What Does Economics Have to Say about Civics?
Updated: Sep 22
EconBuff Podcast #58 with Rex Pjesky
Dr. Rex Pjesky talks with me about what economics has to say about civics. Dr. Pjesky begins by defining what economics is and how he views it. Dr. Pjesky then defines civics and briefly explores the academic landscape of research on civics from various disciplines. We explore what economics can have to say about civics given these two definitions. Dr. Pjesky argues that economists are well equipped to approach the issues in civics because economics is a science concerned with coordination between strangers and the fundamental issue in civics is coordinating strangers. Dr. Pjesky introduces the ideas of Nobel Laureate James Buchanan and his pioneering work on public choice and how economics applies to civics. We discuss Buchanan and Gordon Tullock’s work in some detail. Dr. Pjesky outlines how this branch of economics applies to elected officials and to regulators, focusing in particular on corruption and regulatory capture. Finally, we consider whether democracy can survive if political actors are self motivated as Dr. Pjesky argues and we conclude with Dr. Pjesky’s view on cynicism in civics.
SE7: E2
FOLLOW ME HERE:
Amazon Music: https://music.amazon.com/podcasts/0434c041-ec75-443e-8002-68cfcdd66db6/econ-buff-podcast
Facebook: https://www.facebook.com/econ.buff.1
Substack: https://econbuffpodcast.substack.com/
My website: https://econbuffpodcast.wixsite.com/mysite
Thumbnail photo credit: ChatGPT AI Image Generation
Music Credit: https://www.youtube.com/@UCqXsGBa-OplAomMuPqmmPKg
LEE STITZEL: Hello and welcome to the EconBuff podcast. I'm your host Lee Stitzel. With me today is Dr. Rex Pjesky. Rex is a professor of economics at West Texas A&M University. We've debated how many times he's been on the show now somewhere between 15 and 20 times. So definitely a frequent flyer. So I want to welcome Rex back. Rex, welcome to the podcast.
REX PJESKY: It's good to be here again. Thank you.
LEE STITZEL: So our topic today is what does economics have to say about civics. Before we get into that, I just wanted to establish what economics is. Probably don't really have an extended discussion about this anywhere on the podcast, which given what I'm interested in and since you're the most frequent guest on the podcast, what you're interested in is probably borderline criminal. So, let's just start with a little discussion on what is economics and then we'll work up to tying it to what it has to say about civics.
REX PJESKY: Right. Very good. That's, I mean, that's a good question. I think if you visit most principles classes, most economics textbooks, you're going to find some definition of economics that involves the study of choice in the presence of scarcity. So what economics is usually defined as is the science of how individual businesses, household actors, just individuals in general make choices among alternatives in the presence of some sort of budget constraint. And so economics is the science of choice. And that's a really good economic definition. I like to be a little bit more fundamental in my definition of economics. I like to think of economics as focusing on exchange and this goes back more towards you know Adam Smith's idea in The Wealth of Nations. I think in terms of a more modern treatment it falls in line with James Buchanan, the 1986 Nobel laureate in economics and Buchanan thought that economists should focus on the idea of exchange and the reason that he did this is because he realized that economic activity doesn't happen in a vacuum or rather if it does happen in a vacuum, it's not very interesting. So if you expand on that, economics becomes the study of how people coordinate their actions.
Okay? So economics becomes the science of how strangers cooperate and compete with one another. And that's a much more rich definition of economics.
LEE STITZEL: Maybe one of the most profound things that I've learned from you that I bring into my classes, particularly my principles classes, is that a major part of coordination is learning when to cooperate and when to compete. So I kind of hear that in the definition that you just shared. Do you think that economics and that study of coordination is it limited to coordination between strangers or do you think the institutions that we deal with are mostly centered around coordinating between strangers?
REX PJESKY: I think economics has the most interesting and unique things to say when we talk about the study of how strangers coordinate their activities. Of course, the ideas and the tools of economics extend into you know like even family dynamics and you know how business partnerships even people that know each other might conduct exchange and might coordinate and compete with one another. But I think the richest contribution of economics comes from you know the coordination among strangers. If you're going to have a modern society that we know about you've got to have some mechanism that allows strangers to cooperate and to coordinate. Coordination is a much broader term. So, you know, when you think about the microphones that we're talking into, the clothes that we're wearing right now, the technology that a listener is using to listen to this podcast right now, and basically everything that we buy with our money requires us to have some sort of coordination with strangers. So, I don't know the person who built the microphone that I'm speaking into. I don't know the people who grew my food to a great extent. I don't know who, you know, bolted together my car, etc.
So, almost no one in what we would consider to be a modern economy knows the people who built the stuff they're consuming. So there has to be some way that humanity has found to coordinate the actions of strangers. So I'm looking at an iPad that was assembled in China. It's got components from all over the world. And it's sitting right here in front of me. I was able to go to a store and buy this thing and use it and consume it for myself. That requires the coordination of perhaps millions and even billions of people and without that coordination mechanism we couldn't have the world that we have right now. So economics is more than anything else the study of how those relationships emerge from people's self-interested goals into something that can create the products and the relationships that produce the products that we all take for granted and that we all derive tremendous satisfaction from.
LEE STITZEL: Yeah. It's a puzzle, right? Because if I think about my life and my experiences, it's centered on interactions mostly with people that I know. Spending time with my wife and kids, seeing my family, seeing my friends, people I know at church, people I know at work, people I know in my personal life. But that can mask the fact that a tremendous percentage of my interactions are implicit, like you're describing. Things that are shaping my world are done by people that I will never know. And so a lot of that has to do with the material world that we interact with. Of course, I don't think economics is limited to that. That's going to be part of what we're arguing today. So that I think is what makes the study of economics interesting because there's a, I don't want to use the word...
yeah, we'll say tension between the way I think about my experience of my life has to do with people that I know and so I have this almost unobserved, it's not actually unobserved, but I just don't think about it very much, interaction that requires coordination between a bunch of strangers who do not know me who will never know me who are not interested in knowing me and yet, especially when it comes to interaction with the material world, is actually very rich. That's, I think, what allows economics to have something interesting to say of course we want to talk about civics today so the transition there is almost it's almost perfect right because we often think about economics as what's going on with our exchange in commercial society, our exchange in terms of what we buy and consume, what we use to live and then hopefully to flourish. But there's a similar corollary of exchange and coordination between strangers in civic life. Do you view that as sort of a domain that economics can speak to?
REX PJESKY: I mean, absolutely. So the tools of economics are really good at describing how large numbers of people coordinate and you know as you said the beauty of this, and the beauty of the modern world, which exists whether or not we study it through the lens of economics or not which I find to be very humbling and interesting. So, you know, if I plan on, you know, after my workday is done, if I plan on going across the street from the university to the grocery store and you know, buying some apples to have with my, you know, dinner tonight, I can go over there and exchange a few green pieces of paper for some apples that I can take home and eat. That is a rich part of the experience that I have as a human being. I don't think about it and that's the entire point of the marvel of the modern economy. So, we can go to a grocery store and swap a little bit of money out and buy apples that we absolutely know nothing about other than the fact that they're sitting on a shelf in a grocery store and we can buy them.
We don't understand or even know the processes that brought those apples to me as a consumer, as an individual to buy. I don't know the apple grower. I don't know the apple shippers. I don't know who built all the machinery that involved shipping the apples or growing the apples. I don't understand how to grow apples myself. But yet through the modern coordination that we would call the modern economy, I can consume those apples without a second thought. And so when you talk about we don't even think about our relationships with strangers. Well, that's the feature of the system. It's not a bug of the system at least in my mind. And it makes it a marvel. It makes it a miracle that we can consume products from all over the world produced by strangers that we don't know that we couldn't hope to know. And that process works so well that we don't have to think about it at all. So, if I go to the grocery store after work today and they don't have apples, I will be shocked to my core and wonder where are all the apples? Because every time I've sought to buy apples, I've been able to buy apples.
Even though I do not understand the process that led to those apples being on the shelf for me to buy for, you know, buck and a half or $2 a pound or whatever apples cost. That's a remarkable feat and it allows me to focus all of my energy on cultivating the relationships that do matter to me with my family, with my friends, with my church or civic group, whatever it is for different individuals and economics is mostly about that. Well, as it turns out, civics is also the study of the coordination among different individuals. So, with civics, we generally don't think of you know, producing apples or iPads or anything. With civics, we generally think about a group of people deciding on rules that determine outcomes for all of us. Okay? So civic processes are our governments. So basically you know what are our taxes going to be you know how are we going to tax everyone and what's the tax revenue going to go for? So what's the structure of public schooling going to be like? You know how are we going to organize you know the things that we expect from municipal governments? So you know streets and water you know water provision.
So civics is the study of how strangers coordinate their activities using political processes. Okay. So how do we vote on these things? Who gets to decide? Is it majority rule? Do we vote for people that decide for us? And so the realm of civics studies the same basic idea of coordination among strangers. Because again once you get to a group of a certain size you can't coordinate without some sort of mechanism to do so. So, if you're talking about you know a family within a household where you've got two parents and some kids or whatever then everybody can just talk and decide and come to consensus and everybody's got enough information to decide what's best for everyone and everybody has a very, very defined role in those kinds of systems and so people can just decide. But when you get to the point where you've got a community of, you know, 10,000 or a hundred thousand or a million or in the case of the United States, you got 350, you know, 330, 350 million people, whatever the population is of the United States, you can't talk these things out with people that you know and decide what you're going to do.
You have to have some political process that determines what all of the policies are from the political perspective. So that's what civics is. That's what economics is. And economics as a discipline has developed all kinds of theoretical and empirical tools used to study human phenomena in both realms. So economics has a tremendous toolkit for studying you know the commercial relationships among strangers. Those same tools can be used to basically study the civic or the political relationships among large numbers of strangers. So it's the same kind of problem but you've got different institutions that have arisen. But the same toolkit can be used to study the outcomes in both cases.
LEE STITZEL: So let me put it this way and see if you like it. Economics is about solving the coordination problem particularly between strangers. The fundamental issue in civics is solving a coordination issue between strangers, particularly in the political realm. Is that...
REX PJESKY: That's exactly correct.
LEE STITZEL: So, to me... I'm biased. I'm an economist. Of course economics has things to say about the public sphere. Let me ask you one question before we move forward. I suspect that if you asked a different discipline, if you asked a political scientist what civics was, I don't think they would frame it in terms of coordination the way that you just did. Am I wrong about that, or what do you think?
REX PJESKY: I wouldn't expect that they would and in fact I would think that it would be a very good thing if they didn't. So different disciplines in what we would consider to be social scientists, social sciences are going to have different frames of reference and they're going to have different toolkits to approach problems that are otherwise similar. So, you know, sociology, political science, psychology, you know, the other business disciplines that might be also considered social sciences, social work, you know, even people that you know, specialize in things like education, all of these things are in one way or another, social sciences, they're all going to have different toolkits and different perspectives on these problems, and they're all going to approach them in unique ways. And they've all got their ability to contribute to things. So, you know, political science is going to approach the civics problem more as a matter of you know, participation and basically you know, different ways of deciding rules. I think of course if you had a political scientist on here they might give a definition that's going to be a lot more reliable than whatever I would think about political science.
History is another one is going to have another certain way of looking at the problems that we would call civic problems. So how do how do people coordinate their activities using various political processes? Now, I think that if there's somebody out there that's a historian or a political scientist or a sociologist, if they hear my definition of economics and how it applies to civics, they're going to say, "Oh, yeah, of course that's fine." Yeah, that's a really good way of framing it. So, the political process is just a coordination mechanism where we have you know, different ways of voting. For instance and of course in a democracy that's going to be the big question. How do we vote on these things? What do we vote on? What do we not vote on? How does something come up to a vote? What's the agenda look like? And if you want to go broader and deeper back in history, you know, different societies have had political processes that don't rely on voting. Voting is relatively new in the human experience.
So you'd have monarchs; basically you'd have some sort of tribal leaders all right you might have religious leaders deciding everything if you've got you know in some societies in the past. But all of those arrangements that humanity has taken to solve the problems in what we would call civic life to coordinate the members of society through political processes are going to have something to do with how those public decisions get made.
LEE STITZEL: I think of political science as being interested in technical aspects of how the coordination problem which is what you described, right? Which system? How do you get participation in the system? Et cetera, et cetera. I was also thinking there's probably been a shocking amount of decisions like that being left to fate or luck or chance I could think of cases where there are stories about political leaders literally casting lots and leaving these things or trying to determine if the gods are on their side and then you know having a situation where well I was going to go to war but two black ravens flew over the camp so the gods are against us so maybe we'll sit this one out you know so of course to us, to the rational mind, that seems insane, but well, you have to have some way of figuring these things out.
REX PJESKY: Yeah. I mean, so that would be the case. I mean, how many birds flew over last night, that's going to determine what we're going to do. But we think of that as random. They think of that as signs from the gods. Which in a world like ours where we have a tendency toward thinking everything in the world is reduced to the material, that's very confusing to us. Of course, we're wrong about that. But that doesn't necessarily mean their way is superior, obviously.
LEE STITZEL: So, now that we've kind of laid that out, how does the rubber meet the road? How do the tools that economists use to think about commercial society apply to the coordination problem in civics?
REX PJESKY: Well, I mean probably the individual's research program that sort of set the groundwork for all modern economic thinking that is basically encapsulated by your question would be the would be James Buchanan's research. All right, which basically started, maybe, in the '50s. All right. And what Buchanan what his breakthrough was that he wanted to study political actors using exactly the same tools that economists used in household and business decisions. So, in other words, Buchanan assumed that political actors responded to incentives just exactly like a business executive would respond to incentives, just exactly like a consumer would respond to incentives. So whether or not you're talking about elected leaders or monarchs or voters or any other group or person that's acting within the political landscape, you know, acting as a political actor instead of a market actor. Buchanan said, "Well, why in the world would we ever assume that people don't respond to incentives when they become bureaucrats or when they become elected leaders or when they are selected as the monarch or when they step into the voting booth. They respond to the same structure of incentives as someone does when they're out shopping for apples.
LEE STITZEL: What's Buchanan responding to? Is that a reaction to an academic world that's trying to model how governments make decisions and then therefore assuming that the leadership in that model whether democratic or monarchical, has pure motives in terms of just maximizing the welfare or is he even responding to something older than that?
REX PJESKY: Well, I think the belief, you know, among and I use political scientists in the broadest sense, so I'm not talking about like professors of political science today, but sort of the history of political science has always assumed that there was a romance to politics. So a lot of thinking throughout history has been to assume that people in the public sphere seem to act above these concerns. So one of the most famous phrases attributed to James Buchanan is that people should study politics without romance. And what he meant by that is that we should analyze government and politics using the same realistic assumptions about human behavior that economists use for market participants and not come up with some idealized notion of benevolent public servants. So I think we do have the notion of and certainly throughout history and even today we have this idealized notion that public servants are somehow 100% benevolent and people who are elected or people who are you know or bureaucrats or something like that.
They are not subject to the same sort of, for lack of a better word, frailties of human behavior that causes us to be imperfect that causes us to be self-interested at the expense of others and so if Buchanan was responding to something that has existed in people's thinking, it was basically that people don't turn altruistic just whenever they get into government and I think that for you know perhaps centuries of political-science-type thinking or political philosophy type thinking the problem has always been that if we want government to serve the public interest in a pure and benevolent and even altruistic sense then the key is to make sure that we have more representation and more transparency in the process of selecting our policies and leaders. And what Buchanan said was those might be good things and worthwhile things, but it's not going to guarantee the outcome that you necessarily want. So if everybody participates in the political process, we're still electing leaders that respond to incentives. And so if the incentives are bad, we're going to get bad outcomes even if everybody participated in this election.
LEE STITZEL: I think even now we tend to have a romantic view of the public servant and the leader. I think because at least in part those people are presenting themselves that way, right? Nobody campaigns and says, "I'll be your Texas state representative, and I'll respond to whatever incentives are placed before me in a way that helps me best navigate my role as Texas state rep." Right? They get up there and give very grandiose, very idealistic, promise things they can't deliver, etc., etc., etc. And probably the political narrative that happens most of the time now is your guy's corrupt so he's just going to try to get things out of the system for himself like literal kickbacks and such and my guy's pure and he's really here for the people that's going to be really common. I think Buchanan's message. And it almost couldn't be more timely.
REX PJESKY: Yes. Well, I mean, it couldn't be more timely now because it's always timely. Everyone who seeks public office is going to claim that they will go to Washington or Austin or, you know, whatever the capital is in the unit that we're talking about, and they're going there as a public servant to serve the public interest. Have you ever seen anyone running for public office not say that? So everyone is going to appeal to this romance of politics that people seem to have. So we want our leaders to be altruistic and you know the people that we vote for the people that want to take society in the direction that we think it should go. Of course, we think, well, this is in the best interests of everyone when it may not be because people disagree about what the best interests of the people are. So we see that all the time in public discourse. So both sides and you know when in the place in the time that we're recording this podcast it's you know Republicans and Democrats. So, Republicans and Democrats both claim that whatever their desired actions are for the people.
And that kind of I would call it naive thinking completely ignores the fact that you know political institutions operate within real incentives and constraints.
LEE STITZEL: Do you think that's more obviously true with monarchs that they're not necessarily strictly maximizing the welfare of their people and instead might be responding to a certain other set of incentives and then democracy masks that because that's the romance of our time, right? Listeners to this podcast are going to go, well, yeah, of course monarchs are selfish welfare maximizers of themselves and not of their people, but democracy is not like that. Democracy is much better.
REX PJESKY: Yeah, I think most people at least in the United States would think that. And you know, I would have to look at the incentives of these kinds of things. So, I have no problem with anyone who thinks that, you know, democracy as we define it in the modern world is better than monarchy and but what Buchanan would say...
LEE STITZEL: That's an acceptable position or, I don't know, a scoreboard argument?
REX PJESKY: I think it might be a scoreboard argument. That's, I mean, that's a good question. But what I would need to basically justify that might be a scoreboard-type argument. So it's like, wow, you know democracies perform better economically, better in, you know, you pick the dimension. Okay it wouldn't have to be just strictly material economics. It could be anything else. And so give me a metric and let's look at history the best that we can. These kinds of things are messy, you know, to look at and say, wow, democracies perform better on these dimensions than monarchies, so democracies are better. You know, someone might be able to find a set of things that you know more authoritarian regimes do. There are people that write in politics today that admire certain more authoritarian regimes that don't have some sort of participatory political process that function better because they can just do things without having to go to the people. All right? There are individuals that will admire societies that have governments that can just do things. Okay? So, I don't think that there's a broad agreement on democracy itself being a good thing in our society in the United States as a lot of people might think.
Okay. Now, here's what Buchanan would say about all of this. You know, far be it from me to speak for Buchanan, what people should do in his, you know, politics without romance idea, that quote is compare real political institutions as they actually operate with the real incentives and constraints that exist rather than comparing them to some idealized utopian models of how they might work in theory. So we have this utopian model of how a democracy would work and you know where the politicians you know get together and talk about what's best for the people and then just do it. There may be people out there that idealize monarchies or other what we would consider to be like more authoritarian states that might say well we can achieve a utopia through these means but what economics and Buchanan's line of thinking would contribute is: let's compare again the real political institutions as they actually operate not how we think they operate because how we think things should be doesn't really make any difference. All right? So, how does this bureaucracy that sits within a democracy, how does it really function? Is it really satisfying what we could consider to be good outcomes for the people?
So if we have an authoritarian regime that acts in various ways, what are the real incentives and constraints facing those kinds of government, and does that have good outcomes for the people that live in those societies with those kinds of political processes?
LEE STITZEL: So political actors respond to incentives. That's probably the bottom line of what you're saying.
REX PJESKY: That is Buchanan. That probably could have been Buchanan's Nobel laureate speech. Political actors respond to incentives. Thank you.
LEE STITZEL: Thank you very much. Yeah. Yeah. Any questions? So, I'll take questions. That would probably be very interesting. What are some ways that works out? We sort of talked about it at a high level. So give the listener some grip, some handles, something to grab on to and say, "Okay, I think I understand what he's saying in a generic way." All right. Give us some examples of how that would play out. How economists have researched that. How Buchanan's work might have evolved. Give them some handles.
REX PJESKY: Okay. Well, so let's think about a regulatory agency. So what a lot of people might do is that we tend to assume that a regulatory agency automatically protects the public interest. Okay. So, we've got you know, we have a regulatory agency that's supposed to make sure that our food is safe to eat. We might have a regulatory agency that is to ensure that our rivers are clean, that our air is clean. We might have regulatory agencies that are supposed to protect us from things like workplace discrimination and you know and on and on and on and on. So what Buchanan and his students would have been interested in is instead of assuming that these regulatory agencies automatically protect the public interest we should ask what regulators, politicians and lobbyists personally gain or lose from particular rules and look for outcomes from regulatory actions based on those incentives. So what economics brings to the civic discussion again are these powerful set of theoretical and empirical tools where we can actually answer questions like that using real data based on real theories as opposed to thinking that wow we have an agency that's supposed to protect the food supply and so well that's what they do.
Of course they do. I mean, why would you think anything else?
LEE STITZEL: I think some listeners are listening going who thinks like that, and my answer is: we all do. Everybody. The answer is: what does the U.S. Department of Agriculture do? It helps farmers. What does the FDA do? Well, you know, they make sure our drugs are safe. You're falling into politics with romance when you do that.
REX PJESKY: That's exactly right. So, you know, the FDA is a really, really good example and economists have done quite a bit of this. The FDA is filled up with people who have really, really complicated relationships with industry officials basically. So, you know, the FDA might be swayed by incentives that are given to them from industry people. And again, the worst way that we can envision this in the context of an FDA type situation would be a case where there's a direct payoff from a drug company to a regulator in order to get a drug approved that perhaps otherwise shouldn't be approved. And again, that's the most concrete and perhaps easiest to understand and maybe the worst instance of what Buchanan was saying about thinking about how these political institutions like the FDA, like the EPA, like the USDA, like OSHA, like all of these different regulatory agencies, and elected officials themselves, actually behave. So, are they captured by special interests? And you know, that's something that everybody who thinks about politics at all certainly understands happening. But it always seems to be the other people that are captured by special interests.
And my people you know, whoever my people are, however you define my people, they are always serving the public interest. It's the other, you know, it's the other side. If there are two sides of the issue, there's probably almost always more. But the, you know, the people on the other team, they're all captured by special interests. The implication of that is that if you're captured by special interests, you're not acting in the public interest. But you know, that would never happen to the people that agree with me.
LEE STITZEL: So how does that work out? You laid out the most extreme, most obvious, just kickbacks. Listeners are going to go, "Well, political scientists probably study corruption." I think where economists really shine is probably the next tier or two down of obviousness on how regulators would respond to incentives. How might that work out? Can you think of other things that might be specific to like a regulator?
REX PJESKY: Yeah, I mean, what you're talking about there is what Buchananite-type thinkers would call regulatory capture and also rent-seeking. So an industry might lobby a regulatory body for rules that for instance might limit competition. So you've got licensing laws, entry barriers, you know, technical standards that favor, you know, that favor incumbents. And so what that does is by capturing the regulators and by limiting competition in a given industry, that might not serve the public interest. That might serve the interests of firms currently in the industry. And so let's, you know, let's just say I'll give you an example of this that might be in the spirit of what you're asking. So, I've noticed that big companies tend to favor higher minimum wage laws relative to smaller companies. And so, well, why would they do that? Why would they do that? Well, if you're a big established company, you might be able to afford to pay legally mandated wages. You might already be paying wages that are higher than you're proposing be legally mandated. Well, how does that serve you? How does that serve your interest?
Well, if you can cause a startup in your industry to have to pay high wages at the very beginning, it might discourage those startups from becoming startups in the first place. That limits competition. So, you maintain your larger or your monopoly position based on keeping your competitors out of the marketplace through regulation.
LEE STITZEL: And you also get the bonus of getting goodwill from people that want minimum wages to be higher. So it's almost like a double bonus.
REX PJESKY: Another way that regulatory capture can happen is that you know a lot of firms will hire ex-regulatory people. So, you know, you might hire someone to be on your board of directors or whatever. You know,, you might be a financial firm or a bank or something like that and you might hire someone that worked for the SEC for 20 years and so you get them on your board. Well, that individual has got contacts that still work there. So, that eases the communication between the two groups. So, you know, you could get favorable treatment because you're basically writing the regulations and the rules that are going to govern you. And again these revolving-door policies make that easier. What's even more sort of insidious would be that if you work for the SEC today and you're in the middle of your career, you might be looking for your next big promotion. And so you might establish yourself as someone who is friendly to the industries that you're regulating in hopes of getting a job with them sometime in the very near future.
So if you write favorable regulations for the big companies in the industries that you're supposed to be controlling, well that might make you an attractive executive for them sometime in the future. So, you know, there are lots of different ways that economists and others, I would imagine, have been able to imagine that these things happen. And the toolkit of economics makes massive contributions to this process because we can actually, you know, economists can actually use all of our training in the economic way of thinking to come up with hypotheses that we can test to see if these things actually happen and are a problem. And then we can use our empirical toolkits to basically measure this. So, you know, I just, you know, came up with an idea right now. So, I'm a regulator that works for, you know, some SEC-type thing. And my goal is to get a big high-paying job, big cushy job with a bank someday.
So, if I'm easy when I'm writing my regulations and when I'm interpreting Congress's rules, if I do those things in a way that's sort of easy on the banks, then I'm demonstrating my value to those institutions and they might hire me at a higher salary than I'm getting from the federal government sometime in the future. So, that's a testable hypothesis and that's an example of the coordination problem.
LEE STITZEL: That's an example of the coordination problem. In a situation when they ought to be adversarial.
REX PJESKY: Yes.
LEE STITZEL: It's not exactly competition. In a situation when they ought to be adversarial, they're cooperative.
REX PJESKY: Yeah. And now see the politics without romance says that most likely I'm stepping out on a limb here. Most likely the public interest would expect that relationship to be adversarial. That would be the entire point. So the regulators, again, if we're talking about the financial sector, all of the agencies that regulate various pieces of the financial sector, whether it's banks or insurance or hedge funds or whatever, there are a lot of them. I think most voters would almost assume that the regulators that work in the public are working in the public interest. And since we've identified these industries as needing regulation through the political process, that implies an adversarial relationship between the two. Okay? So, the regulators are going to want to look at how banks behave with the bias of wanting to change the way banks inherently behave. So, that's what I mean by adversarial in these kinds of relationships. But if there's the possibility of regulatory capture then there might be a more cooperative arrangement between the people who work in these two areas.
So that's another contribution from Buchanan is to realize that whatever kind of agency that we're talking about, whatever kind of industry that we're talking about, those are all filled with self-interested individuals who are acting based on the incentives that their jobs give them and the constraints and the power, for lack of a better word, that their jobs give them. So in that sense there's no such thing as the SEC, there's no such thing as Bank of Whatever, okay? There's no such thing as these things but rather those institutions are filled with people that are acting with their own agency based on the constraints and whatever preferences they have. So again that leads us away from the idea of politics with romance and it leads us toward the idea of politics without romance because we realize that every single one of us has our own agency and we will act in our own self-interest. All right. So the trick for society in general is to try to have policies in place whether or not they're laws or even social norms might do it. There will be all kinds of things that might help achieve these kinds of ends.
The goal is to align all of these individual actors' incentives with whatever can be correctly deemed as the public interest
LEE STITZEL: Is the idea that only individuals act and that collectives can't act, is that a uniquely James Buchanan idea? That's a big idea..
REX PJESKY: No, I mean, that's a big idea. Buchanan certainly would have thought that, but a lot of people think that doesn't originate with him. I don't think it originates with Buchanan. So, I wouldn't even venture a guess as to who that originated with. So, I mean you could find it in Hayek. You could find it in a bunch of social thinkers who are economists and non-economists. But this idea that only individuals act is something that is going to be realized across all times and all disciplines.
LEE STITZEL: It's a little weird because the idea that people act on behalf of groups, that they represent them, is a very old idea. I mean, that goes probably all the way back in time. And then it's like because we live in an era that thinks a lot about individual liberty, you think we would understand that better, but somehow we almost seem to grasp that less well: only individuals act. So the SEC couldn't have done anything. It's the people that work for the SEC that would have done things and they do it on behalf of the SEC, you know, as some kind of collective, as some kind of group. It's a little puzzling to me that it seems like maybe we of all people should understand that best and it seems like maybe we don't. I mean, a way that you could
REX PJESKY: Yes. I mean, a way that you could think of this would be to think of the SEC as not an independent actor, but the SEC is a framework of rules and institutions that provide incentives for individuals to act in certain ways.
LEE STITZEL: And I think this is sort of the end result, the end explanation of what Buchanan's research program was contributing to the world: this idea about institutions?
REX PJESKY: Yes.
LEE STITZEL: Can you give us a synthesis of that?
REX PJESKY: So, you know, the SEC, any agency whatsoever, is basically a framework. It's a set of rules. It might have goals. It might have missions. You know, there might be rules that specifically say this is what you can do, this is what you can't do. The people who work for these places exist within that framework. They have their own self-interests. And if the government agency is a really, really good one, really well designed, then it's going to be designed in such a way either through transparency or absolute rules that basically will dictate how someone will act in the public's best interest. I think that, you know, this is sort of beyond what Buchanan is talking about but you know think about a real estate agent or you know somebody who's a financial planner. All right, those professions and a lot of professions basically have rules in place that are supposed to guide the interests of whoever the agent is and make sure that those actions are aligned with whoever the customer is. So if I'm a real estate agent, there are all sorts of rules, we'd call them ethics rules, but there are all sorts of rules that dictate my behavior.
The root cause of those rules, the reason those rules exist, is to make sure that the real estate agent's interests are aligned with the home buyer or the home seller. And again, economics would give us a framework to determine whether or not or to what extent those rules actually work in that. And so, economists would have all sorts of ability to study you know, when you work with a real estate agent, are they really looking out for you or not? Because that's the purpose of the rules to make sure that the incentives of the people that you're dealing with are aligned with yours. And to go way back in economics, this is basically what Adam Smith meant when he talked about the invisible hand was that with the invisible hand, you could have a set of institutional rules, for lack of a better word, that would basically align the incentives of the people that are participating in the same markets that you are as sellers to have the same interests that you do as a buyer.
So when I go eat at a restaurant, I know that the people who run the restaurant do not want to serve me food, say for instance, that's going to make me sick. Okay? So market institutions and government agencies could have a role in this too. I'm not making any judgment about where these incentives and rules come from.
LEE STITZEL: It's from markets.
REX PJESKY: It's from markets. Yeah. But you know I would grant roles for all different kinds of things. So if the seller is going to maximize profits, they're going to want to provide a good experience to the consumer in every single way. So when I go sit down in a restaurant to eat, I'm fairly confident that the cooks and the owner of the restaurant, their incentives are aligned with mine. I want to have a good dining experience. They want to give me one. There's no problem with that whatsoever. So what you need to have in the realm of like market activity and public activity is that you want to have institutions that evolve, that emerge, or are designed. I wouldn't quibble with the you know how these things come about. That would be a you know that might be a completely different discussion. But the goal that we have for these institutions should be that we make sure that these agencies, legislative bodies, politicians, bureaucrats, whatever. We want to make sure that the incentives they face are aligned with what we would consider to be the public interest. And that has to have some underlying process, or that has some underlying process that doesn't guarantee the result.
Again, going back to Buchanan's politics without romance. It is a critical mistake for people that think about these questions to assume that outcome, to assume that just because we have a regulatory body that they act in the public interest. Just because we have an SEC that regulates banks or FDIC that insures banks or whatever just you know just the Federal Reserve that regulates banks. It is a fatal mistake to assume that we're going to get the outcome just because these agencies exist.
LEE STITZEL: See, markets align people's incentives. I think a major part of that is because participation is voluntary. And so we have this extra problem. Maybe it's not extra, but this problem in coordination in the public sphere because it's by nature not voluntary. I don't get to tell the police officer, well, I didn't vote on the rule that said the speed limit should be 55 here, so you can't give me a ticket. The officer is going to be like, sir, step out of the vehicle. So that does I think add a dimension that's really difficult and in my estimation makes the fact that we approach it with romance almost worse. We need to be more attuned to the incentive problems that are at play rather than less.
REX PJESKY: I mean I would agree with that specifically because any result that we get from the political process ends up almost being not voluntary. So your example is a good one. If the speed limit is 50 miles an hour, it's 50 miles an hour. And if you go above that, then you have broken the law. You've broken the rules that society has decided. And keep in mind, it doesn't make any difference what the process to decide that 50 mph speed limit was at that point. You have broken that rule. And then civic society, the political process, is going to have some system in place to detect and enforce those rules and punish the people that break those rules. So the idea of being what you could call a political fundamentalist is not a good way to approach the world. Just like you know a lot of our colleagues in economics might be termed as market fundamentalists. I think that's a mistake to look at the world through market fundamentalist eyes because we know anybody who is not completely naive knows that you're not always going to participate in a market process and get what you want. We are skeptical of the businesses that we patronize.
So, when I go to buy a car with a car salesman, I'm skeptical of the salespeople at the car dealership, I'm a little skeptical of the people at the restaurant that's serving me food. I'm skeptical of all of these things. And I should constantly be evaluating, as a consumer, whether the products that I'm buying are somehow harmful to me because of a misalignment of incentives. A lot of people who have attitudes about the political process don't have the same skepticism with the political process. So, I don't assume that just because we have a government agency that protects workers that they're always going to do their best to do that any more than I would assume that the private individuals that I work with are always going to do their best to effectively serve me.
LEE STITZEL: That's actually a concise insight of economics. When I interact with you and I know clearly what you want from this interaction even if it's not really adversarial but we're engaged in exchange I know you want my money and you know that I want whatever you're selling a meal or a car or whatever that makes it easier for me to evaluate those terms of trade when we conceal that in a political process and we say well the FDA wants safe drugs out there but as you've discussed, in some senses they don't. They want a job and they want to make sure they have somewhere to go after their FDA career and they want prestige or a bigger budget for their department or they want to move up in the FDA that's what those people want. So then our interaction with them, one, it's not direct, it's indirect, which probably makes it more difficult, but it also makes it harder for us to evaluate what incentives they're reacting to. So it makes it more important that the political process is aware of what Buchanan is trying to teach us. So let me turn, unless you had something to say about that. Let me turn a little bit.
You talked about regulators and then you talked about this problem with how people that should represent us need to behave and that institutions should align their incentives. That's a perfect setup for talking about how our elected leaders might have incentives other than just to represent us the most purely that they could. So talk a little bit about what type of incentive issues somebody who's subject to election so not a regulator but somebody who's subject to election might face.
REX PJESKY: Well, I mean, if you're subject to election, your most immediate concern is to get people's votes. So, you're going to do whatever it takes to basically get a majority in the decision-making process. All right? So, even if it's not a majority, you're going to do whatever it takes to win the decision-making process or the election contest that you're participating in. So, with elected officials, you've got all kinds of you know, things that might happen that might result in elected officials not working in the public interest. You might have you know, probably my favorite example of this and probably the most common example of this would be the concentrated benefits and diffuse costs. So if you can win over a section of the electorate by making promises to them that have huge benefits to them and in turn transfer the cost of those benefits to a wider group of people. Okay, you can increase the chance of your election. All right? So, if you can promise you know, I'll use a numerical example.
If you can promise a 10% voting bloc, a $10 benefit to each of them and you transfer the cost of that to all of your potential constituents at a dollar cost per person. You might really change your vote based on the fact that politician A is going to give you $10 benefit, but if you're deciding to vote on something or for something and a certain politician's suggested policy might cost you a dollar, that might not swing your vote. Okay. There may be other considerations of you know a certain politician as you're you know as you're deciding who to vote for. You know somebody's suggested platform might cost you in some ways but it might not sway your vote. But if you give somebody a really big benefit well then that might sway your vote you know tremendously. So, you know, if a politician, if that individual got elected, was like going to send me a check for $10,000 or something like that, that'd probably sway my vote, you know, one way or another, and it would sway a lot of people's votes one way or another.
But if a politician is going to do something that might cost me a couple of bucks, and I like that politician in other ways, then the politician might be able to get away with taking those things and giving my money to special interests. And this stems from the fact that you know when we get down to voting for you know one candidate or another our selection is really, really limited compared to the various policies that we might prefer. So our politicians might decide a hundred things for us and we get into the voting booth and we vote for politician A or politician B. And you know using simple calculations if politician A has a better policy on 51 of the hundred issues than politician B then we're voting for politician A. Even though a lot of things that are going to happen to us under you know politician A's rule are going to be things that we don't like but it's better than the other person. So our decisions as voters in the voting booth are really, really broad and really, really complicated. Most things that we decide in the marketplace are much narrower. Okay.
So when I go and decide to buy apples for instance, I'm just deciding whether or not I like apples. All right? But buying an apple doesn't lock me into buying peanut butter. Okay? So again in the United States as of right now we've organized ourselves into two different parties and each party has a platform that represents a wide variety of policies and I look at both you know personally as a voter I'm going to look at both parties platforms. If I'm a sophisticated voter I'm going to look at both parties platforms and I'm going to like a lot of what both parties do. So, as a voter that's subject to my own incentives of self-interest, I'm very, very likely going to vote for the politician, the party, you know, either of those two things. That basically gives me the menu that I like most because you know once one party, once one politician gets into office, they're going to try to advance their entire selection of policy choices off the menu. So, you know, for instance, I might like, one politician's tax policy, for instance. I might really, really like, what they're going to do to tax policy.
So, I've got one politician that's going to, and I'll speak as an economist, move us towards consumption taxes, away from income taxes, which is something as an economist I like. You know that same politician is going to you know broaden the base and lower the rates because my training as an economist has told me I really, really like that you know a lot. So I like this politician's tax policy but I really, really don't like their views on public education for instance whatever those are. And so the other person that I might vote for has a mirror of those policies. So I really, really don't like politician B's tax policy, but whatever their thoughts are on education, I really, really like that. So when I go into the voting booth, I've got quite a quandary, don't I? And it's not clear to me who I'm going to vote for. It's not clear to me who I should vote for. But what economics does is give us a toolkit perhaps that we can actually measure these things. Okay.
And you know the toolkit of economics will sort of give us all kinds of insights into how politician A and B in this example will try to maneuver their positions and package their positions in such a way that will get them elected. And within, you know, within that framework, we realized very, very quickly that politicians have a lot of room for, you know, various chicanery if we might add it. So a politician might be able to put together a package of policies that a majority of people like and get elected, but accompanying that package of policies might include a whole bunch of things that are not in the public interest that a lot of people don't want. And that's the unique problem in civics. That's the unique problem in the political process. You know in general because it's a much broader choice, or one way of describing it is a much broader choice set. You know a lot of people say well that's the fault of the two-party system. Well fine three parties don't solve that. Four parties don't solve that. A parliamentary system where you get proportional representation.
None of these things solve that because at the end of the day, every election, regardless of how many people you have to choose from, whether it's two or whether it's 10, whether you've got two parties or three parties or 10 parties, you're going to end the day with a winner and a loser.
LEE STITZEL: Even true democracy doesn't solve that because somebody has to set the agenda, right?
REX PJESKY: Well, yes. And that's something else interesting that pops out of the economics of the political process. So, you know, probably the most basic lesson, and I haven't called it by name, but we've been dancing around this for, you know, several minutes now. Probably the most basic result that comes from economics that applies to politics is a median voter rule. So, you know, basically what that says is if you've got a democratic decision-making process, the politician that captures the middle voter, there's been like movies and stuff made about this. The politician that captures the middle voter is going to win the election. So if a politician can put together a menu of policies, a set of policies that is attractive to the median voter of whoever is going to do the voting, then that politician is going to win. And there are all kinds of combinations of policies that both parties are going to try to put together to appeal to that median voter.
LEE STITZEL: That's where economics and political science would probably differ a lot would be my guess, right? Because if you listen to political commentary, which might not really be representative of political science, they want to analyze why an election was won by breaking down all the different groups and trying to distill it, which by the way doesn't overcome the median voter idea, you know, but they'll say something like, "Well, Bush won because grassroots movement and things like that." And so that would be one place that economics would be very different from political science. Another thought I had while you were talking about that is when you give a numerical example about giving 10 voters $10 and then spreading the cost among a hundred potential voters. Ironically, 20 years ago, that might have been a silly example. Now, we live in a world where every now and then the government will literally write you checks. And so, that rings true. But even if many things that don't look like that are exactly that, building a school, building a pool in the town that benefits a subgroup of the constituents, the potential voters in the city at the cost of basically all of the members in the city.
So, any of these types of things can become special interest groups. And if you don't think through the lens of economics, you don't realize that special interest dynamic that you're talking about is at play.
REX PJESKY: Well, a very concrete example of what you're talking about comes from your work with the sports stadiums. So, a sports stadium in the city benefits a very narrow set of constituents within the city. And these sports stadiums are always sold. And I'm not saying they're wrong. That's immaterial. But these sports stadiums are always sold to the voting public as things that benefit the public at large. So if you listen to the rhetoric of people that try to convince sports stadiums to be built, to have the bonds passed, to build the sports stadiums, all right, they will try to convince you that this is somehow good for you even if you don't even like the sport and never plan on going to the game. Is that correct?
LEE STITZEL: Yeah. Oh, yeah. 100%. And then, of course, the economic research is quite strong in that area and shows that the benefits are very concentrated and not diffuse at all. So it's consistent with what you were talking about earlier. So we're over an hour now. So I want to bring this in for a landing. Do you think this economic approach to the coordination problem in the public sphere, do you think it is cynical? And if so, do you think it's not cynical enough or too cynical? Maybe some of the listeners are kind of attached to the romance of politics.
REX PJESKY: Well, I think a lot of people are and I mean that's a good question to ask an economist because you know another definition of economics might just be pure cynicism. So you know I feel like that you know when I went through you know five years of graduate school sometimes I just felt like I was getting a degree in cynicism. And so, you know, certainly economics and the economics of politics, the politics without romance, it's almost right there, suggests cynicism. Is it too cynical? I don't think so. All right. I absolutely don't think so. I'm biased. But when you apply the toolkit of economics to bureaucrats, elected officials, government decision-making processes, of course, it's going to be cynical because we're not assuming the outcome. So the idea of politics without romance, it completely lacks cynicism. And the correct amount of cynicism that a citizen should have about these things is not zero. It's more than zero. So, you know, if we attribute a mythical public servant idea to the people who go to Washington or to the capital or to whatever government office, it doesn't make any difference what it is, whether they're anybody who works for the government, especially bureaucrats and elected officials.
It is certainly not true that these people suddenly transform into selfless public servants that are not subject to the various incentives and self-interest thinking that we know exists in every other area of human endeavor.
LEE STITZEL: My guest today has been Rex Pjesky. Rex, thanks for joining us on the EconBuff.
REX PJESKY: Thank you very much.
LEE STITZEL: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econpodcast.wixsite.com. That's wixsite.com. You can contact us at econpodcast@yahoo.com.
Comments