The Fatal Deceit of Public Policy: Can Austrian and Public Choice Economics Complement each other?

Abstract

In the past few decades many economists who situate themselves in the Mengerian Tradition have tried to come to grips with the fol- lowing question: what is the relationship between Austrian Eco- nomics and Public Choice? Can a common ground be established between the two? To the extent that the Virginia school of Public Choice emerged out of the Chicago public finance tradition1 (James Buchanan was a student of Frank Knight), one would doubt that —except for a broadly shared classical liberal outlook— the two research programmes can have many things in common. In their book An Austro-Libertarian Critique of Public Choice economists Thomas di Lorenzo and Walter Block (2016) demonstrate, in fact, how scholars within this tradition rely on too much neoclassical formalism that leads them to part company with both Austrians and Libertarians at the level of positive and normative analysis. Similar criticisms were brought forward by Murray Rothbard (1960), Hans Hermann Hoppe (1993; 2001; 2004) and Joseph T. Salerno (2014). Rothbard, in particular, was appalled at the attempt by Buchanan and Tullock to use the framework provided by neoclassical economics (built upon mechanical physics and embed- ded in a positivist methodology that insists on the importance of starting with unrealistic assumptions for constructing models that possess predictive value) to build a value-free political analysis that, in contrast with “orthodox political theory”, viewed the state, ultimately, as just another type of voluntary agency within the broader division of labour2. For this reason, Rothbard (2011: 932) concluded that “this ‘economic approach’ to politics far from the great advance they think it is… is the death knell of all genuine political   philosophy.”

Despite all these conceptual errors, however, as Peter Boettke and Edward J. López (2002:112) point out, Public Choice, intended as the extension and application of the economic way of thinking to the study of collective decision-making, has stressed the impor- tance of methodological individualism as well as a “commitment to the unification of the social sciences on the foundation of a rational choice model”. At its very basis, “The public choice school of economic thought”, writes Walter Block (2005), “is dedicated to the notion that political choices and decision making may be prof- itably studied using the tools of economic analysis”, an idea that can indeed find resonance in the work of most Austrian econo- mists. In Human Action, Ludwig von Mises (1949), in fact, presents Economics as a part of a broader social science (Praxeology) that is devoted to the study of all processes of human action and interac- tion (thus including both political action and interaction). “Ludwig von Mises”, in the words of Jesús Huerta de Soto (2009: 251), “was one of the most important forerunners of the School of Public Choice, which studies, using economic analysis, the combined behaviour of politicians, bureaucrats and voters. This approach, 

which today has reached a high level of development under the auspices of theorists like James M. Buchanan (winner of the Nobel Prize for Economics in 1986), fits in perfectly with the broad prax- eological conception of economics developed by Mises, who con- sidered that the goal of our science was to build a general theory of human action in all its varieties and contexts (including, therefore, political actions)”.

In his Estudios de Economía Política, Jesús Huerta de Soto (2004) stresses, in particular, Mises (1944) book on Bureaucracy as a mod- ern precursor of Public Choice. In this book, Huerta de Soto under- lines, Mises (1944) develops, as a by-product of his theorem of the impossibility of rational economic planning under socialism, a comparative theoretical analysis between profit management and bureaucratic management. In The English Constitution Walter Bage- hot (1873: 165) aptly observed that while “a bureaucracy tends to under-government, in point of quality; it tends to over-govern- ment, in point of quantity” for “functionaries are not there for the benefit of the people, but the people for the benefit of the function- aries.” What Mises accomplished was to ground Bagehot’s empiri- cal observation on sound economic reasoning, placing the blame on the methods in use within the government sector and not in the individuals themselves: “The fault is not with the men and women who fill the offices and bureaus. They are no less the victims of the new way of life than anybody else. The system is bad, not its sub- ordinate handy men” (Mises, L 1944: 17).

In spite of the above disagreements among various Austrian economists regarding the complementarity of both approaches, the following essay will try to underline the importance of ground- ing the insights of Public Choice within the theoretical framework developed by the Austrian school when it comes to analysing pub- lic policies. The basic argument is that Austrian Economics pro- vides the only correct foundation of Public Choice Economics and that the latter’s empirical consideration regarding narrow political interests on the part of politicians and bureaucrats, if supple- mented by the essentialist and dynamic depiction of the market process that characterizes the Mengerian tradition, can provide an important analytical framework that allows to weigh the incentive structure of different political arrangements as well as (and this is more important still) a thymological tool that enables one to see the invisible intentions behind proposed public policies. As a thy- mological tool Public Choice analysis, grounded on the Austrian dynamic conception of the market process, might prove of extreme value both to entrepreneurs (who can better anticipate the evolu- tion of public policies and therefore employ their ingenuity to anticipate such circumstances) and to historians (who will be able to engage in a more realistic process of revisionism)3.

The paper will be divided into five sections. In section 1 we will briefly define and examine what is meant with the term public pol- icy and define both its nature and scope. Section 2 will dive into an analysis of Public Choice and show how it revolutionised the way in which social scientists in general and economists in particular have approached the democratic political process. Section 3 will high- light some of the main drawbacks of the neoclassical model of equi- librium on which Public Choice rests and show how the Austrian theory of the market process, driven by competition and entrepre- neurship, provides a more solid foundation for analysing, for exam- ple, the behaviour of legislators, rent-seeking actors and the voting public. Section 4 will analyse the topics of Competition and Monop- oly as well make an excursus into the real historical origins of Anti- trust to show how the use of a unified Austrian-Public Choice framework can enrich our understanding from both a theoretical and historical perspective. A conclusion will end the paper.