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Modern Political Economy II: Some Contemporary Issues (in Pathways to Research, Ebsco)

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Modern Political Economy II: Some Contemporary Issues (in Pathways to Research, Ebsco)

Abstract

This article builds on a companion piece (Jakee, 2022) that introduced untrained readers to modern political economy, or public choice. While the other article focused on the concepts developed by the first generation of public choice theorists--from about 1950 to 1970--this article focuses on several overarching themes that motivate political economists. These themes include collective action, voting, constitutions, bureaucracy, game theory as a tool, representative government (including political parties and interest groups), regulation, and non-coercive solutions to collective choice problems.
Modern Political Economy II:
Some Contemporary Issues
Forthcoming in Pathways to Research (2022),
EBSCO Information Services
Abstract: This article builds on a companion piece (Jakee, 2022) that introduced
untrained readers to modern political economy, or public choice. While the other article
focused on the concepts developed by the first generation of public choice theorists—
from about 1950 to 1970—this article focuses on several overarching themes that
motivate political economists. These themes include collective action, voting,
constitutions, bureaucracy, game theory as a tool, representative government (including
political parties and interest groups), regulation, and non-coercive solutions to collective
choice problems.
Keith Jakee
Wilkes Honors College
Florida Atlantic University
and
Visiting Research Fellow,
Center for the History of Political Economy
Duke University
kjakee@fau.edu
June 2022
Author Note: I would like to thank Carlos Cury and Alice Cordova for research
assistance, and Ken Kalczuk and Sheilagh Riordan for helpful comments. Maxime
Desmarais-Tremblay and Vincent Carret offered especially insightful advice. I am
particularly grateful for the research support of the Institute for Humane Studies, the
Wilkes Honors College, and the support and facilities provided by the Center for History
of Political Economy at Duke University.
Modern Political Economy II: Some Contemporary Issues
In a related, more historically-oriented paper, I defined “modern political economy” and
attempted to give some context to its development (Jakee, 2022). Above all, it is a subdiscipline
that attempts to understand the political sphere using insights and approaches initially developed
in economics. Over time, the discipline has developed many tools of its own with which
to analyze politics and group settings. Non-economists often refer to the approach as “rational
choice,” a label that describes its fundamental precepts: rationality and choice among individual
actors. It is also widely known as “public choice,” owing to an early group of mid-century
scholars searching for a moniker for their new journal, which eventually became Public Choice,
now in publication for more than 50 years.1
The field is also sometimes called the “economic theory of politics,” which has attracted
adherents in both economics and political science. It has also appealed to some sociologists
(Coleman, 1990; Elster, 1989; Vanberg, 1994), legal scholars (Ellickson, 1991, McAdams,
1997), and even philosophers (Schmidtz, 1995; Ullmann-Margalit, 2015). I will use modern
political economy (or MPE), public choice, and rational choice interchangeably throughout this
article.2
Largely borrowed from mainstream economic theory, MPE typically makes two key
assumptions about individuals, including those operating anywhere in the political sphere: (i)
they confront tradeoffs in making decisions, which means they will be sensitive to the
opportunity costs of those decisions; more costly political decisions will require more substantial
benefits to the decisionmaker; and (ii) they are “rational” in the sense that their actions are
1 The motivation for the Public Choice title came from the desire to differentiate this new disciplinary field from the
study of private choice, which are those decisions involving atomistic-like behavior that ignore group and spillover
effects.
2 It should be noted that “political economy” is also used in several other, somewhat overlapping, scholarly
communities. For example, “international political economy,” also referred to as “global political economy,” tends
to focus on the international aspects of politics (both as a cause and effect); it is a field largely dominated by
political scientists. Another recent tradition that uses the term refers to a group of (mostly) economists centered
largely at Harvard and MIT, including Daron Acemoglu, Alberto Alesina, Roberto Perotti, Torsten Persson, James
Robinson, Jeffrey Sachs, Guido Tabellini, among others. Much of the work among this group is highly consistent
with the ideas presented in this article. However, this “new” political economy tradition appears to have bypassed
much of the scholarship that preceded it, the very scholarship that I focus on in this paper (see, i.e., Blankart and
Koester, 2007; or Tollison, 2007).
2
consistent with their interests, whatever those may be.3 In other words, MPE postulates a clear-
thinking, clear-acting individual who responds to incentives: the greater the incentives, the
greater the expected response. It therefore rules out both altruism and what is sometimes called a
“dualistic” assumption about human nature.4 The latter, often assumed by scholars and casual
observers of politics (Buchanan, 1984[1979]), suggests individuals act self-interestedly in private
or economic spheres but in the “public interest” when moving into the political sphere. The
public choice approach broke with this assumption, and in doing so, effectively revolutionized
the study of politics. Even those who disagree with its assumptions or conclusions generally
recognize that its postulates cannot be ignored (Udehn, 1996).
MPE can trace its modern roots to developments in the 1950s and 1960s, although those
roots run much deeper into history. The companion paper to this one (Jakee, 2022) covers that
history. It begins by tracing the roots of modern political economy to classical political
economy, in particular, the work of Adam Smith (1976 [1776]). It notes that Karl Marx (with
Frederick Engels, 1848) also sought to join economic and political phenomena, although not in a
manner very satisfactory to most modern political economists. The first generation of modern
political scholars, who began working in the middle of the 20th century, were not content with
economists’ general neglect of political and group dynamics. Thus, they began to draw the two
disciplines of economics and political science together again. My companion paper reviewed and
contextualized the contributions of those founders.
For example, that article noted the strong influence of Kenneth Arrow’s (1951) technical
proof, later called “Arrow’s Impossibility Theorem.” It established the impossibility of any
voting or preference aggregation system delivering a clear social “winner” and it had a profound
effect on the theory of voting. The “Modern Political Economy I” article also discussed Duncan
Black’s (1948) development of the “median voter theorem,” which suggests election results will
be determined by the median voter. It reviewed James Buchanan’s profound influence across the
field of public choice, particularly in developing theories of constitutions (see, i.e., Buchanan,
3 In many rational choice analyses, the “trade-off” assumption is replaced with the assumption that individuals
maximize their wellbeing (i.e., utility, happiness, or interests). The latter allows the use of a common mathematical
technique involving maximization subject to constraints.
4 A number of social scientists, including economists—see, i.e., Mansbridge (ed.) (1990), or Frank (2011)—have
grappled with the definition and implications of “altruism,” or acts of seeming selflessness. However, such
motivations are generally ruled out in the rational choice framework because of the risk that they become ad hoc
explanations for otherwise unexplainable behavior.
3
1999-2002). It assessed the highly influential work of Anthony Downs (1957), who uncovered a
range of additional insights hiding in Black’s median voter approach, for example, the effect of
political parties bunching up around the position of the median voter and the lack of incentives
for citizens to inform themselves about electoral matters. It presented William Niskanen (1971)
as the progenitor of modern theories of bureaucracy and Mancur Olson (1965) as laying out,
more clearly than anyone had to that point, the problems of free-riding inherent in any multi-
person—or “collective choice”—setting. That review detailed the importance of William Riker
(1962), the only political scientist among the MPE founders, due to his early adoption of game
theory and the implications for democracy of his “minimum winning coalitions.” It suggested
that George Stigler’s (1971) “economic theory of regulation” was a turning point in social
science’s approach to regulation: instead of assuming regulation was in the public interest—as
had largely been the case—Stigler insisted political-economy analysts needed to begin
unraveling the actual incentives facing regulators and the regulated. Finally, the article
emphasized the great importance of Gordon Tullock’s intellectual contribution for a range of
MPE issues, but especially for his articulation of the theory of “rent seeking” (1967). Rent
seeking describes the phenomenon whereby individuals and groups divert real resources from
productive, economic uses to unproductive political transfers.
For organizational—and brevity’s—sake, we can think of many of the current topics
covered by MPE scholars under the following rubrics: collective action, voting, constitutions,
bureaucracy, game theory as a tool, representative government (including political parties and
interest groups), regulation, and non-coercive solutions to collective choice problems. After
providing a useful list of valuable resources in MPE, I briefly articulate these contemporary
topics.
Useful Resources in MPE
Much of the work in MPE that followed the 20th century founders has continued to refine, and
empirically test, the themes and propositions developed by that first generation of scholars. The
possible list of topics is too extensive to cover in an article of this size, but there are several very
good compendia for those interested in delving further into the modern issues. Toward a Theory
of the Rent-Seeking Society (Buchanan et al., 1980), while several decades old, is somewhat of a
classic that brings together many insights in the then-congealing subdiscipline. The Encyclopedia
4
of Public Choice (Rowley and Schneider, 2004) also includes summaries that remain highly
relevant today. Mueller (2003) is a near-encyclopedic treatment of public choice up to that date
and it is filled with technical analyses for more advanced students. This work still remains a
critical reference for many MPE scholars. Choosing in Groups (Munger and Munger, 2015) is a
more recent attempt to consolidate much of the MPE literature with an emphasis on “spatial
analysis”—or the tools developed in the modern context by Black (1948) and Downs (1957).
Another work that aims to provide a broad, introductory overview of public choice is Tullock et
al.’s Government Failure: A Primer in Public Choice (2002). Finally, the three volumes of the
Oxford University Press Handbook series—in “Political Economy” (Wittman and Weingast,
2008) and “Public Choice” (Congleton et al., 2019a and 2019b)—are as comprehensive as one
can find in a few volumes.
A Short List of Contemporary Issues in MPE
Collective Action
As discussed in the companion article (Jakee, 2022), Mancur Olson’s important first book, Logic
of Collective Action (1965), generated an entirely new class of problems in any multi-person
setting: the collective action problem. It illuminates and analyzes the fact that public good
problems are ubiquitous in any situation where multiple individuals must act or make decisions
collectively. If the group’s output cannot be easily attributable to specific individuals, the project
will be a public good for each individual because everyone can enjoy the benefits of that output.
This scenario—familiar to anyone who’s worked in a group setting—gives rise to the famous
“free rider” problem, where each individual has the incentive to freeload on the work of others.
Dixit calls this Olsonian insight “nothing less than what is arguably the most important class of
failures of Adam Smith’s invisible hand” (1999: F443).
Not surprisingly, Olson’s thesis provoked considerable controversy, particularly in
political science (McLean, 2000: 653) and sociology, disciplines that frequently treated group
behavior as “organic.” The organic assumption implies that groups, somehow, act or make
decisions as single, organic units, which allows the analyst to ignore the problem of how the
individuals who compose the group actually arrive at collective action or decisions. This problem
highlights a deep philosophical divide across the social sciences, that of methodological
individualism versus methodological holism (see Heath, 2020, for a highly useful summary).
5
Most economists, as well as rational choice practitioners, fall on the methodological
individualism side. Many political scientists, sociologists, legal scholars and other social
scientists fall on the holism side. Olson’s Logic (1965) split this divide wide open. As Dixit
suggests, “In today’s terminology, we can say that … [non-economists] were implicitly thinking
of social outcomes as equilibria of cooperative rather than non-cooperative games. Olson
focused on enforcement issues; he implicitly thought in terms of non-cooperative games” (1999:
F443).
Among other things, Olson upended the theory of pluralism—which had remained
popular, if not predominant—throughout the 20th century among students of democratic politics.
Pluralism suggests that interest groups (or political lobbyists) are unproblematic for democratic
functioning because these groups will mirror the underlying preferences of the citizenry: strong
(and widespread) feelings about some issue, say the public subsidization of higher education,
will naturally give rise to a lobbying group to represent that interest. Stronger community
feelings are likely to beget stronger interest groups. Stronger interest groups lobbying political
actors would then be taken as prima facie evidence that the “community” desired the action
promoted by the lobby group and weak or non-existent lobby groups in some area X could be
taken as evidence for a lack of community interest in X. A societal “balance” of community
interests, as manifested in political decisions, was presumed to result (see, for example, Bentley,
1908).
Olson (1965) challenged this tranquil intellectual view by arguing the micro
underpinnings of group behavior involved public goods and that there would be systematic bias
towards those groups that could most easily control for free riding. These would be small,
narrowly focused groups, like producer associations, not broad interests, like the mythical
“public interest,” or even widespread consumer interests.
Dixit (1999) provides a concise summary of Olson’s thesis and notes some of the
subsequent developments that “escaped” Olson himself, such the effect that different incomes
have on individual contributions to collective action.5 Dixit also reviews some of Olson’s later
works, such as the highly cited Rise and Decline of Nations (1982). He calls Olson’s thesis in
5 More precisely, it was shown by later scholars that incomes below some threshold will not contribute to collective
action but that those with incomes above the threshold will contribute the entire excess even if preferences are
identical across all individuals (Dixit, p. F447).
6
Rise and Decline—that certain successful political coalitions can divert a nation’s real resources
to themselves at the expense of political outsiders—“of utmost importance in economic and
political science, in history, and in practical international affairs” (p. F447).
A recent publication—from management scholars—analyzes what has been called the
second-order cooperative dilemma, defined as the incentive to free ride on enforcing collective
action rules and punishing rule-breakers (Sabin and Reed-Tsochas, 2020). They apply their
insights to the context of group lending, or microfinance, in a developing economy and find that
willingness to punish those who violate the rules increases as social cohesion increases, but only
up to a point. At the highest levels of social cohesion, the unwillingness to punish defectors—
which has the very real economic consequence of reducing loan repayments—is attributed to the
idea that “the financial transaction is often deemed of secondary importance to the social
relationships” (Sabin and Reed-Tsochas, 2020: 1644).
Green and Shapiro (1994) is a well-known critique of Olson, along with rational choice
more generally. Lohmann (1995) is one, among many, rebuttals to Green and Shapiro (see also
Friedman, ed. 1996). Lohmann argues that Green and Shapiro fundamentally “misunderstand the
theory of rational choice” (p. 130) and therefore mischaracterize many classes of collective
action. The point in raising this back-and-forth controversy is to provide some flavor of the care
that has been taken to examine the specific parameters of collective action in the decades since
Olson first proposed his theory. For more extensive analyses of Olson’s insights, see the special
issue of the journal Public Choice devoted to the 50-year anniversary of the Logic’s publication
(Heckelman, ed. 2015, and the other articles in that issue).
Voting
The careful analysis of the many features and permutations of voting systems was one result of
MPE’s progress. As the mechanics of voting are particularly amenable to mathematical
examination, this area tends to be highly technical, and like collective action, would be
impossible to fully survey here. However, the following topics provide some flavor for the
questions asked in this literature: (i) can voting be reconciled with rational choice methods and
assumptions? (Aldrich, 1993); (ii) whether, and to what extent, do citizens vote as a function of
7
their pocketbooks? (Hibbs Jr., 2008, or Lewis-Beck and Stegmaier, 2019);6 (iii) if, according to
Downs and many others, voters have little incentive to vote (see Jakee, 2022), why does anyone
vote at all? (Kaniovski, 2019); (iv) if “economic” or “instrumental” voting does not explain
actual voting turnout, perhaps something else is motivating voters: one such possibility is
“expressive voting,” or the notion that voters merely want to “express” their sentiments and
enjoy the benefits of merely participating in one of the essential functions of democracy (that is,
voting itself) without regard to outcomes or the instrumental value of their single vote (Hamlin
and Jennings, 2019); (v) Buchanan and Tullock (1962), having done the early modern analysis of
logrolling, or vote trading, set off decades of additional research on its mechanics and results
(see, i.e., McGann, 2019); (vi) what can be said about the effects of fraud on elections? (Shikano
and Mack, 2019); (vii) are laboratory experiments of voting consistent with public choice
predictions? (Kamm and Schram, 2019); (viii) would forcing all citizens to vote—compulsory
voting—improve voting results? (Jakee and Sun, 2006, and Holbein et al., 2021), among many
other topics.
Constitutional Political Economy
While the Calculus of Consent (Buchanan and Tullock, 1962) set off the modern technical
analysis of constitutions, Buchanan (1990: 2-3) frequently argued the bulk of public choice
scholarship focused on post-constitutional decision making, leaving the theory of constitutions
understudied. As a result, Buchanan and others started a new journal, Constitutional Political
Economy, shortly after his 1986 Nobel Prize, to explore the rational choice analysis of
constitutions. Since then, constitutional analysis has become a sub-field of MPE.7 Hamlin (2019)
presents a convenient update of many of the issues covered in constitutional economics since its
founding.
Among the other intellectual developments related to constitutional economics was the
“quality of government” literature, which seems to have developed independently from the
constitutional literature. Like constitutional economics, this sub-area focuses specifically on
6 Note that, as of 2019, Lewis-Beck and Stegmaier (2019: 1) claim there were over 600 books and papers just in this
sub-area of public choice, which might give some idea of the proliferation of studies in MPE more widely.
7 Curiously, Buchanan’s coauthor of Calculus, Gordon Tullock, seems to have had less interest in this area as his
career developed. An interesting side note is that Tullock was not a trained economist, but a lawyer, with but a
single economics class as a student. Buchanan, by contrast, was a Ph.D. economist who, after about 1970, moved
considerably more in the direction of political theory.
8
issues of “governance,” or how well the state truly governs. La Porta et al., (1999) is a seminal
article that empirically analyses government quality across 152 countries. Chong et al. (2014),
which uses a test of the postal system in 159 countries, is one of many more recent papers in this
vein.8
Bureaucracy
The study of bureaucracy has become yet another sub-field of public choice. Niskanen’s
conclusion that bureaucrats maximized budgets received both support (see, for example, the
volume edited by Borcherding, 1977) and resistance (see, i.e., Migué and Bélange, 1974; or
Miller and Moe, 1983). Despite disagreements over modeling and assumptions, Niskanen’s
analysis set off many decades of research around the question of “who’s in control?” when it
comes to bureaus and their outputs: the bureau—the Niskanen position—or the legislature,
including its subcommittees?9 As a result of this intellectual sparring, the interaction between
legislatures and bureaus is considerably better understood now than before Niskanen’s
provocative Bureaucracy (1971).
A key implication of Niskanen’s “budget-maximizing” bureaucrat is an ever-growing
state, driven not by efficiency criteria as postulated by the market failures paradigm, but by the
parochial interests of administrators. Niskanen’s Bureaucracy was therefore seminal in driving
interest in both the potential inefficiency of bureaucracies and the reasons for the substantial
growth in the size of governments across the developed world in the 20th century (see, i.e.,
Borcherding, 1977; or for more recent work, Borcherding and Lee, 2004; or Borcherding, et al.,
2005).
Benson et al. (1995) is a clever example of empirical work that focuses on bureaucratic
incentives. The authors test the claim that the “War on Drugs”—specifically, the Comprehensive
Crime Act of 1984—increased the incentives for law enforcement agencies to make arrests for
8 Bates (1988) is an important early compilation of papers by economic development scholars who employed
rational choice methods to analyze problems of economic development. Many of the same issues of the quality of
state governance arise throughout the book’s chapters. See Aidt (2019) for a recent review of how political
economists analyze corruption, more generally, or the journal Economics of Governance for many issues that
overlap those presented in this article.
9 See Moe (1996) for an informative discussion of “who’s in control?” in the context of modern bureaucratic
analysis.
9
drug offenses (relative to those for property and violent crime) because the new law allowed
local police agencies to confiscate (then auction) property that resulted from drug arrests.10
Game Theory as a Tool
From its early beginnings in Riker (1962) and Buchanan and Tullock (1962), game theory has
thoroughly permeated the analytical study of political processes because it is particularly suited
to studying strategic interaction.11 Strategic interaction refers to those actions taken by any one
actor that affect the actions taken by others; under such circumstances, each actor has an
incentive to consider the actions of others in deciding upon her strategy. Gary Becker (1983), yet
another Nobel Laureate, wrote a highly influential article on the theory of interest group behavior
using a game-theoretic approach. He concludes that interest group activity will be largely
efficient, since—according to his assumptions—the public will be sensitive to inefficient policies
(deadweight losses) promoted by any interest groups.
This game-theoretic trend has only intensified over the years, as is evidenced by perusing
the specialty MPE journals, such as Public Choice (see Bolle and Otto, 2021), Rationality and
Society (see Bertolai and Scorzafave, 2020), Journal of Theoretical Politics (see Pond, 2021),
and Economics and Politics (see Terai, and Glazer, 2021), among others. Political economy
themes using game theory are also suffused in the flagship journals across the social sciences.
Examples include Prendergast (2007) in the American Economic Review, Parameswaran et al.
(2021) in the American Political Science Review, Horz (2021) in the American Journal of
Political Science, or Mark (2018) in the American Journal of Sociology.
Representative Government, Political Parties, and Interest Groups
MPE has provided considerable insight into representative government, political parties, and
interest group activity. This is yet another area—or set of areas—that are vast and deep, and the
interested reader should thus consult one of the three volumes of Oxford’s Handbook series—in
“Political Economy” (2008) or “Public Choice” (2019)—for near-comprehensive reviews of this
material. For example: Ansolabehere (2008) reviews Downs’ influence on the analysis of voters,
10 DeAngelo et al. (2015) builds on Benson et al. (1995) and finds, among other things, that drug crimes “spillover”
from one district to another, depending on the degree of enforcement.
11 See Buchanan (2001) for an account of the importance of game theory in economics generally, and political
economy, specifically.
10
parties, and interest groups, and proposes more nuanced underlying assumptions on what drives
voters, including voter beliefs and ideology; 12 Prat (2008) analyzes political advertising;
Grofman (2008) studies the impact of electoral laws on political parties; Laver (2008) draws out
important distinctions between a “legislature”—rooted in the separation of powers—and a
“parliament;” Cox (2008) evaluates the “organization” of legislatures, including the control
wielded by committee chairs; Diermeier (2008) reviews the issues surrounding governments
composed of coalitions; Cutrone and McCarty (2008) assess bicameralism; Stratmann (2008)
examines campaign finance; and Dunleavy (2008) considers the problems of the bureaucracy
behaving as an interest group.
Another large area that falls under representative government and interest groups (not to
mention several others) is the issue of redistribution, that is, the transfer of resources from some
groups to others through the political process. Redistributive activities—which are tightly
interwoven with the notion of the welfare state—account for a larger and larger share of what
governments in advanced nations do and hence have become a focal point for many scholars
across disciplines (see, i.e., Bellani and Ursprung, 2019).
Theories of Regulation
Considerable scholarship on the rational choice theory of regulation was produced after Stigler’s
(1971) seminal article. Fellow University of Chicago economists contributed to, and advanced,
the theoretical underpinnings of regulatory decisions. Importantly, this literature differs from the
previously dominant “public interest” theory of regulation, as the latter focuses on devising
ideal-type policies that will enhance efficiency. The economic (or political economy) theory of
regulation attempts to model actual political decisions concerning regulation, not the ideal
regulatory policies for a given set of market failures.
Further articulating the theory of regulation, Peltzman (1976) weakened Stigler’s strong
conclusion of “capture theory”—that producers virtually always dominate regulatory decisions to
the detriment of consumers. Peltzman’s considerably more nuanced (and mathematical) model
12 See Aldrich (1995) for an influential analysis of political party development in the United States. True to the
themes laid out in this paper, Aldrich notes, “My basic argument is that the major political party is the creature of
the politicians, the ambitious office seeker and officeholder. They have created and maintained, used or abused,
reformed or ignored the political party when doing so has furthered their goals and ambitions. The political party is
thus an ‘endogenous’ institution…” (1995: 4).
11
instead concluded that sometimes consumers win and sometimes producers do; it depends on, for
example, organizing costs of the two sides, incomes, the degree of competitiveness of the
industry, and so on (see pp. 227-231). Peltzman revises Stigler’s position by assuming the public
(who support regulators or political decisionmakers) is—at least somewhat—sensitive to the
deadweight losses caused by the kinds of inefficient regulatory decisions that Stigler’s theory
presumed, even though producers will tend to have the advantage of smaller group size (à la
Olson’s Logic). Other “Chicago”-inspired papers that follow in this line of inquiry include
Posner’s “Taxation by Regulation” (1971), Becker’s previously-mentioned “Theory of
Competition Among Pressure Groups for Political Influence” (1983), and Wittman’s “Why
Democracies Produce Efficient Results” (1989), among others.
No review of regulation in the MPE context would be complete without remarking that
another set of MPE scholars was uncomfortable with the “Chicago School’s” increasingly
sanguine view of regulation after Stigler. Mitchell (1989) articulates some of the fundamental
differences between “Chicago Political Economy” and the “Public Choice”—or “Virginia
School” public choice—perspectives (see also, Brady and Forte, 2020).13 After Stigler, Chicago
political economy tended to focus on a stricter market interpretation of political phenomena,
including market “clearing” and full information. This led to later variants of the Chicago School
often concluding that political “markets” were efficient conductors of underlying citizen
sentiment. By contrast, the Virginia School—the home of Buchanan, Tullock and many other
contributors to MPE—has tended to focus on the many potential failures of the political system
and state activity, leading to a rather pessimistic view of the state-fixes-market-failures
paradigm. As such, it has often been referred to as a theory of “government failure” (see, i.e.,
Tullock et al. 2002).
Littlechild (2018), a scholar long involved with both the theory and practice of
regulation, emphasizes yet another aspect of regulation as he draws on first principles: if the
public interest approach to regulation is purportedly aimed at solving the failure of adequate
competition, how is it we define “competition” in the first place? This is not a trivial issue as
Littlechild argues much of the approach to regulation is oriented around rather contrived models
13 The “Chicago School” of economics is so-named for its focal point at the University of Chicago, while the
“Virginia School” is so-named for its development at three Virginian universities (e.g., University of Virginia,
Virginia Tech, and George Mason).
12
of competition that are static, meaning competition is defined by highly simplistic measures of,
for example, numbers of firms (i.e., small numbers imply lack of competition, while large
numbers imply vigorous competition). A more nuanced understanding of competition would
appreciate its dynamic nature that should be understood in terms of firm behavior, and the ways
in which new ideas and technologies influence how firms actually compete with one another.
Non-Coercive Solutions to Collective Choice
To fully appreciate the MPE project, it is necessary to accept Max Weber’s (1946 [1918]) claim
that one of the primary differences between the state and civil society (including markets) is that
only the state can legitimately use force or coercion to accomplish its mandates.14 As such, an
important strand of thinking that was both concurrent with, and provoked by, MPE asked
whether all so-called market failures will require coerced government intervention. For example,
Buchanan (1965) developed the initial analysis of what are called “club goods”—later referred to
as “toll” goods—that have the particular characteristics of non-rivalrousness but excludability.
Consider, for example, large swimming pools: they can be jointly enjoyed by more than one
consumer at a time (at least up to some point of congestion) and they can be fenced off at low
cost so that each consumer can be made to pay for this quasi-public good. Buchanan concluded
these impure public goods could—and often are—provided by private companies and non-profit
organizations.15
In an analysis closely related to Buchanan’s club goods, Charles Tiebout (1956),
examined how some kinds of public goods might be better supplied locally rather than federally
or centrally. If some public goods have a geographic limit to their “publicness,” then different
locales could provide different public good mixes to suit differences in tastes for them: citizens
with a high demand for public goods can secure them from those local governments that
specialize in providing more public goods (and accordingly pay higher taxes for them); those
with lower demands can then get lower levels of public goods in different—lower tax—
jurisdictions. If it is costless to relocate between local jurisdictions—a substantial assumption to
be sure—then typical public good provision may not be as inefficient as typically assumed by
14 Widely considered the defining characteristic of the modern state, Weber calls this insight the “monopoly of the
legitimate use of physical force” in his essay “Politics as a Vocation” (1946: 78). See also Downs (1957: 15-16, 23).
15 See Sandler and Tschirhart (1997) for a much more technical and updated treatment of the theory of clubs.
Demsetz (1970) treats a related issue, the private production of public goods.
13
Samuelson (1954) and others, as long as citizens can relocate to the jurisdictions that most
closely reflect their tastes. Tiebout (1956) thus provided subsequent public choice scholars with a
strong intellectual argument for federalist systems of government over centrally-administered
ones.16
Coase (1960) played a primary role in setting off one of the most important movements
in modern economics with his suggestion that externalities—under certain conditions—might be
ameliorated privately, counter to the then-dominant analysis by Pigou (1920). In those cases
where the affected parties could negotiate, or transact, costlessly, there would be no need for
third parties (the state) to intervene: the parties would be able to “internalize” the externality
efficiently all by themselves. This so-called Coase Theorem has, like many other ideas in MPE,
not been without considerable controversy. However, it has been highly influential in instigating
yet another sub-field in economics—law and economics—which overlaps considerably with
MPE.17 Coase’s ideas have also played a key role in environmental economics and in modern
policies for governments to auction, for example, radio spectrum (Coase, 1959; or see Hazlett et
al., 2009, for a recent evaluation of Coase’s influence on spectrum auctions).18
Elinor Ostrom, who also contributed substantially to our understanding of non-coercive
solutions to collective action problems (see, i.e., 2009), stands out in MPE for a number of
accomplishments. First, she was the first woman to receive a Nobel Prize in economics for her
work in political economy. Second, she did so not as an economist but as a political scientist—
demonstrating the point made earlier that public choice has been a cross-disciplinary endeavor.
Third, like the other scholars detailed here, she turned conventional intellectual thinking—across
the social sciences—on its head.
To appreciate Ostrom’s insights, consider the influence of Garrett Hardin (1968), who
was among a trifecta of authors who, in the 1960s, provoked considerable fear among both
scholars and the public over human population growth and environmental degradation with his
16 See Rodden (2008) for an analysis and update on political economy issues surrounding federalism.
17 See Medema (2020) for a comprehensive overview of the Coase Theorem.
18 A perceptive reviewer of this manuscript noted the real contribution of Coase’s “transaction costs” insight
centered on the “private action between individual parties, whereas the sine qua non of MPE is collective action.” I
agree, in the strict sense of interpreting the role transaction costs play between transacting parties. However, Coase’s
transaction cost insight, and especially his “Social Cost” paper (1960), have become highly influential in thinking
about limits to government intervention. In other words, transaction cost considerations have become a key
argument that many cases of externalities cannot be improved upon by state interference.
14
“Tragedy of the Commons” paper.19 In what was essentially a rehashing, and minor theoretical
updating, of Thomas Malthus’ argument 170 years earlier (1798), Hardin argued that human
population dynamics were governed by the tragedy of the commons, one of a sub-class of market
failures.20 In the matter of human population growth, Hardin argued each person’s private
incentives are to have as many children as she can. However, the planet has finite resources with
which to support an ever-growing human population. According to Hardin’s approach, there
were no “natural” solutions to this dysfunctional equilibrium, by which he meant non-coercive
solutions. As a result, he argued, the survivability of the species was in serious doubt. This view
has fueled decades of thinking on issues as far-ranging as population control to environmental
protection.
Ostrom took this issue, and related others, and studied actual commons problems (more
technically “common pool resources” or CPRs) both in field studies and in many newly-devised
economic experiments. She found that many CPRs did not succumb to the pessimistic “no-
solutions” view propagated by Hardin and others. In emphasizing the often-voluntary nature of
the communal solutions, she termed her approach the “Institutional Analysis and Development”
program (Ostrom et al., 1992). Readers should see Ostrom (2009), her Nobel lecture, for an
account of her fascinating intellectual journey.21
Conclusion
As noted throughout this article, there are so many topics and publications in the area of modern
political economy it is impossible to cover them comprehensively in such a brief account. I have,
however, attempted to provide a glimpse into the issues and approaches taken by recent public
choice scholars. By providing a substantial list of references, interested readers should have
plenty of material to dig more deeply into any of the topics included here.
I have also hoped to accomplish two other goals related to encouraging early researchers.
The first is to emphasize that it is real people who do research and develop innovative
approaches to the problems that surround us. This explains why the companion paper (Jakee,
19 Two other highly influential works in this burgeoning new environmental movement were Rachel Carson’s Silent
Spring (1962) and Paul Ehrlich’s Population Bomb (1968).
20 Some scholars might find it curious that Hardin never actually cites Malthus.
21 See Bertolai and Scorzafave (2020) for a recent formalization of the emergence of property rights (viz. “order”)
without state enforcement or Benson (1990) for an extended analysis of the same.
15
2022) largely took a historical approach to modern political economy, starting with Adam Smith
and then proceeding through the work of those who we now recognize as the founders of MPE,
such as James Buchanan and Mancur Olson. The current article has also focused on how
subsequent authors have built upon the founding ideas.
The second goal is to give readers a sense that our job is never finished: as brilliant and
influential as Adam Smith or Ronald Coase were, there is always room for new, innovative work
that looks at an old problem anew or finds completely new problems to solve. Having even the
vaguest appreciation for the history of any scientific or scholarly endeavor reinforces this point:
rarely when scholars think an issue is settled is it truly settled. New approaches, new questions,
new theoretical and empirical techniques throw old solutions into question. As such, I hope to
have conveyed some appreciation for the evolution of these ideas, or how one set of research
questions gives rise to another. I hope this approach inspires the next Elinor Ostrom to pursue
new questions and new ideas.
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Governance rules are efficient mechanisms in the sense that they increase people’s welfare. They emerge even when the state is unable or refuses to create and enforce them. We study a situation in which this demand for governance manifests itself through the emergence of property rights in illicit drug markets: a privately-provided governance. Specifically, we propose a model for property rights emergence in illicit drug markets as predicted by the theory on governance provided by prison gangs. It is studied a situation in which an agreement among criminals, resembling property rights enforceability on its allocative effect, can emerge in illicit drug markets. Our Mechanism Design approach shows that a change inside the prison system, from a competitive environment to the hegemony of a group of criminals, implies the equilibrium in illicit markets to shift from warfare to peace: the hegemonic group is shown to desire to promote the collusive agreement when it is able to do so. This contrasts with the equilibrium under no hegemony, in which the possibility to conquer consumers/territories drives violence up to a positive level. The novel empirical perspective implied by the model is explored using data from Brazil, a context for which the theory of governance provided by prison gangs has been pointed as a key explanation.
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The Coase theorem is one of the most influential and controversial ideas to emerge from post–World War II economics. This article examines the theorem’s origins, diffusion, and the wide variety of uses to which it has been put by economists and others over the sixty years since Coase published “The Problem of Social Cost.” Along the way, we explore the ambiguity and controversy surrounding the theorem, develop a Coase theorem that is valid as a proposition in economic logic, and probe the implications of all of this for the use of the Coase theorem going forward. (JEL D23)