Public Choice Economics Overview

We're going to talk about public choice economics, and this is an area of economics that's only really started up since about 1950. It's not very old, though some of the wisdoms recognized by public choice economics date to way before that. But this is an area that there is such cognitive dissonance, I don't know if you ever heard that term before, with not just the American public, publics everywhere, right? On one hand, there is a great deal of mistrust that people have with politicians, right? You ask people about politicians and they tend to be very cynical, right but then At the same time, you ask them, well, should the government be doing this? Well, of course, yes. Should the government be doing that? Oh, yeah, yeah. That's a very good thing. But hang on. Aren't all of these programs going to be, first of all, designed, created, and then run by politicians and bureaucrats? And didn't you just say that you're very skeptical about... than having your interest in mind? What's going on here? People are very confused at this point and economics does try to put it in a much more organized way that we think about government. It used to be that economists did not really do that. Economists stuck to the studying of markets and we left the study of politics and government institutions to political scientists. The problem is that political scientists did such a horrendously bad job of explaining politics and government that economists had to intervene. We had to get involved and set things straight, right? Actually, how many of you had some political science classes? What's the basic assumption that you always started off with in terms of the political agents? What drives them? What motivates them? Yeah, go ahead. Right, public service and public interest, right? And, oh, go ahead. Make it quick. Ego, just because of the self-interesting and I'm a psychology major. Okay, well, that is the more correct answer, but unfortunately, this is the answer when you start studying political science, right? The starting point, almost always, is that we model, we think about political actors as being driven by public interest. Right, that they are in fact just trying to do good from the perspective of the rest of us. Which is really strange because in economics, of course, the basic behavioral postulate is that people are self-interested. Right, we start off with the very assumption, going back to Adam Smith, that what drives people is self-interest. Is that why people whose motivation is the public good act? on the public good as if they see it? As a what? As if they see it. Oh, as they see it? Well, I would question the whole idea that anybody acts in public good. Maybe on occasion, but certainly if they will act in the public good, it has to be from a subjective perspective, right? As they see it. Whether that's actually public good or not, who knows? I mean, that is not something that any of us individually are really able to know. What is in public good? How do you know? The fact is that these are incredibly complex things, right? So it's always, everything we do is filtered through our subjective perceptions. Self-interest drives people from the economic perspective. And then we have this problem that in politics, we do not think of people as being self-interested. But these same people, when they're not working, outside of the working hours, right, they are... When they're within markets, they are self-interested. Somehow, again, as I talked about yesterday in my morning lecture, when they cross over those hollowed thresholds of government buildings, they're transformed. They somehow go from being self-interested to being publicly interested. And at this point, you have to go, huh, hang on, something smells here, right? This is not right. So one of the guys that... ...made great contributions to public choice economics. James Buchanan, he won the Bell Prize in 1980. He passed away just two years ago in 2013. He was a professor at George Mason University for, I think, since about 84 until he passed away at the age of 92 as all great free market economists, right? Mises, Hayek, Milton Friedman, Buchanan, I think Tulloch too was also 92 when he passed away. So I want to give you this fairly long quote. here by Buchanan. In fact, this quote comes from a speech that he gave at Hillsdale College, explaining, which is where I teach, explaining what public choice economics is. Public choice provides analyses of politics of the behavior of persons in public choosing roles, whether these be voters, politicians, or bureaucrats, that were equal to those applied to markets and to the behavior of persons as participants in markets. Public choice became a set of theories of governmental failures. as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or as I put it in the title of a lecture in Vienna in 1978, public choice may be summarized by the three-word description, politics without romance. I love that. More on that in a second. Exposure to public choice analyses necessarily brings a more critical attitude towards alleged political solutions to various socioeconomic problems. There can be no presumption that politicized corrections for market failures will accomplish the desired objectives. Okay, so you know a lot of lingo here, but what he's saying basically is very simple. Economists about a hundred years ago, a little bit longer, came up with all of these explanations, these theories of market failures, that markets do not work perfectly under certain conditions. Briefly talked about that yesterday during my lecture. And what they did subsequently said, if we can recognize a market failure, we can simply assume that the government can correct those failures. So you got things like antitrust laws, monopoly and cartels being an example of market failure. Well, government needs to get involved through some kind of a regulatory apparatus. to fix those market failures, right? Now what Buchanan is saying is that, hang on, not so fast. Just because you recognize some market failure does not mean that the government is going to be capable of carrying out the correction to fix those market failures. Because guess what? As all human institutions, government is Far from perfect, right? It fails itself. And so what public choice economics started doing is, in fact, studying how government fails, how government is incapable of engaging in behavior that we expect of it, at least those more naive of us expect of it, right? That it's going to fix these market failures and usher in paradise on earth, which is what a lot of people seem to expect. Okay, and that is why Buchanan refers to public choice economics as politics without without romance. There is so much ridiculous romance in so much of American life and certainly other countries still when it comes to politics, right? We'd like to think of it as being a noble pursuit this thing that you know like Mr. Smith goes to Washington, right? Where people go in to really make a difference, to try to make lives better for others. And I'm thinking, what a bunch of hooey, right? That just has nothing to do with reality. The politicians that go to Washington, D.C., who knows what their motivations are initially, but you can be pretty sure that fairly quickly those motivations do not consist of trying to make people better off, right? Those motivations become really a matter of self-interest. And that is the starting point of public choice economics, right? That people acting in these public choosing roles, whether they be voters, whether they be bureaucrats, or whether they be legislators, elected officials, right? All three of them are going to act in ways that they perceive will increase their self-interest. interest that will increase their own well-being first and foremost. Sometimes they will consider their own well-being as being aligned with public interest. And they will do things that seem to be in public interest. But the point that public choice economics starts off with is that self-interest trumps any notions of public interest. That justice in markets, politicians and bureaucrats and voters are driven first and foremost by self-interest. Buchanan has this great quote. Also from the same piece that I want to quote for you here, public choice and its basic insights into the workings of politics incorporates a presupposition about human nature that differs little, if at all, from that which informed the thinking of James Madison at the American founding. That's this guy. What's James Madison's claim to fame? What's that? He's attributed to writing the Constitution, but presumably is more active in the Constitution. He actually did almost single-handedly write it. I mean, there were contributions, but he was the main author of the Constitution. So that is his main claim to fame. That's a heck of a claim to fame, you know, I take that. So Buchanan goes on. The essential scientific wisdom of the 18th century, of Adam Smith and classical political economy, and of the American founders was lost through the centuries of political folly. Public choice does little more than incorporate a rediscovery of this wisdom and its implications into analyses and appraisal of modern politics. So what he's saying is that here's what's happened. People in the 18th century, the American founders, The classical economists, in particular Adam Smith, but also all of the Scottish Enlightenment philosophers, David Hume, Adam Ferguson, they all understood this. They all really were doing public choice economics. They knew that you had to start off with the understanding that people within government act in self-interest. Unfortunately what's happened is that you had all sorts of socialist ideas. Marxian kind of communist extreme, the Fabian socialists in Europe, progressives in the United States that muddled these waters, that started looking to the government as the primary solution to all of our problems, right? And in order to do that they had to start off, bless you, it's the truth you see, they had to start off with the presumption. that public officials are going to be acting for the public good, right? If you're a progressive, you've got a serious problem with public choice economics because you cannot trust that people in charge of the government are in fact going to be driven by the public good, you see? And then the whole thing falls apart. So it's a serious challenge and it was a rejection. All of this socialist thinking was a rejection of what I would consider, and certainly the Independent Institute, and I think people associated with it, consider as wisdom of the 18th century. The wisdom that this country, in fact, was founded on. That we cannot trust our politicians. It's very simple. Now, Buchanan, in particular, was influenced by these... Italian economist of the late 19th century. And it was a total fluke. He was a student at University of Chicago after World War II. And he went into a library, and these are buildings filled with books. You may have heard of them. Books are these paper things, collection of pages, right, that you can actually hold in your hand and you have to physically turn. I know it's a foreign concept. to most young people that are connected at a hip to their phone and do all the reading on there. But there was a very nice thing that you could do in the library. You can browse. And that's exactly what Buchanan did. He just started wandering through the library and picking books at random. So he found a book by Puviani. Now, Puviani is almost completely unknown today, but if you know anything about... Italian politics, it's always been a mess. It's a complete disaster. I mean, they, it's, it's, you know, public choice economics personified. It's a complete mess. And it was that way back in the late 19th century. And so you had... Pugliani and a few other Italian economists there at the turn of that century of the turn of the 20th century they were doing public finance and they started looking around and saying look we can't start off by assuming that people are within government are publicly interested that is so patently obviously not the case so we're gonna start off by saying that in fact they are self-interested hey that's pretty good right 100 years after Adam Smith. And in particular, what they said is the following. When it comes to public finance kinds of issues, which is all about taxation and spending, right? How does government raise revenues? All the stuff that Michael talked about yesterday. And then how it spends money. What Poviani came up with, he said, is that politicians try to create fiscal illusions. Fiscal illusions. That's the phrase that he coined. And these fiscal illusions have the purpose of making all of us, as citizens, think that the taxes to which we are subjected are not nearly as onerous as they really are, and that the benefits that we get from those taxes are in fact much greater than they really are. Right? And you actually hear this all the time. I mean, there are a lot of people on the left, sort of in response to the whole Tea Party movement, that started fighting back by saying, you should be grateful that you have to pay your taxes. Because it's through the payment of your taxes that you get to live in civilization, right? As though it's like all or nothing, right? If you have some less taxation. We're all going to start throwing stones at each other and living in a cave again, right? But that's a very clear notion of fiscal illusions, and that's created not by political actors, but by true believers, people that love their government, the government, right? But fiscal illusions usually come from the government actors themselves. There are a massive number of examples, but I'll just give you two. Push costs onto future generations. How is that done? Right, so governments don't like raising taxes. Why don't they like raising taxes? Anybody that proposes to raise taxes is probably going to have a hard time getting re-elected. It's not very popular with the people, right? And sometimes, if you raise taxes enough, you may have a revolution on your hands. That's a pretty extreme example. but there are historical cases where that's happened. Now, the way you can avoid that is you can increase spending by simply engaging in deficit spending. You borrow money, right? And the American government has become incredibly good at that. So if you remember from Michael's lecture, what is our federal debt today? Yeah, $18.25 trillion and rising rapidly. By the way, just to put this into context a little bit, when Bush Jr. was elected in 2000, anybody know what the debts to that? Who said that? It was actually a little bit less. It was $4 trillion. Bush doubled it. In fact, yeah, come to think of it, it probably was around five. I think you were right. How do you know that, by the way? Ah, very good. Okay. So about five trillion dollars. By the time of the end of his presidency, so the two terms, right, eight years, it went to ten trillion dollars. And Obama just beat on Bush during the 2008 elections for being completely fiscally irresponsible and allowing the debt to double. during his two terms. When Obama took office, the debt, the federal debt, was at 10 trillion dollars. Where is the federal debt going to be by the end of Obama's second term? It's going to be 20 trillion dollars. So think about that. Between 2000 and 2016, we've gone from 5 trillion dollar debt to 20 trillion dollar debt. How much is a trillion dollars? It's 1,000 billion. Yes. What's a billion? A thousand million. So, you actually, what a trillion is, is a million millions. These numbers defy human understanding, right, Michael? That's the world GDP, right? Yeah, not good. In fact, I read this recent piece that said, you know, we used to talk about astronomical numbers when we refer to extremely large numbers, right, that defy human understanding. In fact, astronomy has got nothing on economics at this point. point, right? In fact, in economics we're talking about much larger numbers than anywhere in astronomy. So it's really time to switch from talking about astronomical numbers to economic numbers, right? Twenty trillion dollar debt. We are on course now and by the way we have all sorts of built-in factors as Michael talked about yesterday that will... Ensure that this debt continues to rise at this pace. We are in course on doubling the national, the federal debt every eight years. Is our economy doubling every eight years in size? No, not even close. Right? GDP growth is about 2% a year. Right? At 2% a year it takes 35 years to double the size of the economy. Here's what's happening to the debt. Here's what's happening to the size of the economy. We've got a problem, folks. Everybody, everybody in D.C. is in complete denial. They're delusional. They're dangerously delusional. They're criminally delusional, right? You talk to Republicans, and these people are idiots. I don't know how else to put it. They talk about... It's time to increase our defense spending. With what money? Where is this money coming from? Right? You guys are pretending to be fiscally responsible? And you want to massively increase defense spending? Are you insane? ISIS! ISIS! Listen, every one of us has a much higher chance of being killed by lightning than being killed by ISIS. Your chances of being killed by ISIS are basically zero. Right? But ISIS, ISIS. Oh, if it's not ISIS, oh, 9-11, 9-11, right? And then, of course, on the left, oh, we've got to take care of grandma, right? Or we're going to be pushing grandma off the cliff. I mean, these people are so irresponsible. It is just shocking, okay? But that is why. Ultimately, every one of them, you look at people in the Senate, and the average age in the Senate is like 65, right? Old fogies, what do they care? They got a very cushy job, and they love the power that they have, and they're going to milk it for all it's worth, right? And the debt, well, it's inconvenient, but that's your problem, guys. And it will be your problem. You will have to deal with it, because at some point... we're not going to be able to keep accumulating this debt. There will come an end point where you will simply not be able to get enough people to actually purchase the government bonds. That is coming, and it's probably coming sooner rather than later. And if I'm sounding scary, good. That's exactly my intention. I need to scare you. You need to be very scared. We are on an unsustainable path, and it's all about these fiscal illusions. The government has been engaging in fiscal illusions for decades now. In fact, for most of the 20th century, we've had consistent deficits since the 1940s. Certainly, they've been going up since the 1950s. Under Obama, they've really hit a peak. We had deficits of what? 10% of the GDP for a while, which is shocking. The only other time we had that was during World War II. You can understand it during World War II. Can you explain it during non-war periods? Makes no sense. So that's one example of a fiscal illusion. And then there is financing government through inflation. Steve, did you talk about inflation? Did you have a lecture on that? Has anybody? OK. So inflation is just government engaging in printing more money, and it reduces the purchasing power of each dollar. So governments love inflation because they all have huge debt, and it diminishes, inflation will diminish the real value of the debt. Right? If you are a debtor, you love inflation because the debt is going to be less burdensome as the inflation goes up. Okay? But of course, if you're not a debtor, if you're in fact trying to save, save for retirement, understanding that, hey, Social Security may not be there very much by the time I'm ready to retire, and you want to save for yourself, well, inflation is working contrary to your purposes, right? Contrary to your interests. It's diminishing. the purchasing power of the stuff that you're saving. And it's not going to be worth nearly as much in the future as it is right now. So governments, of course, they see it from the other perspective. Yes, let's have more inflation to reduce the real value of the debt. One more precursor was Friedrich Hayek, a student of Mises, one of the greatest economists ever, for sure, also Nobel Prize winner. And he has a famous book in 1944, The Road to Serfdom. He has a chapter there called Why the Worst Get on Top. And in there, he was really not talking about democracy. He was talking about authoritarian regimes. But it is somewhat applicable to democracies as well. And what he says is the following. Look at the incentives facing those people in places of authority in the government. They are not likely to be just impartial observers. They're not the ones that are going to see that, oh, this particular intervention is making things worse. We'll give it up. Why wouldn't they do that? If a particular intervention clearly is making things worse, why wouldn't they stop? And what do they gain out of it? Yeah, or just don't forget power, right? I think for most of us, I have really zero desire for power. I mean, it's just not within my purview. It's not what motivates me. But there are a lot of people out there that do, that are greatly motivated by power. They want power. They crave it. What will happen is that they will not want to give up these programs, because these are the programs that give them more power. to give them more control over people. And that is what a lot of people are motivated by. The way Hayek put it is that those that have a comparative advantage in exercising political power will be the ones that will in fact get power. Those are the ones that are going to be willing to do what it takes to achieve those places of power. So you look at the... The early days of the Russian Revolution, right, the Soviet Union, it's not Trotsky that ends up in power, if you know anything about these things. Trotsky was the kinder, gentler communist, right, which is a relative thing, okay. Who gets power? Well, Lenin has the power initially, right, but he dies fairly soon. So who assumes power after him? Stalin, right, and Stalin is about as bad as it gets. What does Stalin do? Stalin has no compunctions with killing anybody that gets in his way. Which is exactly what he did with Trotsky. Trotsky ended up going into exile and fled to Mexico. And Stalin found him in Mexico. He had the mason KGB assassinate Trotsky in Mexico. Even in Mexico he was a threat. A threat to his power. So that's the situation that we have. That people are very much driven by lust for power. And it's those people that have the fewest compunctions. You know, sort of like the House of Cards. How many of you watch that show? You know, people say, oh, that's so crazy. You know, it's so out of the realm of possibility. I don't know. I mean, I see a whole lot of politicians that end up in prison. In Illinois, the last three governors are in prison right now. Okay, this is, it's not that far-fetched. And, you know, who comes to mind in the real world, of course, is this guy here. That's Putin, the current leader of Russia. And this guy will do basically whatever it takes. I mean, he actually is assassinating his opponents. Most recently, there was a great critic of his government that was assassinated right in front of Kremlin. You know the the seat of the government in Moscow. And he's just, he doesn't care. Nothing happens to him. He does all of these incredibly awful things. He invades Ukraine. Nothing happens. So why not, right? All right. The early developments of public choice economics came with group decision-making in small committee voting situations, right? And you think, oh, I need a nap, right? But in fact, there were some incredibly important insights that came from this, in particular by this guy, Kenneth Arrow. Arrow, again, another Nobel laureate later on. In 1951, he came up with this article. He wrote this article where he was trying to explain whether it is possible to generate, as he put it, a rational, rational social ordering by adding up individual preferences. So take the preferences of people voting, sort of try to aggregate them, and see if they meet. the standards of rationality, right? That's what he did. And in order to do that, he came up with this model. So here's a little matrix. One, two, and three refers to people. So it's person one, person two, person three. A, B, and C are different policy alternatives. The rank ordering, preference rank ordering is given for each column, right? So person one. prefers policy A to policy B and policy B to policy C, right? Person two prefers policy B to C and C to A. Person three prefers C to A and A to B. Okay, everybody with me? Very simple kind of matrix. So what Error did is he said then let's look at what would happen if we allow voting in pairwise alternatives, right? So vote on particular two policies at at a time. So let's pit A versus B first. Which one's going to win? So person A is going to vote for which one of those? A or B? A. Person two is going to vote for what? And person three is going to vote for what? For A, right? So you have two for A, one for B. A wins, okay? So then let's pit B versus C. Oops. See, I don't know why it's doing this. It's very frustrating. Okay, so with B over C, person 1 prefers B over C, person 2 prefers B over C, person 3 prefers C over B. So we once again have 2 against 1 for B, right? So B wins. Now through transitive properties, what would you expect would be the case then? A wins. Right, you would expect that A would win over C, right? But then let's pit A versus C in voting. So person one prefers A over C. What about person two? What about person three? So which one wins? Huh? Well, that's not good. That does not satisfy rationality conditions. You see, if you prefer... A to B and B to C, you would expect that you would prefer A to C. But if in fact you vote for A versus C, C wins. Uh-oh, that's trouble, right? This is what Arrow explained. And he came up with this term called vote cycling. He explained that in this sort of a model, you don't actually have an equilibrium. And the outcome that you get depends on the agenda, right? Is somebody controlling the agenda to achieve a particular outcome? If the outcome that needs to be achieved from the perspective of the person controlling the agenda is C, would they vote A versus B, B versus C, or would they vote A versus C? They would vote A versus C. You see, so it opens up the door to manipulation. of the voting agenda to achieve a particular outcome. It's called vote cycling because you can just keep cycling around. If nobody controls the agenda, you never come to an equilibrium point. It just keeps cycling around. This is what came to be known as the arrow impossibility theorem. We cannot derive an ordering of voter preferences that satisfies rationality conditions. And Errol and many people after him, they expanded these matrices, they tried to make them much more complex, and unless they applied certain highly simplifying assumptions, they ended up with the same result. The result is basically that it is impossible to... to derive an aggregation of voter preferences that is in fact irrational, that cleanly and unambiguously represents the will of the people. Well, you can see how this could be a problem if you're a great believer in democracy. There are great implications for democracy here. If you do believe that democracy is so wonderful, now understanding that you cannot aggregate voter preferences to cleanly and unambiguously convey the will of the people. That casts a shadow of a doubt on the whole project. It's now saying, hmm, maybe democracy is not so good. And all of you, of course, were taught that democracy rules, that it's the best. In a Pepsi challenge, it wins nine out of ten times. Buchanan and Tullock said that this result is actually trivial. Because only a naive belief in democracy would expect that voting would give us clean and unambiguous will of the people. I don't think it's so trivial because we do have a great deal of naive belief in democracy out there. It's certainly what progressives say all the time, right? Oh, we need to have democracy, right? Democracy, the will of the people. And in fact, what they often want is democracy. Majority votes to trump constitutional limits. Terribly dislike the Constitution, right? They want majority voting for everything. Tulloch went a little bit further. He said, oh, democracy is either illusion or a fraud. Which actually fits very much with Tulloch's personality. He was a crotchety old man, pretty unpleasant. He was probably a crotchety young man, too, come to think of it, actually. And in fact, a lot of people wondered why he did not win the Nobel Prize for his contributions to public choice economics along with Buchanan, because the two wrote together quite often. And the only explanation you can come up with is that he's just a jerk and they didn't want him there, you know, because it's a very big occasion, everybody wears tuxes, and you don't want people that are going to say crazy things. And that's usually what Talaq did. He said very crazy things that made people quite uncomfortable. So anyway, this is an important quote by him. Democracy is either illusion or a fraud. All right. Now, this then led us to the whole consideration of, you know, it's not just, of course, politicians. We have actually elections, and voters play an extremely important part in democratic elections, right? How much do voters know? What do you think? I think that's very obvious, right? If you talk to most people and you ask them if they vote and say, yes, I'm proud to vote. And then I recommend that sometimes if you have a conversation, don't be like nasty about it, right? But just push it a little bit further and say, so who did you vote for? Okay, what is their stand on this issue? What is their stand on that issue? Right? What's their background? What would they before they started running for this office? And in general, you will find that people know nothing. They don't know anything. They're almost always voting along party affiliations, right? And don't put very little time into investing, investigating rather, sorry, particular politicians. And this is why it's so crazy to me. You have all of these like both drives. And I'm thinking, this is horrible. If you don't know anything, don't vote. I beg you, please do not vote if you don't know anything, right? You are damaging this country. Just because you have the right to vote does not mean you should be exercising that right, okay? You will make things worse. You will. So this is why, you know, I don't know, I've not watched MTV in many years, but they used to have this rock the boat campaign, you know? which is all about getting young people to turn out. And of course it was entirely lefty driven because they all expected that the young people who are foolish and ignorant will of course vote lefty. And so it's a very reliable voting block for the Democratic Party. And they didn't care that these people didn't know anything. They said, oh, get involved. It's like, actually, maybe before you get involved, you should learn something. Right? Inform yourself. Why don't they? Why do people not inform themselves? It's fresh ignorance, you know. Yes, you're stealing my thunder here. My punchline. But what does that mean? It takes hours and hours to learn about people in Canada and the sense of issues and, you know, are they sociopaths and do they lie to the truth or are they honest? It's not a difficult thing or that's not an easy thing to determine if they're a sociopath oftentimes. They hide it well. That's why they're successful politicians, right? Pretty much they all are sociopaths. But yeah, you're absolutely right. It takes a long time to inform yourself. And let's face it, it's boring. It's really dull to read about the issues. And all of these people, they have so much hot air explaining why they support this issue or not. It's just a bunch of cooey. You listen to them talk and say, what are they saying? They say nothing most of the time, right? They're just a bunch of hot air. So it's really painful to, in fact, inform yourself about different politicians. Meanwhile, there is a real cost to that. What's the cost of informing yourself? Exactly. All time has an opportunity cost. You could be doing something else. What else could you be doing? Doesn't matter. Anything that you, in fact, enjoy, right? If you have a family, spend time with your kids, then it's going to be a much better time spent than, in fact, informing yourself about a politician. Why? Because, in fact, people get really angry when you say this, right? And I see a few of your faces. You're getting angry, I can tell. And because it's so, you know, it's so... We're beating on the holy cow here, right? But the thing is this, people act along these lines, very much so. They understand that the odds of their vote mattering, making a difference, are basically zero. Especially if you're talking about national elections. The odds that your vote is going to make a difference is not nil. So, where's the benefit of voting? Oh, you get to feel good about yourself. You get a little I voted sticker. and then you feel superior to others for the rest of the day. But you know, you've not made any difference in terms of this particular election. So that's the benefit. Meanwhile, the cost is pretty high. Even if you're just a young person, it's much more beneficial to just sit on the sofa, eat junk food, and watch terrible TV. That will give you much greater benefits than, in fact, informing yourself about it. particular politician, right? Pretty much anything else you can do is going to be more valuable to you than informing yourself about a politician. So benefits of well-informed voting are much less than the cost of educating oneself, you see? And this is why public choice economists say that voters are predominantly rationally ignorant. It's perfectly rational to be ignorant. And this doesn't, it's not meant in a pejorative sense. Ignorant in a descriptive sense, simply that you don't know. You don't know. You're not informed. And it's a rational thing to not be informed. And that's a big problem for elections. All right, let's push this further. So the main development in public choice economics came after this. This is what they did. Politicians are modeled as being brokers or dealers in this particular model. And individual voters in special interest groups demand wealth transfers and pay with votes. and campaign contributions. That's what lobbying is, right? So we have people that engage in lobbying to get particular policies from the government, to get particular subsidies from the government, et cetera, et cetera, right? Now, there are also other voters and special interest groups who are less capable of effective political organization and that therefore they supply these wealth transfers. It's the wealth... transfers that's in fact the good that's being traded, right? So there are the demanders of wealth transfers, the lobbyists, and then there are suppliers of wealth transfers, which is basically the rest of us. And politicians will pay the price by losing the support of those people. But then what politicians will do, they'll bring about a market equilibrium, balancing benefits and costs in order to maximize their own utility, all right? So here, this is... Nice. I'd like your vote. What do you have to offer? The power to take his money and give it to you. Sold. When you start studying these political markets, it's important to understand that the demanders of wealth transfers, what they receive is not profit. It's what we call rent. So rent is an uncompensated transfer of wealth. Uncompensated transfer of wealth. What that means is that, you know, in a market exchange you are compensated. You give somebody money but you get something in return. Presumably something that you prefer to the money that you've given up. Not so in the political process, right? Your wealth is taken from you and you're not compensated for it. So it's a simple transfer of wealth. There is no, you know, you're not made better off in any possible way. And there's therefore no wealth creation as there is with the profit. When firms make profits in the market system, it's because they are capable of making people better off. They're doing something that people prefer to the other options. So wealth has increased, value has increased. Profit is all the things that are good and true and beautiful in the world. Rent is all the things that are horrible and ugly in the world, right? And it's... Crony capitalism that's all about rent-seeking and these uncompensated wealth transfers. That is the problem. That is what we're trying to actually get rid of. Not capitalists that are, in fact, trying to make profits by serving their customers better. All right. And by the way, this is what was called legal plunder by 19th century French economic journalist Frédéric Bastia. An amazing guy. so many insights into all of these things. I mean, he really understood public choice economics a hundred years before there was public choice economics, right? And this legal plunder, what he means is that it's theft. An uncompensated wealth transfer is a form of theft, but it's democratically done. Therefore, it is legal. Notice that the ultimate beneficiaries of these political markets are the rent seekers, special interest groups engaged in lobbying, and in particular the government act. It's politicians and bureaucrats that get campaign donations for creating favors, creating protections for the constituents or industries within their districts. And bureaucrats whose budgets are going up as a result of all of this, they are the beneficiaries. The rest of the public, we are not. We are the suppliers of these wealth transfers. We are the ones giving up our money. without getting anything in return for it. All right? Now, this rent-seeking, you can think about rent-seeking as requiring investment. That's what lobbying firms are doing, right? They're investing in getting these wealth transfers. So they are constantly there, whining and dining politicians, promising them these campaign donations and those campaign donations and giving money to their favorite charity, quote-unquote, right? Things like that. That is an investment, but you have a lot of lobbying firms that are competing against each other. Not all of them can win. All of these resources are devoted to working within the political machinery. That's what Washington, D.C. is. Most of those resources are, from the social perspective, totally wasted. They do not contribute to our wealth. They do not contribute to our productivity. they are in fact a total loss for the society. But they are not a loss, of course, to the individual politicians. Just as theft is quite a good deal for the thief, a bad deal for the society. You see? So all of these lobbying firms, you look at everything that happens in Washington, D.C., just as 2,000 years ago, everything that happened in Rome, and it was the same kind of stuff, right? Just wasting our resources. in order to play this political game, the Game of Thrones. And those who lose this political game have wasted resources on unproductive ends. So once you start understanding rent-seeking, it's impossible to look at pretty much all of modern politics as anything else except rent-seeking. And the question then is, why do we allow this to happen? And there is a guy that died about 20 years ago, probably would have won a Nobel Prize. If he had lived, he died at a fairly young age. But Mainzer Olson, that's his name, and he wrote this great book, The Logic of Collective Action, where he explained why we go along with this. He said that politicians seek those policies which concentrate the benefits among the few and make those benefits highly visible while dispersing the costs of a particular policy among the many, making those costs small per person and difficult to see. All right, so let me give you an example here. So this is what Bush did in 2001. In the election of 2000, presidential election was a total mess, right? The Supreme Court actually had to get involved to determine who won. Was it Al Gore or George W Bush? And so it was really close. There were hanging chads in Florida. It was a total, really a complete disaster, right? And so Bush with his evil boy genius Karl Rove. who was his main political advisor. They said, we can't have this happen in 2004. So what we're going to do in these two key states, Pennsylvania and Ohio, they needed to win at least one of these two states, absolutely had to win them. And it's the steel industry that dominates those two states. So what they did is they raised steel tariffs in 2001, which was illegal. It was contrary to all of the treaties, trade treaties that we had. within the World Trade Organization. Right? And the World Trade Organization flipped out. All these countries said, what are you doing? This is not right. You know, we are breaking the agreement that we've had. Bush set up to heck with it. And they ended up being sued in the World Trade Organization courts, which took about three years, right? In 2004, they were determined to, in fact, be acting illegally, and they got rid of the steel tariffs at that point. But look what they did for those three years. Think about it this way. Let's say that these tariffs raise the price of steel for all of us individually, but just $10 a year. So steel being more expensive and steel being in everything in some indirect way at least, raises $10 a year for each one of us. Well, there are 300 million of us. That gives $3 billion. I'm just going to pull a number out of thin air. Let's say that there are 100,000 people involved in the steel industry. So we have $3 billion to be divided among 100,000 people. How much is that? $30,000 a person. Now, if you're one of the consumers and you're paying $10 a year more because of these steel tariffs, are you going to know about it? Almost certainly not. If you find out about it, what are you going to do about it? Are you going to start sending letters to your congressman? Are you going to start raising a ruckus? Yeah. It's only $10 a year. On the other hand, you will... So let me actually say this. You're going to be rationally ignorant. On the other hand, if you're one of these people that, in fact, benefits from it, if you're in the steel industry, what are you going to do? You're going to vote for Bush. Darn straight. All right? Darn tootin'. And that's exactly what happened. Bush won in 2004 with a much clearer... margin of victory than he did in 2000. Ann Kruger, who also contributed quite a lot to rent-seeking, she said, what we really should be doing is we should be subtracting a policy's potential magnitude of rent-seeking from expected social benefits of that policy. So what is to be done about this? This is really depressing, right? I mean, if you look at all of this, you just want to slash your wrist. You go, oh, there's no hope, right? So Buchanan, in fact, in Tulloch, they said, wait, hang on, there is actually hope. There is a way to try to solve these issues. And what they did in this great book, Calculus of Consent, they came up with an area of field of economics that we now refer to as constitutional political economy. What they said in there, they said what needs to be done, we need to have this two-level structure of political decision-making. The ordinary politics versus constitutional politics. constitutional politics sets the rules of the game, right? Sets the framework within which ordinary politics can then proceed. This is very important because with the constitutional level, we can require in the ideal unanimity, right? That everybody agrees to these rules. That's not terribly practical. So what they said is we can require super majority rules. A great majority of people, in fact, agree to the rules of the game, which is exactly, of course, the way the US Constitution is set up. In order to get a constitutional amendment, what do you have to do? There are many steps, but ultimately, you need to get how many of the people to vote for it? Three quarters of states, in each state, I think it's two thirds of the people or something like that. So the threshold is really high. You've got to have pretty widespread agreement on a particular policy in order to have that become the rule of the game. Buchanan says, the whole analysis in our book could have been interpreted as a formalization of the structure that James Madison had in mind when he constructed the U.S. Constitution. Or at the least, the analysis offered a substantive criticism of the then-dominant elevation of majority voting to sacrosanct status in political science. So he said, you know, enough of this nonsense that as long as 50% plus one want something, they should get that. That is not what a free society is about, right? So here is a great quote by James Madison that refers to this. If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this. You must first enable the government to control the governed, and in the next place, oblige it to control itself. A dependence on the people is no doubt the primary control on the government. Yeah, good luck with that. But experience has taught mankind the necessity of auxiliary precautions. The auxiliary precautions are the Constitution. That is what the Constitution is supposed to do. And in a constitutional republic, that's, by the way, the difference between a republic and a democracy. In a democracy, everything is decided through majority voting. What a horrible system that would be, right? A republic. sets up a constitution and says some things you do not get to decide by majority, by simple majority. Some things are more important than we allow people to vote on it, right? And that's what we have. That's the ideal. That is how you assure a free society, right? Is that you actually have a republic, not a democracy. And in a republic, our allegiance is not to the government. Our allegiance is to the constitution, right? I'm a naturalized citizen. When I took an oath of citizenship, I gave my allegiance to the Constitution. There was no mention of the U.S. government. This is, by the way, why I hate the Pledge of Allegiance. What a horrible thing that is. In an unbecoming of a free people, why should we pledge allegiance to the flag? What does this flag represent? The Constitution? Well, I don't know. I don't think it does in the minds of many. It represents the government. And by the way, who is this? It's Odysseus. Odysseus in the Odyssey, right? What is this referring to? The sirens. The sirens. So when the ship is passing by the sirens, the sirens had this beautiful song that would hypnotize the sailors. And they would jump in the water in order to get closer to the sirens to hear the song better, and they would drown. Now, Odysseus knew this, so he had all of his men put wax in their ears so they would not hear the siren call. But he wanted to hear it. He knew he couldn't trust himself though, so he had this man tie him to the mast, so he would not be able to jump across the, or jump overboard and die, right? That's what we need to have our government do, to tie its hands, to understand it cannot trust itself. That's a very difficult thing to do, really hard, which is why we have anarchists out there that say that, oh, it's never going to be done. Star Wars 2, the attack of the clones, there is Anakin, right, who becomes later who? Darth Vader, of course. I hope it's not a spoiler alert here. And then, of course, we have younger Obi-Wan Kenobi there, right? And they're guarding Padme, right, who is a senator or something. And they're standing outside of her door during this scene and they're discussing things, right? And Anakin, who's fallen in love with Padme at this point. He says, oh, I'd much rather be dreaming of Padme. Just being around her is intoxicating. Great script. Obi-Wan Kenobi says, be mindful of your thoughts, Anakin. They betray you. You've made a commitment to the Jedi Order, a commitment not easily broken. And don't forget, she's a politician, and they're not to be trusted. Anakin says, she's not like the others in the Senate, Master. Obi-Wan, it is my experience that senators focus only on pleasing those who fund their campaigns. And they're in no means scared of forgetting the niceties of democracy in order to get those funds. Anakin, you know, just like a petulant teenager, right? Not another lecture, at least not on economics or politics. He actually says that, right? While all of this is going on, there's some kind of a creepy crawler that's coming towards Padma to kill her. So he kind of keeps cutting back and forth, and you can't really hear it very well. If you have the subtitles, you can see it very clearly, right? And besides, you generalizing, the chancellor doesn't appear to be corrupt. Who's the chancellor? Well, he's the later emperor, and he's in fact manipulating everything in order to get the power, right? So the chancellor doesn't appear to be corrupt. Obi-Wan, Palpatine is a politician. I've observed that he is very clever in following the passions and the prejudices of the senators. Anakin, I think he's a good man, which is, of course, why he becomes Darth Vader. goes to the dark side, right, and starts serving the emperor. So even in Star Wars, there is public choice economics. All right, thank you very much. I appreciate it.

Well, of course, yes. Should the government be doing that? Oh, yeah, yeah. That's a very good thing. But hang on.

Aren't all of these programs going to be, first of all, designed, created, and then run by politicians and bureaucrats? And didn't you just say that you're very skeptical about... than having your interest in mind? What's going on here? People are very confused at this point and economics does try to put it in a much more organized way that we think about government.

It used to be that economists did not really do that. Economists stuck to the studying of markets and we left the study of politics and government institutions to political scientists. The problem is that political scientists did such a horrendously bad job of explaining politics and government that economists had to intervene.

We had to get involved and set things straight, right? Actually, how many of you had some political science classes? What's the basic assumption that you always started off with in terms of the political agents?

What drives them? What motivates them? Yeah, go ahead. Right, public service and public interest, right?

And, oh, go ahead. Make it quick. Ego, just because of the self-interesting and I'm a psychology major. Okay, well, that is the more correct answer, but unfortunately, this is the answer when you start studying political science, right? The starting point, almost always, is that we model, we think about political actors as being driven by public interest.

Right, that they are in fact just trying to do good from the perspective of the rest of us. Which is really strange because in economics, of course, the basic behavioral postulate is that people are self-interested. Right, we start off with the very assumption, going back to Adam Smith, that what drives people is self-interest. Is that why people whose motivation is the public good act? on the public good as if they see it?

As a what? As if they see it. Oh, as they see it?

Well, I would question the whole idea that anybody acts in public good. Maybe on occasion, but certainly if they will act in the public good, it has to be from a subjective perspective, right? As they see it.

Whether that's actually public good or not, who knows? I mean, that is not something that any of us individually are really able to know. What is in public good? How do you know? The fact is that these are incredibly complex things, right?

So it's always, everything we do is filtered through our subjective perceptions. Self-interest drives people from the economic perspective. And then we have this problem that in politics, we do not think of people as being self-interested.

But these same people, when they're not working, outside of the working hours, right, they are... When they're within markets, they are self-interested. Somehow, again, as I talked about yesterday in my morning lecture, when they cross over those hollowed thresholds of government buildings, they're transformed. They somehow go from being self-interested to being publicly interested.

And at this point, you have to go, huh, hang on, something smells here, right? This is not right. So one of the guys that...

...made great contributions to public choice economics. James Buchanan, he won the Bell Prize in 1980. He passed away just two years ago in 2013. He was a professor at George Mason University for, I think, since about 84 until he passed away at the age of 92 as all great free market economists, right? Mises, Hayek, Milton Friedman, Buchanan, I think Tulloch too was also 92 when he passed away.

So I want to give you this fairly long quote. here by Buchanan. In fact, this quote comes from a speech that he gave at Hillsdale College, explaining, which is where I teach, explaining what public choice economics is.

Public choice provides analyses of politics of the behavior of persons in public choosing roles, whether these be voters, politicians, or bureaucrats, that were equal to those applied to markets and to the behavior of persons as participants in markets. Public choice became a set of theories of governmental failures. as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or as I put it in the title of a lecture in Vienna in 1978, public choice may be summarized by the three-word description, politics without romance. I love that.

More on that in a second. Exposure to public choice analyses necessarily brings a more critical attitude towards alleged political solutions to various socioeconomic problems. There can be no presumption that politicized corrections for market failures will accomplish the desired objectives. Okay, so you know a lot of lingo here, but what he's saying basically is very simple.

Economists about a hundred years ago, a little bit longer, came up with all of these explanations, these theories of market failures, that markets do not work perfectly under certain conditions. Briefly talked about that yesterday during my lecture. And what they did subsequently said, if we can recognize a market failure, we can simply assume that the government can correct those failures. So you got things like antitrust laws, monopoly and cartels being an example of market failure. Well, government needs to get involved through some kind of a regulatory apparatus.

to fix those market failures, right? Now what Buchanan is saying is that, hang on, not so fast. Just because you recognize some market failure does not mean that the government is going to be capable of carrying out the correction to fix those market failures.

Because guess what? As all human institutions, government is Far from perfect, right? It fails itself. And so what public choice economics started doing is, in fact, studying how government fails, how government is incapable of engaging in behavior that we expect of it, at least those more naive of us expect of it, right? That it's going to fix these market failures and usher in paradise on earth, which is what a lot of people seem to expect.

Okay, and that is why Buchanan refers to public choice economics as politics without without romance. There is so much ridiculous romance in so much of American life and certainly other countries still when it comes to politics, right? We'd like to think of it as being a noble pursuit this thing that you know like Mr. Smith goes to Washington, right?

Where people go in to really make a difference, to try to make lives better for others. And I'm thinking, what a bunch of hooey, right? That just has nothing to do with reality.

The politicians that go to Washington, D.C., who knows what their motivations are initially, but you can be pretty sure that fairly quickly those motivations do not consist of trying to make people better off, right? Those motivations become really a matter of self-interest. And that is the starting point of public choice economics, right?

That people acting in these public choosing roles, whether they be voters, whether they be bureaucrats, or whether they be legislators, elected officials, right? All three of them are going to act in ways that they perceive will increase their self-interest. interest that will increase their own well-being first and foremost. Sometimes they will consider their own well-being as being aligned with public interest.

And they will do things that seem to be in public interest. But the point that public choice economics starts off with is that self-interest trumps any notions of public interest. That justice in markets, politicians and bureaucrats and voters are driven first and foremost by self-interest.

Buchanan has this great quote. Also from the same piece that I want to quote for you here, public choice and its basic insights into the workings of politics incorporates a presupposition about human nature that differs little, if at all, from that which informed the thinking of James Madison at the American founding. That's this guy.

What's James Madison's claim to fame? What's that? He's attributed to writing the Constitution, but presumably is more active in the Constitution.

He actually did almost single-handedly write it. I mean, there were contributions, but he was the main author of the Constitution. So that is his main claim to fame.

That's a heck of a claim to fame, you know, I take that. So Buchanan goes on. The essential scientific wisdom of the 18th century, of Adam Smith and classical political economy, and of the American founders was lost through the centuries of political folly.

Public choice does little more than incorporate a rediscovery of this wisdom and its implications into analyses and appraisal of modern politics. So what he's saying is that here's what's happened. People in the 18th century, the American founders, The classical economists, in particular Adam Smith, but also all of the Scottish Enlightenment philosophers, David Hume, Adam Ferguson, they all understood this.

They all really were doing public choice economics. They knew that you had to start off with the understanding that people within government act in self-interest. Unfortunately what's happened is that you had all sorts of socialist ideas. Marxian kind of communist extreme, the Fabian socialists in Europe, progressives in the United States that muddled these waters, that started looking to the government as the primary solution to all of our problems, right? And in order to do that they had to start off, bless you, it's the truth you see, they had to start off with the presumption.

that public officials are going to be acting for the public good, right? If you're a progressive, you've got a serious problem with public choice economics because you cannot trust that people in charge of the government are in fact going to be driven by the public good, you see? And then the whole thing falls apart.

So it's a serious challenge and it was a rejection. All of this socialist thinking was a rejection of what I would consider, and certainly the Independent Institute, and I think people associated with it, consider as wisdom of the 18th century. The wisdom that this country, in fact, was founded on.

That we cannot trust our politicians. It's very simple. Now, Buchanan, in particular, was influenced by these...

Italian economist of the late 19th century. And it was a total fluke. He was a student at University of Chicago after World War II.

And he went into a library, and these are buildings filled with books. You may have heard of them. Books are these paper things, collection of pages, right, that you can actually hold in your hand and you have to physically turn.

I know it's a foreign concept. to most young people that are connected at a hip to their phone and do all the reading on there. But there was a very nice thing that you could do in the library.

You can browse. And that's exactly what Buchanan did. He just started wandering through the library and picking books at random.

So he found a book by Puviani. Now, Puviani is almost completely unknown today, but if you know anything about... Italian politics, it's always been a mess.

It's a complete disaster. I mean, they, it's, it's, you know, public choice economics personified. It's a complete mess.

And it was that way back in the late 19th century. And so you had... Pugliani and a few other Italian economists there at the turn of that century of the turn of the 20th century they were doing public finance and they started looking around and saying look we can't start off by assuming that people are within government are publicly interested that is so patently obviously not the case so we're gonna start off by saying that in fact they are self-interested hey that's pretty good right 100 years after Adam Smith.

And in particular, what they said is the following. When it comes to public finance kinds of issues, which is all about taxation and spending, right? How does government raise revenues? All the stuff that Michael talked about yesterday.

And then how it spends money. What Poviani came up with, he said, is that politicians try to create fiscal illusions. Fiscal illusions.

That's the phrase that he coined. And these fiscal illusions have the purpose of making all of us, as citizens, think that the taxes to which we are subjected are not nearly as onerous as they really are, and that the benefits that we get from those taxes are in fact much greater than they really are. Right?

And you actually hear this all the time. I mean, there are a lot of people on the left, sort of in response to the whole Tea Party movement, that started fighting back by saying, you should be grateful that you have to pay your taxes. Because it's through the payment of your taxes that you get to live in civilization, right? As though it's like all or nothing, right? If you have some less taxation.

We're all going to start throwing stones at each other and living in a cave again, right? But that's a very clear notion of fiscal illusions, and that's created not by political actors, but by true believers, people that love their government, the government, right? But fiscal illusions usually come from the government actors themselves. There are a massive number of examples, but I'll just give you two. Push costs onto future generations.

How is that done? Right, so governments don't like raising taxes. Why don't they like raising taxes? Anybody that proposes to raise taxes is probably going to have a hard time getting re-elected. It's not very popular with the people, right?

And sometimes, if you raise taxes enough, you may have a revolution on your hands. That's a pretty extreme example. but there are historical cases where that's happened. Now, the way you can avoid that is you can increase spending by simply engaging in deficit spending.

You borrow money, right? And the American government has become incredibly good at that. So if you remember from Michael's lecture, what is our federal debt today?

Yeah, $18.25 trillion and rising rapidly. By the way, just to put this into context a little bit, when Bush Jr. was elected in 2000, anybody know what the debts to that? Who said that? It was actually a little bit less. It was $4 trillion.

Bush doubled it. In fact, yeah, come to think of it, it probably was around five. I think you were right. How do you know that, by the way?

Ah, very good. Okay. So about five trillion dollars. By the time of the end of his presidency, so the two terms, right, eight years, it went to ten trillion dollars.

And Obama just beat on Bush during the 2008 elections for being completely fiscally irresponsible and allowing the debt to double. during his two terms. When Obama took office, the debt, the federal debt, was at 10 trillion dollars.

Where is the federal debt going to be by the end of Obama's second term? It's going to be 20 trillion dollars. So think about that. Between 2000 and 2016, we've gone from 5 trillion dollar debt to 20 trillion dollar debt. How much is a trillion dollars?

It's 1,000 billion. Yes. What's a billion? A thousand million.

So, you actually, what a trillion is, is a million millions. These numbers defy human understanding, right, Michael? That's the world GDP, right?

Yeah, not good. In fact, I read this recent piece that said, you know, we used to talk about astronomical numbers when we refer to extremely large numbers, right, that defy human understanding. In fact, astronomy has got nothing on economics at this point.

point, right? In fact, in economics we're talking about much larger numbers than anywhere in astronomy. So it's really time to switch from talking about astronomical numbers to economic numbers, right?

Twenty trillion dollar debt. We are on course now and by the way we have all sorts of built-in factors as Michael talked about yesterday that will... Ensure that this debt continues to rise at this pace. We are in course on doubling the national, the federal debt every eight years.

Is our economy doubling every eight years in size? No, not even close. Right?

GDP growth is about 2% a year. Right? At 2% a year it takes 35 years to double the size of the economy.

Here's what's happening to the debt. Here's what's happening to the size of the economy. We've got a problem, folks.

Everybody, everybody in D.C. is in complete denial. They're delusional.

They're dangerously delusional. They're criminally delusional, right? You talk to Republicans, and these people are idiots. I don't know how else to put it. They talk about...

It's time to increase our defense spending. With what money? Where is this money coming from? Right?

You guys are pretending to be fiscally responsible? And you want to massively increase defense spending? Are you insane?

ISIS! ISIS! Listen, every one of us has a much higher chance of being killed by lightning than being killed by ISIS. Your chances of being killed by ISIS are basically zero.

Right? But ISIS, ISIS. Oh, if it's not ISIS, oh, 9-11, 9-11, right?

And then, of course, on the left, oh, we've got to take care of grandma, right? Or we're going to be pushing grandma off the cliff. I mean, these people are so irresponsible. It is just shocking, okay?

But that is why. Ultimately, every one of them, you look at people in the Senate, and the average age in the Senate is like 65, right? Old fogies, what do they care?

They got a very cushy job, and they love the power that they have, and they're going to milk it for all it's worth, right? And the debt, well, it's inconvenient, but that's your problem, guys. And it will be your problem. You will have to deal with it, because at some point... we're not going to be able to keep accumulating this debt.

There will come an end point where you will simply not be able to get enough people to actually purchase the government bonds. That is coming, and it's probably coming sooner rather than later. And if I'm sounding scary, good. That's exactly my intention.

I need to scare you. You need to be very scared. We are on an unsustainable path, and it's all about these fiscal illusions.

The government has been engaging in fiscal illusions for decades now. In fact, for most of the 20th century, we've had consistent deficits since the 1940s. Certainly, they've been going up since the 1950s.

Under Obama, they've really hit a peak. We had deficits of what? 10% of the GDP for a while, which is shocking. The only other time we had that was during World War II.

You can understand it during World War II. Can you explain it during non-war periods? Makes no sense.

So that's one example of a fiscal illusion. And then there is financing government through inflation. Steve, did you talk about inflation? Did you have a lecture on that?

Has anybody? OK. So inflation is just government engaging in printing more money, and it reduces the purchasing power of each dollar.

So governments love inflation because they all have huge debt, and it diminishes, inflation will diminish the real value of the debt. Right? If you are a debtor, you love inflation because the debt is going to be less burdensome as the inflation goes up. Okay?

But of course, if you're not a debtor, if you're in fact trying to save, save for retirement, understanding that, hey, Social Security may not be there very much by the time I'm ready to retire, and you want to save for yourself, well, inflation is working contrary to your purposes, right? Contrary to your interests. It's diminishing. the purchasing power of the stuff that you're saving.

And it's not going to be worth nearly as much in the future as it is right now. So governments, of course, they see it from the other perspective. Yes, let's have more inflation to reduce the real value of the debt.

One more precursor was Friedrich Hayek, a student of Mises, one of the greatest economists ever, for sure, also Nobel Prize winner. And he has a famous book in 1944, The Road to Serfdom. He has a chapter there called Why the Worst Get on Top. And in there, he was really not talking about democracy.

He was talking about authoritarian regimes. But it is somewhat applicable to democracies as well. And what he says is the following. Look at the incentives facing those people in places of authority in the government. They are not likely to be just impartial observers.

They're not the ones that are going to see that, oh, this particular intervention is making things worse. We'll give it up. Why wouldn't they do that?

If a particular intervention clearly is making things worse, why wouldn't they stop? And what do they gain out of it? Yeah, or just don't forget power, right?

I think for most of us, I have really zero desire for power. I mean, it's just not within my purview. It's not what motivates me. But there are a lot of people out there that do, that are greatly motivated by power. They want power.

They crave it. What will happen is that they will not want to give up these programs, because these are the programs that give them more power. to give them more control over people.

And that is what a lot of people are motivated by. The way Hayek put it is that those that have a comparative advantage in exercising political power will be the ones that will in fact get power. Those are the ones that are going to be willing to do what it takes to achieve those places of power. So you look at the... The early days of the Russian Revolution, right, the Soviet Union, it's not Trotsky that ends up in power, if you know anything about these things.

Trotsky was the kinder, gentler communist, right, which is a relative thing, okay. Who gets power? Well, Lenin has the power initially, right, but he dies fairly soon. So who assumes power after him? Stalin, right, and Stalin is about as bad as it gets.

What does Stalin do? Stalin has no compunctions with killing anybody that gets in his way. Which is exactly what he did with Trotsky.

Trotsky ended up going into exile and fled to Mexico. And Stalin found him in Mexico. He had the mason KGB assassinate Trotsky in Mexico.

Even in Mexico he was a threat. A threat to his power. So that's the situation that we have. That people are very much driven by lust for power. And it's those people that have the fewest compunctions.

You know, sort of like the House of Cards. How many of you watch that show? You know, people say, oh, that's so crazy. You know, it's so out of the realm of possibility.

I don't know. I mean, I see a whole lot of politicians that end up in prison. In Illinois, the last three governors are in prison right now.

Okay, this is, it's not that far-fetched. And, you know, who comes to mind in the real world, of course, is this guy here. That's Putin, the current leader of Russia.

And this guy will do basically whatever it takes. I mean, he actually is assassinating his opponents. Most recently, there was a great critic of his government that was assassinated right in front of Kremlin.

You know the the seat of the government in Moscow. And he's just, he doesn't care. Nothing happens to him.

He does all of these incredibly awful things. He invades Ukraine. Nothing happens. So why not, right? All right.

The early developments of public choice economics came with group decision-making in small committee voting situations, right? And you think, oh, I need a nap, right? But in fact, there were some incredibly important insights that came from this, in particular by this guy, Kenneth Arrow. Arrow, again, another Nobel laureate later on. In 1951, he came up with this article.

He wrote this article where he was trying to explain whether it is possible to generate, as he put it, a rational, rational social ordering by adding up individual preferences. So take the preferences of people voting, sort of try to aggregate them, and see if they meet. the standards of rationality, right? That's what he did.

And in order to do that, he came up with this model. So here's a little matrix. One, two, and three refers to people.

So it's person one, person two, person three. A, B, and C are different policy alternatives. The rank ordering, preference rank ordering is given for each column, right?

So person one. prefers policy A to policy B and policy B to policy C, right? Person two prefers policy B to C and C to A. Person three prefers C to A and A to B. Okay, everybody with me?

Very simple kind of matrix. So what Error did is he said then let's look at what would happen if we allow voting in pairwise alternatives, right? So vote on particular two policies at at a time. So let's pit A versus B first.

Which one's going to win? So person A is going to vote for which one of those? A or B?

A. Person two is going to vote for what? And person three is going to vote for what? For A, right?

So you have two for A, one for B. A wins, okay? So then let's pit B versus C.

Oops. See, I don't know why it's doing this. It's very frustrating.

Okay, so with B over C, person 1 prefers B over C, person 2 prefers B over C, person 3 prefers C over B. So we once again have 2 against 1 for B, right? So B wins.

Now through transitive properties, what would you expect would be the case then? A wins. Right, you would expect that A would win over C, right?

But then let's pit A versus C in voting. So person one prefers A over C. What about person two? What about person three?

So which one wins? Huh? Well, that's not good.

That does not satisfy rationality conditions. You see, if you prefer... A to B and B to C, you would expect that you would prefer A to C.

But if in fact you vote for A versus C, C wins. Uh-oh, that's trouble, right? This is what Arrow explained. And he came up with this term called vote cycling.

He explained that in this sort of a model, you don't actually have an equilibrium. And the outcome that you get depends on the agenda, right? Is somebody controlling the agenda to achieve a particular outcome?

If the outcome that needs to be achieved from the perspective of the person controlling the agenda is C, would they vote A versus B, B versus C, or would they vote A versus C? They would vote A versus C. You see, so it opens up the door to manipulation. of the voting agenda to achieve a particular outcome. It's called vote cycling because you can just keep cycling around.

If nobody controls the agenda, you never come to an equilibrium point. It just keeps cycling around. This is what came to be known as the arrow impossibility theorem. We cannot derive an ordering of voter preferences that satisfies rationality conditions. And Errol and many people after him, they expanded these matrices, they tried to make them much more complex, and unless they applied certain highly simplifying assumptions, they ended up with the same result.

The result is basically that it is impossible to... to derive an aggregation of voter preferences that is in fact irrational, that cleanly and unambiguously represents the will of the people. Well, you can see how this could be a problem if you're a great believer in democracy.

There are great implications for democracy here. If you do believe that democracy is so wonderful, now understanding that you cannot aggregate voter preferences to cleanly and unambiguously convey the will of the people. That casts a shadow of a doubt on the whole project. It's now saying, hmm, maybe democracy is not so good. And all of you, of course, were taught that democracy rules, that it's the best.

In a Pepsi challenge, it wins nine out of ten times. Buchanan and Tullock said that this result is actually trivial. Because only a naive belief in democracy would expect that voting would give us clean and unambiguous will of the people. I don't think it's so trivial because we do have a great deal of naive belief in democracy out there.

It's certainly what progressives say all the time, right? Oh, we need to have democracy, right? Democracy, the will of the people. And in fact, what they often want is democracy. Majority votes to trump constitutional limits.

Terribly dislike the Constitution, right? They want majority voting for everything. Tulloch went a little bit further.

He said, oh, democracy is either illusion or a fraud. Which actually fits very much with Tulloch's personality. He was a crotchety old man, pretty unpleasant.

He was probably a crotchety young man, too, come to think of it, actually. And in fact, a lot of people wondered why he did not win the Nobel Prize for his contributions to public choice economics along with Buchanan, because the two wrote together quite often. And the only explanation you can come up with is that he's just a jerk and they didn't want him there, you know, because it's a very big occasion, everybody wears tuxes, and you don't want people that are going to say crazy things. And that's usually what Talaq did.

He said very crazy things that made people quite uncomfortable. So anyway, this is an important quote by him. Democracy is either illusion or a fraud. All right.

Now, this then led us to the whole consideration of, you know, it's not just, of course, politicians. We have actually elections, and voters play an extremely important part in democratic elections, right? How much do voters know? What do you think? I think that's very obvious, right?

If you talk to most people and you ask them if they vote and say, yes, I'm proud to vote. And then I recommend that sometimes if you have a conversation, don't be like nasty about it, right? But just push it a little bit further and say, so who did you vote for?

Okay, what is their stand on this issue? What is their stand on that issue? Right? What's their background?

What would they before they started running for this office? And in general, you will find that people know nothing. They don't know anything. They're almost always voting along party affiliations, right?

And don't put very little time into investing, investigating rather, sorry, particular politicians. And this is why it's so crazy to me. You have all of these like both drives.

And I'm thinking, this is horrible. If you don't know anything, don't vote. I beg you, please do not vote if you don't know anything, right? You are damaging this country.

Just because you have the right to vote does not mean you should be exercising that right, okay? You will make things worse. You will.

So this is why, you know, I don't know, I've not watched MTV in many years, but they used to have this rock the boat campaign, you know? which is all about getting young people to turn out. And of course it was entirely lefty driven because they all expected that the young people who are foolish and ignorant will of course vote lefty. And so it's a very reliable voting block for the Democratic Party.

And they didn't care that these people didn't know anything. They said, oh, get involved. It's like, actually, maybe before you get involved, you should learn something. Right? Inform yourself.

Why don't they? Why do people not inform themselves? It's fresh ignorance, you know. Yes, you're stealing my thunder here. My punchline.

But what does that mean? It takes hours and hours to learn about people in Canada and the sense of issues and, you know, are they sociopaths and do they lie to the truth or are they honest? It's not a difficult thing or that's not an easy thing to determine if they're a sociopath oftentimes. They hide it well.

That's why they're successful politicians, right? Pretty much they all are sociopaths. But yeah, you're absolutely right.

It takes a long time to inform yourself. And let's face it, it's boring. It's really dull to read about the issues. And all of these people, they have so much hot air explaining why they support this issue or not.

It's just a bunch of cooey. You listen to them talk and say, what are they saying? They say nothing most of the time, right? They're just a bunch of hot air.

So it's really painful to, in fact, inform yourself about different politicians. Meanwhile, there is a real cost to that. What's the cost of informing yourself? Exactly.

All time has an opportunity cost. You could be doing something else. What else could you be doing? Doesn't matter.

Anything that you, in fact, enjoy, right? If you have a family, spend time with your kids, then it's going to be a much better time spent than, in fact, informing yourself about a politician. Why?

Because, in fact, people get really angry when you say this, right? And I see a few of your faces. You're getting angry, I can tell.

And because it's so, you know, it's so... We're beating on the holy cow here, right? But the thing is this, people act along these lines, very much so. They understand that the odds of their vote mattering, making a difference, are basically zero.

Especially if you're talking about national elections. The odds that your vote is going to make a difference is not nil. So, where's the benefit of voting?

Oh, you get to feel good about yourself. You get a little I voted sticker. and then you feel superior to others for the rest of the day.

But you know, you've not made any difference in terms of this particular election. So that's the benefit. Meanwhile, the cost is pretty high. Even if you're just a young person, it's much more beneficial to just sit on the sofa, eat junk food, and watch terrible TV.

That will give you much greater benefits than, in fact, informing yourself about it. particular politician, right? Pretty much anything else you can do is going to be more valuable to you than informing yourself about a politician. So benefits of well-informed voting are much less than the cost of educating oneself, you see?

And this is why public choice economists say that voters are predominantly rationally ignorant. It's perfectly rational to be ignorant. And this doesn't, it's not meant in a pejorative sense. Ignorant in a descriptive sense, simply that you don't know. You don't know.

You're not informed. And it's a rational thing to not be informed. And that's a big problem for elections. All right, let's push this further.

So the main development in public choice economics came after this. This is what they did. Politicians are modeled as being brokers or dealers in this particular model. And individual voters in special interest groups demand wealth transfers and pay with votes.

and campaign contributions. That's what lobbying is, right? So we have people that engage in lobbying to get particular policies from the government, to get particular subsidies from the government, et cetera, et cetera, right? Now, there are also other voters and special interest groups who are less capable of effective political organization and that therefore they supply these wealth transfers. It's the wealth...

transfers that's in fact the good that's being traded, right? So there are the demanders of wealth transfers, the lobbyists, and then there are suppliers of wealth transfers, which is basically the rest of us. And politicians will pay the price by losing the support of those people.

But then what politicians will do, they'll bring about a market equilibrium, balancing benefits and costs in order to maximize their own utility, all right? So here, this is... Nice. I'd like your vote.

What do you have to offer? The power to take his money and give it to you. Sold. When you start studying these political markets, it's important to understand that the demanders of wealth transfers, what they receive is not profit.

It's what we call rent. So rent is an uncompensated transfer of wealth. Uncompensated transfer of wealth. What that means is that, you know, in a market exchange you are compensated.

You give somebody money but you get something in return. Presumably something that you prefer to the money that you've given up. Not so in the political process, right? Your wealth is taken from you and you're not compensated for it. So it's a simple transfer of wealth.

There is no, you know, you're not made better off in any possible way. And there's therefore no wealth creation as there is with the profit. When firms make profits in the market system, it's because they are capable of making people better off. They're doing something that people prefer to the other options.

So wealth has increased, value has increased. Profit is all the things that are good and true and beautiful in the world. Rent is all the things that are horrible and ugly in the world, right? And it's... Crony capitalism that's all about rent-seeking and these uncompensated wealth transfers.

That is the problem. That is what we're trying to actually get rid of. Not capitalists that are, in fact, trying to make profits by serving their customers better. All right. And by the way, this is what was called legal plunder by 19th century French economic journalist Frédéric Bastia.

An amazing guy. so many insights into all of these things. I mean, he really understood public choice economics a hundred years before there was public choice economics, right?

And this legal plunder, what he means is that it's theft. An uncompensated wealth transfer is a form of theft, but it's democratically done. Therefore, it is legal.

Notice that the ultimate beneficiaries of these political markets are the rent seekers, special interest groups engaged in lobbying, and in particular the government act. It's politicians and bureaucrats that get campaign donations for creating favors, creating protections for the constituents or industries within their districts. And bureaucrats whose budgets are going up as a result of all of this, they are the beneficiaries. The rest of the public, we are not. We are the suppliers of these wealth transfers.

We are the ones giving up our money. without getting anything in return for it. All right?

Now, this rent-seeking, you can think about rent-seeking as requiring investment. That's what lobbying firms are doing, right? They're investing in getting these wealth transfers. So they are constantly there, whining and dining politicians, promising them these campaign donations and those campaign donations and giving money to their favorite charity, quote-unquote, right?

Things like that. That is an investment, but you have a lot of lobbying firms that are competing against each other. Not all of them can win.

All of these resources are devoted to working within the political machinery. That's what Washington, D.C. is.

Most of those resources are, from the social perspective, totally wasted. They do not contribute to our wealth. They do not contribute to our productivity. they are in fact a total loss for the society.

But they are not a loss, of course, to the individual politicians. Just as theft is quite a good deal for the thief, a bad deal for the society. You see? So all of these lobbying firms, you look at everything that happens in Washington, D.C., just as 2,000 years ago, everything that happened in Rome, and it was the same kind of stuff, right? Just wasting our resources.

in order to play this political game, the Game of Thrones. And those who lose this political game have wasted resources on unproductive ends. So once you start understanding rent-seeking, it's impossible to look at pretty much all of modern politics as anything else except rent-seeking. And the question then is, why do we allow this to happen?

And there is a guy that died about 20 years ago, probably would have won a Nobel Prize. If he had lived, he died at a fairly young age. But Mainzer Olson, that's his name, and he wrote this great book, The Logic of Collective Action, where he explained why we go along with this. He said that politicians seek those policies which concentrate the benefits among the few and make those benefits highly visible while dispersing the costs of a particular policy among the many, making those costs small per person and difficult to see.

All right, so let me give you an example here. So this is what Bush did in 2001. In the election of 2000, presidential election was a total mess, right? The Supreme Court actually had to get involved to determine who won.

Was it Al Gore or George W Bush? And so it was really close. There were hanging chads in Florida. It was a total, really a complete disaster, right? And so Bush with his evil boy genius Karl Rove.

who was his main political advisor. They said, we can't have this happen in 2004. So what we're going to do in these two key states, Pennsylvania and Ohio, they needed to win at least one of these two states, absolutely had to win them. And it's the steel industry that dominates those two states. So what they did is they raised steel tariffs in 2001, which was illegal. It was contrary to all of the treaties, trade treaties that we had.

within the World Trade Organization. Right? And the World Trade Organization flipped out.

All these countries said, what are you doing? This is not right. You know, we are breaking the agreement that we've had. Bush set up to heck with it.

And they ended up being sued in the World Trade Organization courts, which took about three years, right? In 2004, they were determined to, in fact, be acting illegally, and they got rid of the steel tariffs at that point. But look what they did for those three years.

Think about it this way. Let's say that these tariffs raise the price of steel for all of us individually, but just $10 a year. So steel being more expensive and steel being in everything in some indirect way at least, raises $10 a year for each one of us.

Well, there are 300 million of us. That gives $3 billion. I'm just going to pull a number out of thin air.

Let's say that there are 100,000 people involved in the steel industry. So we have $3 billion to be divided among 100,000 people. How much is that?

$30,000 a person. Now, if you're one of the consumers and you're paying $10 a year more because of these steel tariffs, are you going to know about it? Almost certainly not.

If you find out about it, what are you going to do about it? Are you going to start sending letters to your congressman? Are you going to start raising a ruckus? Yeah.

It's only $10 a year. On the other hand, you will... So let me actually say this.

You're going to be rationally ignorant. On the other hand, if you're one of these people that, in fact, benefits from it, if you're in the steel industry, what are you going to do? You're going to vote for Bush. Darn straight. All right?

Darn tootin'. And that's exactly what happened. Bush won in 2004 with a much clearer... margin of victory than he did in 2000. Ann Kruger, who also contributed quite a lot to rent-seeking, she said, what we really should be doing is we should be subtracting a policy's potential magnitude of rent-seeking from expected social benefits of that policy.

So what is to be done about this? This is really depressing, right? I mean, if you look at all of this, you just want to slash your wrist.

You go, oh, there's no hope, right? So Buchanan, in fact, in Tulloch, they said, wait, hang on, there is actually hope. There is a way to try to solve these issues.

And what they did in this great book, Calculus of Consent, they came up with an area of field of economics that we now refer to as constitutional political economy. What they said in there, they said what needs to be done, we need to have this two-level structure of political decision-making. The ordinary politics versus constitutional politics. constitutional politics sets the rules of the game, right? Sets the framework within which ordinary politics can then proceed.

This is very important because with the constitutional level, we can require in the ideal unanimity, right? That everybody agrees to these rules. That's not terribly practical.

So what they said is we can require super majority rules. A great majority of people, in fact, agree to the rules of the game, which is exactly, of course, the way the US Constitution is set up. In order to get a constitutional amendment, what do you have to do? There are many steps, but ultimately, you need to get how many of the people to vote for it? Three quarters of states, in each state, I think it's two thirds of the people or something like that.

So the threshold is really high. You've got to have pretty widespread agreement on a particular policy in order to have that become the rule of the game. Buchanan says, the whole analysis in our book could have been interpreted as a formalization of the structure that James Madison had in mind when he constructed the U.S. Constitution. Or at the least, the analysis offered a substantive criticism of the then-dominant elevation of majority voting to sacrosanct status in political science.

So he said, you know, enough of this nonsense that as long as 50% plus one want something, they should get that. That is not what a free society is about, right? So here is a great quote by James Madison that refers to this. If men were angels, no government would be necessary.

If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this. You must first enable the government to control the governed, and in the next place, oblige it to control itself.

A dependence on the people is no doubt the primary control on the government. Yeah, good luck with that. But experience has taught mankind the necessity of auxiliary precautions.

The auxiliary precautions are the Constitution. That is what the Constitution is supposed to do. And in a constitutional republic, that's, by the way, the difference between a republic and a democracy. In a democracy, everything is decided through majority voting. What a horrible system that would be, right?

A republic. sets up a constitution and says some things you do not get to decide by majority, by simple majority. Some things are more important than we allow people to vote on it, right?

And that's what we have. That's the ideal. That is how you assure a free society, right?

Is that you actually have a republic, not a democracy. And in a republic, our allegiance is not to the government. Our allegiance is to the constitution, right?

I'm a naturalized citizen. When I took an oath of citizenship, I gave my allegiance to the Constitution. There was no mention of the U.S. government. This is, by the way, why I hate the Pledge of Allegiance.

What a horrible thing that is. In an unbecoming of a free people, why should we pledge allegiance to the flag? What does this flag represent? The Constitution?

Well, I don't know. I don't think it does in the minds of many. It represents the government.

And by the way, who is this? It's Odysseus. Odysseus in the Odyssey, right?

What is this referring to? The sirens. The sirens. So when the ship is passing by the sirens, the sirens had this beautiful song that would hypnotize the sailors.

And they would jump in the water in order to get closer to the sirens to hear the song better, and they would drown. Now, Odysseus knew this, so he had all of his men put wax in their ears so they would not hear the siren call. But he wanted to hear it. He knew he couldn't trust himself though, so he had this man tie him to the mast, so he would not be able to jump across the, or jump overboard and die, right? That's what we need to have our government do, to tie its hands, to understand it cannot trust itself.

That's a very difficult thing to do, really hard, which is why we have anarchists out there that say that, oh, it's never going to be done. Star Wars 2, the attack of the clones, there is Anakin, right, who becomes later who? Darth Vader, of course. I hope it's not a spoiler alert here.

And then, of course, we have younger Obi-Wan Kenobi there, right? And they're guarding Padme, right, who is a senator or something. And they're standing outside of her door during this scene and they're discussing things, right?

And Anakin, who's fallen in love with Padme at this point. He says, oh, I'd much rather be dreaming of Padme. Just being around her is intoxicating. Great script.

Obi-Wan Kenobi says, be mindful of your thoughts, Anakin. They betray you. You've made a commitment to the Jedi Order, a commitment not easily broken. And don't forget, she's a politician, and they're not to be trusted. Anakin says, she's not like the others in the Senate, Master.

Obi-Wan, it is my experience that senators focus only on pleasing those who fund their campaigns. And they're in no means scared of forgetting the niceties of democracy in order to get those funds. Anakin, you know, just like a petulant teenager, right?

Not another lecture, at least not on economics or politics. He actually says that, right? While all of this is going on, there's some kind of a creepy crawler that's coming towards Padma to kill her. So he kind of keeps cutting back and forth, and you can't really hear it very well. If you have the subtitles, you can see it very clearly, right?

And besides, you generalizing, the chancellor doesn't appear to be corrupt. Who's the chancellor? Well, he's the later emperor, and he's in fact manipulating everything in order to get the power, right? So the chancellor doesn't appear to be corrupt.

Obi-Wan, Palpatine is a politician. I've observed that he is very clever in following the passions and the prejudices of the senators. Anakin, I think he's a good man, which is, of course, why he becomes Darth Vader.

goes to the dark side, right, and starts serving the emperor. So even in Star Wars, there is public choice economics. All right, thank you very much.

I appreciate it.

Transcript for:Public Choice Economics Overview

Transcript for:
Public Choice Economics Overview