Public Finance, 2nd Edition

the notion of an overall social optimum that the various governments are

striving for becomes highly problematic.

Information also plays a special role in the normative theory of Wscal

federalism. The main issue here is how sophisticated people are within each

local government. As they vote on policies in their own localities, do they

consider how people in other localities might react to they policies, or do

they take the policies elsewhere as given? The answer to this question has

important implications for the eYciency of local solutions to allocational

problems.

THE THEORY OF PUBLIC CHOICE

The theory of public choice developed by James Buchanan and his followers

challenges virtually every tenet of the mainstream public sector theory.

Buchanan described the foundations of the public choice perspective in his

Nobel lecture delivered in Stockholm, Sweden, in 1986.

7

The disagreements

with the mainstream view begin at the most basic level, with the assumptions

about how people behave. According to Buchanan, the mainstream theory

assumes that people are essentially schizophrenic. They are self-interested in

their economic lives, but when they turn to the government in their political

lives they suddenly become other-interested and consider the broader social

or public interest in eYciency and equity. Nonsense, say the public choice

advocates. People do not change their stripes; they remain self-interested in

their political lives as well. They turn to government only because they cannot

get what they want for themselves in the marketplace, and they view the

government as just another venue for seeking their own objectives. Buchanan

refers to individuals' interactions with the government as Wscal exchanges, to

mirror the self-interested motivations of standard market exchanges. Using

the government in the pursuit of self-interest is seen as entirely appropriate

and legitimate.

The thrust of public choice theory is positive, not normative. Buchanan

scoVs at the notion of an idealized, beneWcent government acting as an agent

of the people in pursuit of social objectives. Instead, Buchanan argues that

public sector economists should be studying actual political and governmen-

tal institutions and determining whether they give the people what they want.

The test of government eYciency in this positive vein is simply how well the

government serves each person's self-interest. Full eYciency requires unan-

imity under democratic decision making, because only then will no one lose

as a result of any government policy. This is as ``eYcient'' as the government

can be in helping people get what they want. Notice that the public choice

7

The lecture was reprinted in J. Buchanan, ``The Constitution of Economic Policy,''

American Economic Review, June 1987, pp. 243±250.

26 THE THEORY OF PUBLIC CHOICE