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1988). The occasional model will nod to diversity, for example, by assuming that
two constituencies with different utility functions are represented by two parties that
probabilistically succeed each other in power. Such minimal diversity can be neatly
aggregated into a social welfare function by the simple means of weighting the two
parties’ utility functions with the two parties’ election probabilities (Alesina 1987).
On a related note, social choice also demonstrated that voting rules affect voting
outcomes. If people’s preferences are sufficiently diverse, there exists no such thing as
a neutral voting rule that will “simply” aggregate people’s preferences. At first blush,
this result seems rather worrisome because of its potential to undercut the legitimacy
of outcomes arrived at by democratic means. But we shall see how this insight would
get picked up productively—after all, if institutions can warp democratic decisionmaking,
they can also serve a corrective function.
Social choice consisted largely of mathematical exercises with little economic content.
Public choice, in comparison, employed microeconomic theory, and it was
geared towards finding political explanations for the discrepancy between economic
theory and practice. Before public choice entered the fray, economists were in the
habit of spelling out what actions a benevolent dictator should take when he or she
(or should we say, it?) encounters market failure. Public choice theorists, most prominently
among them James Buchanan and Gordon Tullock, refused to see market
failure behind every bush; in their minds, government failure loomed large (Tullock,
Seldon, and Brady 2002).
These contrary approaches are nicely illustrated with reference to the income tax.
Traditional public finance theory offered a model in which a benevolent dictator
chooses a progressive income tax schedule that trades off the gains to social welfare
that come with taxing the rich and distributing the proceeds to the poor against the
deadweight losses that arise because taxes distort the economic choices of rich and
poor (Atkinson and Stiglitz 1980). In contrast, public choice demonstrated that reelection-motivated
policy-makers will devise an income tax schedule that is riddled
with loopholes benefiting special interests, with the result that a nominally progressive
income tax can end up being regressive in effect, and grossly inefficient to boot. 3
Public choice also proposed institutional solutions to government failure. The
typical proposal sought to tie the hands of elected policy-makers and to create
transparency vis-à-vis voters or other audiences. The flat tax is a case in point (Hall
and Rabushka 1995). It forgoes the benefits of progressivity and efficiency, but it
also prevents policy-makers from piling on loopholes that benefit special interests
precisely because voters, or other audiences, can easily monitor slippages and make
a public fuss. The simplicity and transparency of the flat tax create a political cost of
defecting from it.
Advanced democracies with complex economies have been reluctant to implement
the institutional proposals coming out of public choice theory, perhaps because the
proposals are seen as too crude; or might it be because they are inconveniently
incorruptible? Interestingly, in the aftermath of the breakdown of Communism and
³ See, for example, Hettich and Winer 1998.