Stephanie Slade has written an excellent piece for Reason called “Not All Policy Is Industrial Policy.” She is responding to the fatalistic argument from some industrial-policy advocates that says because interest groups will seek favors from government no matter what, policy will always benefit some industries over others. Therefore, the argument goes, the task of policy-makers is to pick the correct industries to benefit with policy for the good of the public.
Slade makes the point that constraining government is not, in fact, just another form of industrial policy. “The state’s role is to enforce the basic rules of the game, which apply to everyone equally, and it should never abuse its power by tilting the playing field to favor one team over another,” she writes. That’s different from the industrial-policy view of the role of government, which says that “markets cannot be trusted to produce good outcomes, so government actors must step in and overrule them.” It’s the vision of the government as the referee versus the government as the mechanic.
One of the things that often informs the supporters of government-as-referee is public-choice economics. One of the founding texts is Calculus of Consent, written by economists James Buchanan and Gordon Tullock in 1962. Buchanan would go on to win the Nobel prize in economics.
Calculus of Consent is mostly a theoretical book. It studies how groups of individuals make choices. It relies on thought experiments and abstract logic more than it does on real-life policy debates.
Buchanan and Tullock’s purpose in writing the book was to correct what they saw as a shortcoming in most economists’ analysis of politics. The mainstream approach at the time was to diagnose a market failure, then call for government to fix it. Buchanan and Tullock’s point was to remind economists that “government” is not some unitary thing that makes decisions independently. It’s full of individuals.
Their foundation was “methodological individualism,” which they make clear is not the same as individualism as a political ideology. Methodological individualism simply means that the individual — not an agency, or a legislature, or an interest group — is the unit of analysis. Individuals join groups, but they do not lose their individuality when they do so. Politicians, bureaucrats, and lobbyists respond to incentives just like other individuals do.
Public-choice economics, then, seeks to describe politics through that particular lens. It’s the application of the economic way of thinking to politics. It allows us to speak of “the market for subsidies” or a “political equilibrium point.” It’s a tool for analyzing how politics works. Buchanan called it “politics without romance.”
Public-choice economics does not, in and of itself, prescribe what policies should be. It offers some insights into what types of decision-making processes will be effective. But it doesn’t say what tax rates should be, how an industry should be regulated, or what the right level of immigration is.
That being said, it’s not a coincidence that public-choice theorists often wind up favoring limited government. Looking at politics through the public-choice lens clarifies a lot of the problems with implementing an effective interventionist agenda. It adds an implementation problem to the knowledge problem. It shows that even if we could somehow do the impossible and have all the right information to design the perfect government intervention, it would still have to be implemented by individuals whose incentives likely don’t align with that design.
Economists were really good at analyzing market failures before Buchanan and Tullock. They offered a toolbox to analyze government failures as well. And when you understand how convoluted the incentive structures are for politicians, bureaucrats, and interest groups, you’ll better appreciate how little individuals in government really know about what they imagine they can design.