are maximized.

To counter this belief in utility maximization though is Nietzsche and his belief in nihilism.[4] Essentially that morals are all subjective and change with the times and thus there is no truth in utility because the value of that utility will change. While initially one may question why nihilism is applicable in economics, it does tell a lot about decision making in the government when it comes to the important questions of “who gets what, when and how”-Harold Lasswell. Depending on the era the importance of building a road to city A might not be as important as building a road to city B instead, despite the fact that city B generates more revenue from an improved road than A, city A is the cultural center and therefore a pride is taken in the music production of the nation over that of economic prosperity. Where in the next decade, the road to city B would be built over the choice of city A due to economic prosperity is now of greater importance. An example in real life would be immigration laws that limit the free flow of labor. While it is proven that a global economy will benefit from free flowing labor, many southern states in the United States, and other nations impose immigration laws in order to protect their own citizens. While this does not maximize the utility of capital in their nation or completely utilize global labor forces effectively, states continue to uphold these immigration laws due to a subjective feeling that their own citizens and individual economy are more important than the international economy. What Nietzsche tells us about rational choice theory is that it has no real significance when it comes to short or long term decision making in the state because what was viewed as a good decision at one point (state approved genocide for instance) will be rendered ineffectual eventually. The beauty of Nietzsche’s argument is that it is neither short nor long term based. What may be seen as long term once, may actually become short term and then longer down the line views will change.

Buchanan also has a voice and raises that public choice may not be moral as well. Using examples such as false studies or reports by the media may change or alter the way that the masses ultimately view a subject or how they value the subject at hand.[5] If we are told by the media that 90% of the population inflate their tax returns, then we ourselves become less hesitant to the idea of doing the same the next time we file taxes because of the illusion that so many people already lie about it before us. Ultimately, it is saying that maximization is a falsehood because our perception can be altered so easily. I find this to be a weaker argument because as technology increases, and it becomes easier to access information, it is harder for bogus news sources to be capable of compiling a massive lie that is able to fool the entire population and alter their entire perception on an issue. This also goes to include government officials and the ruling class in general. That said, there is still a serious relevance to the issue that manipulation of data can have a serious toll on an actor’s ability to make rational decisions.

By looking at public choice as a philosophical sphere, we can then begin to understand the roots and the mindset of those actors that are working within a structural field, and later understand the actors at play during a strictly economic perspective.

Government Structure

There are many differing thoughts on how government manages its decision making process. From the clarity of the government’s responsibility, to the election processes, to how long a regime expects to stay in power; only a complete and comprehensive look at the structure can help to tell what motivates a government’s incentive to choose short or long term goals and overall public choice philosophy.

When it comes to a government, the decision making process may tend to favor short term solutions over long term solutions due to the voting processes involved in the state. That is, a government where the term of office is short is going to favor quick results in order for its constituents to associate the good with that regime and thus increase chances of reelection. If the current regime in power though has a long term, or a long amount of time in office however, a long term solution might be chosen over a short term benefit due to the nature of the election process and lack of time constraint.[6]

This makes sense where a government such as a warlord in Africa realizes there is a high turnover rate and revolts frequently. This would create incentives for him to seek short term benefit over long term stability; in which case this could also turn into an exploitation of the population because benefiting the population of constituents has relatively little return on the ability to remain in power. This would create further incentives to be an exploitive, and short term power seeking leadership. In a government such as communist China though, where there is only one political party and all of the decisions made are associated with that government, there is a large incentive to create long term stability over short term gains due to already assured survival of the in power party regime.

This brings us to the next factor in government structure, Anderson makes a great argument that bases voting potential on the clarity of responsibility associated with the party in power.[7] How well one can associate blame and misgivings will result in how the government makes decisions. Take for example a parliamentary system used in England. It is extremely easy to associate whom is in power and whom to blame when something bad happens. This results in interesting perversions.

One such perversion is manipulating the elections due to future speculation of fortunate or unfortunate political outcomes.[8] In the British system Parliament can decide within a certain span of time when to hold elections, therefore it is beneficial to hold an election when the economy is doing well, rather than when the economy is doing badly depending on this clarity of government.[9]

What does this spell for a British government? It is best to make policies based on when the positive effects coincide with your election. If that means passing long term bills the moment you step into office, and then short term, fast acting policies before an election, then that would have the most benefit for remaining in power which is ultimately what the political party would choose to do (looking at rationalism.)

According to these authors, in the case of the United States where the clarity of who is the decision maker is difficult to see though, and with fixed dates for elections occurring on four years, the party in power is vastly up to the mercy of time rather than being able to forge its own opportunities. This means that a similar strategy, except on a much more expedient scale must be taken (in comparison to a British parliamentary system) when hoping to get optimal results leading up to an election. Predominately that turning out bills that will have effects in under 4 years upon being elected then instantly turning to short term stimulus and benefits upon the campaign years in order to see economic booms. The issue then is once reelected, the economy cannot be so messed up that it is unfixable before the next election so your party can stay in power. This may take more long term decision making on the part of the regime in power in order to maintain power.

An interesting nuance that Anderson interjects is the power of coalitions. While a political party may lose less of the vote and not be in power, that does not mean it won’t have a large role in the newly existing coalition that forms in the wake of an election. Because of this we see that policy makers are free to choose whatever they would like short or long term so long as it benefits their political party because the results will have little effect. Thus, the people have little options in alternatives of whom to vote for. A similar perversion exists in China where voters may choose between communist candidate #1 and communist candidate #2.

Thus after this section we can see how actors utilize their limited resources (using utilitarian/rational choice theory) given the environment and the structure that they are given to operate within. The decisions they make are therefore dependent on the short and long term results that actors perceive themselves to see and the actions that are available to take given the structure they operate within.

Keynes vs. Hayek

Perhaps the most famous and well known arguments for government decision making are Keynes and Hayek for their polar opposite view points in regards with how government should guide the economy. These economic perspectives can also be spread to social capital and decision making at large.

To introduce the subject, Keynes believes that we should act here and now in order to solve issues and that they will not simply solve themselves. That is, government intervention is a necessity and going into debt is alright as long as we can eventually pay it off. The issue is that the problem exists today and so we should attempt to solve the problem of today instead of worrying about a theoretical and unknown tomorrow, those issues will come eventually and we can solve them then; but today we need to solve today’s problems.[10]

Other authors expand on Keynes and use studies to support his claims that increasing the amount of government spending in the public sector will result in an increase of spending in the public sector. This will ultimately create growth via more spending, which creates more jobs, and with lower interest rates there is less incentive to save money therefore people holding money would rather invest it than hold onto it and thus greater amounts of growth. [11] This is seen as only able to be temporarily maintained though because the government goes through a large expenditure to start it, think of it like a kick start to an economy, it takes a lot of energy to begin but then in theory it should continue rolling on its own. Attempting to sustain this kind of spending would eventually bankrupt a nation.

Hayek responds to this claiming that it is irresponsible for the government to be spending money on subjects that it lacks full information about, instead of solving a problem it may only make the problems worse. The reason the economy gets messed up in the first place is due to a boom and bust cycle created by the very process that Keynes is referring to. The government creates a fake stimulus and thus fake incentive, this creates speculation that cannot be completely understood and thus risk cannot be accurately managed. So while a momentary boom is created, it is always associated with a bust. Hayek’s solution to this is the integration of a fixed rate of inflation that way stock holders and investors can understand the associated risk and takes out the extra span of speculation associated with the insecurity. [12]

Supporting Hayek is the case that many state owned firms are now becoming privatized due to the government seeing that private institutions tend to become more efficient that government run programs. [13] While in ancient times most state owned firms were means of production such as metal working, mills, salt mining etc; the government held a monopoly on almost all necessary goods. The remainder of most private ownership was left to trading and money lending-that is a service based economics. With WWII and the Great Depression there was another push by governments to own resources that way there was no competition in attempting to combat these two existential threats; that said nationalization of goods was often synonymous with mercantilism. Post WWII and Great Depression though, the inefficiencies of government management and attempting to deal with a civilian population had great consequences. Seeing that the government was unable to maximize the potential of the corporations due to lack of incentive, governments began to cut these programs from national budgets and they then had to succeed on their own. The first big success being British Telecom, seeing it accomplish goals, privatization became a national agenda in the United Kingdom.[14] We see using this example that by allowing actors to work on their own accord instead of state governance that they are capable to succeed. The argument here is that this should give the government the confidence to not need to micromanage the economy and instead put long term milestones in place instead of constantly destabilizing the economy with short term tweaks.

The contrast is apparent; Keynes calls for short term decisions and benefits because it is impossible to speculate the problems (or even growth) of tomorrow, where Hayek calls for stability and safe long term future growth that is independent of a boom and bust cycle.

How does this all relate to public choice? In addition to economic theory, it reflects the decision making of how governments view problems and their responses to it. While some may choose to fix the near term problems with little regard to long term ramification but rather seek instant gratification of their constituents (typical of the short term government structures); other governments with longer terms may seek to fulfill long term goals rather than the present issues because they will have little consequence further down the road.

After looking at the three subjects of personal actors, how they operate within a government structure, and then large economic foundations, it now makes sense how these three spheres operate together, and must be within each other’s boundaries rather than working separately and apart.

Synthesis

Taking all of the contained ideas listed above in reference to short term gains vs. long term stability, a synthesis of ideas and creation of a more wholly grey rather than black and white may help to create a smoother working government.

In regards to the first subject, that of Rational Choice vs. Nihilism, it is obvious that the perspective of today is what allows for elections being that elections are never held retrospectively. Therefore optimization of resources is very critical to today’s politician, although Nihilism as a perspective is extremely important to keep in mind as flexibility of a government is also important. The ability for a government to recognize its constituent’s wants, needs, and desires and that those change over time is as equally crucial to maintaining power as it is to originally obtaining said power.

For the structure of government, we see varying results. The overall structure of the government will dictate how the regime handles its populace. That said, it is important to recognize how clear it is to associate blame, the extent of coalitions to form within the government, the expected length of term in power, positive / negative future expectations, and when elections are expected to be held.

Finally the question of Keynes or Hayek, after being thoroughly tested time over and again there is still much confusion left over whom the winner is and the always changing state that we live in has yet to prove a true victor.[15][16] This question then I leave up to the constituents of the nation and the government to choose which is bet for their nation. While the United States has typically favored Keynesian logic within the past decade it appears (with exceptions) that most welfare states contain Keynesian motifs while most underdeveloped (third world) countries follow Hayekian logic.[17][18] It is still unknown though, and requires further study if being a Keynesian nation allows for getting out of a third world status, or if being an industrialized nation affords the luxury of being Keynesian.

An important key to understanding the synthesis of these ideas is that no single part of the equation is able to work on its own. That is, nihilism cannot function without a structure of government to coincide with. If the structure of government is short terms then not only are there more likely to be short term solutions, but these short term solutions are likely to quickly evolve over time rather than be slight modifications to pre-existing legislation. If there is a sense of utilitarianism than utility is going to be maximized in the short term and if the party is clearly marked with this short term Band-Aid then perhaps it will seek long term solutions in the future in order to compensate. This is all tied together economically by a normative argument of which is better, Keynes or Hayek? There are multiple sources on either side of the fence to support the “best” possible choice, but it comes down to user discretion as to what the best choice for a nation will be in the end.

What we take from this is that actors will decide using incomplete information to make decisions that will maximize their utility within the confines of the authority the structure gives them to the end goal being that of achieving persistent or distant goals.

Conclusion

Ultimately it is strictly dependent on the situation if the country at hand will make a short term bargain or a long term decision. With so many factors to include structure of existing systems, theology of the population, economic status, availability of information, and strategic goals; it is difficult to generalize across the board. However, general trends exist where a nation that has short term goals will choose short term solutions and long term goaled nations will shoot for long term strategies.

Works Cited

Anderson, C.J.. "Economic Voting and political context: a comparative perspective." Electoral Studies 19 (2000): 151-169.

Becker, Gary S., and Revolution War. The economic way of looking at behavior: the Nobel lecture. Stanford, CA: Hoover Institution on War, Revolution, and Peace, Stanford University, 1996.

Bentham, Jeremy, and Laurence J. Lafleur. An introduction to the principles of morals and legislation ;. New York: Hafner Pub. Co., 1948.

Buchanan, James, and Geoffrey Brennan. "Is Public Choice Immoral? The Case for the "Nobel" Lie." Virginia Law Review 74 (1988): 179-189.

Douglass, North, and Barry Weingast. "“Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England.." Journal of Economic History 49, no. 4 (1989): 803-832.

Hayek, Friedrich A. von. The road to serfdom. 50th anniversary ed. Chicago: University of Chicago Press, 1994.

Hicks, J.R.. "Econometrica." Mr. Keynes and the "classics";A suggested Interpretation. (accessed April 17, 2013).

Krugman, Paul. "Keynes Was Right - ." The New York Times - Breaking News, World News & Multimedia. (accessed April 17, 2013).

Keynes, John Maynard. The general theory of employment, interest, and money. Amherst, N.Y.: Prometheus Books, 1997.

Leibfried, Stephan, and Giuliano Bonoli. Welfare state futures. Cambridge: Cambridge University Press, 2001.

Lewis-Beck, Michael, and Richard Nadeau. "Economic Determinants of Electoral Outcomes." Annual Review of Political Science 3 (2000): 183-219.

Megginson, William. "From State to market: A Survey of Empirical Studies on Privatization." In Journal of economic literature. Menasha, Wisc.: American Economic Association., 2001. 321.

Mill, John Stuart. Utilitarianism. Raleigh, N.C.: Alex Catalogue, 199.

Nietzsche, Friedrich Wilhelm, and Walter Arnold Kaufmann. On the genealogy of morals. New York: Vintage Books, 1967.

Porta, Rafael. "The Quality of Government." Oxford Journals | Economics & Law | Jnl. of Law, Economics, and Organization. (accessed April 17, 2013).

Salmon, Felix. "Keynes Trumps Hayek in Asia Society Debate Over Economic Policy - The Daily Beast." The Daily Beast. (accessed April 17, 2013).

Smith, Alastair. "Election Timing in Majoritarian Parliaments." British Journal of Political Science 33 (2003): 388-418.

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[1] Bentham

[2] Mill

[3] Becker

[4] Nietzsche

[5] Buchannan

[6] North

[7] Anderson

[8] Smith

[9] Lewis-Beck

[10] Keynes

[11] Hicks

[12] Hayek

[13] Megginson

[14] Megginson

[15] Krugman

[16] Salmon

[17] Leibfried

[18] Porta

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Public Choice: Explaining Short term gains vs. Long term Decision making in Government

2013

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4/17/2013

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