The Application of Public Choice Theory
to Science and Engineering Policy
Barry S. Fagin
Thayer School of Engineering, Dartmouth College
Hanover, NH 03755
Public choice theory has made a valuable contribution to our understanding of public policy. In our judgment, this contribution has been underappreciated by the science and engineering policy community. We give a brief overview of the key elements of public choice theory and discuss its application to science policy. Based on its predictive power and relevance to contemporary politics, we recommend that it be taught to engineering students, particularly those interested in policy issues.
Through the early 1970's, public policy models were formed around the notion of government as a "superindividual", one embodying the interests of society as a whole and capable of correcting the effects of market failure (Gwartney and Wagner 1988). Accordingly, the attention of most researchers was focused on the identification of market imperfections, which were then used to identify corrective policy directives for government action.
This view was challenged in the late 70's and early 80's with the development of public choice theory by James Buchanan, (Buchanan and Tollison 1984), for which he received the 1986 Nobel Prize in Economics. Public choice theory applies the tools of economic analysis to political behavior, in an attempt to explain the functioning of political institutions. This model permits the understanding of "political failure", in a similar fashion to the concept of market failure developed by classical economics.
The challenge of public choice theory to conventional policy making has, we will suggest, important implications for science and engineering policy, and in particular for engineering educators who teach public policy. In this paper, we will discuss these implications by showing some examples of the predictive value of public choice theory in science and engineering policy. We will offer our suggestions for new material for students, and conclude with directions for future work.
2.0 Essential Features of Public Choice Theory
Public choice theory attempts to analyze public behavior in the same manner that economics analyzes private behavior. Accordingly, many of its key features are similar:
1) People act to maximize utility in their public capacities as well as their private ones. This means that voters are assumed to make choices that are expected to maximize benefits to them or minimize costs. Equally importantly, agents of government are expected to behave similarly.
We note that it is a gross misinterpretation of these assumptions to say that they preclude altruistic and compassionate behavior in the public sector, any more than they preclude altruistic and compassionate behavior in the private sector. These assumptions do imply, however, that people's willingness to engage in both egocentric and altruistic political behavior changes in a predictable way in response to incentives, in a way similar to their private behavior.
This assumption, in turn, has important consequences:
2) In response to incentives, people may engage in rent-seeking behavior. Rent-seeking is the economic term used to describe attempts by individuals to use the political process to obtain gains for themselves at the expense of others. Individuals may or may not find rent-seeking profitable, depending on the political incentive structures they face. Examples of rent-seeking include lobbying for preferential tax treatment, protection from competition, subsidies, industry-specific tariffs, and so forth.
Rent-seeking is economically inefficient, but according to public choice theory it is an inevitable by-product of human organization if constitutional and governmental arrangements permit the power of the state to be used to harm some and benefit others. In our modern democracy, rent-seeking behavior generally manifests itself in the form of special interest groups seeking legislative privilege, either by lobbying for special legislation or by seeking increased allocations of public resources. In both cases, the benefits to the recipients are concentrated, while the costs to the taxpayer or consumer are diffuse. This, according to public choice theory, is due to the incentive structure under which American government currently operates.
3) To the extent that public policy recommendations ignore human self-interest and the incentive structure under which they operate, they will fail to have the intended normative consequences. Since in the vast majority of cases public policy is carried out by agents of government, it is likely to fail if it assumes well-informed and altruistic behavior on their part and on the part of those who would be affected by the policy. In fact, many public choice economists have argued that the unintended consequences of legislation, taxation, or other governmental activity can decrease social utility to below the point when the activity was first initiated.
3.0 The Predictive Value of Public Choice Theory and Implications for Science Policy
The assumptions of public choice theory are not axioms that must be accepted as self-evident. They are empirically testable, and considerable research effort has been expended in determining their validity in the "real world". For a survey of the literature, the reader is referred to (Mitchell 1983). Our concern, however, is with the application of public choice theory to science and engineering policy, an area we believe has received insufficient attention from public choice theorists. In our judgment, the best work in this regard is (Martino 1992), written by a physical scientist.
We believe the predictions made by public choice theory are borne out by an examination of science policy decisions over the past few decades, particularly where the federal funding of scientific activity is concerned. We present a few examples here.
3.1 The Political Funding of Science
The basic argument for federal funding of science concerns the inability of individual firms to appropriate the results of their research, and was first proposed by Kenneth Arrow in (Arrow 1962). Under certain conditions, firms may not be able to recover the potential benefits from research due to difficulties associated with keeping the research secret from competitors and other external factors. These firms may then underinvest in research, requiring government funding to make up for the lost social benefits.
Public choice theory, however, would suggest that since government funds would be collected and distributed through the political process, it is important to consider the incentives of the agents involved in the process when examining the consequences of federal funding of science. The self interest postulate, for example, suggests that politicians would face strong incentives to use federal funds earmarked for science to support reelection efforts. By concentrating the benefits on desired recipients, typically in their home state, and by diffusing the costs over a large taxpayer base, legislators pursue their own self interest (and, in all fairness, those of at least some voters), at the expense of overall social welfare. This process has become known as "porkbarrel science" (Martino 1992).
In fact, this behavior is markedly visible today. The 1991 budgets for the Departments of Energy, Defense, and Agriculture, for example, contained over a quarter of a billion dollars for non-peer reviewed earmarked appropriations for scientific projects (Marshall and Hamilton 1990). This "academic pork" flowing directly to universities creates tremendous incentives to rent-seek. This is discussed in the next section.
3.2 Incentives to Rent-Seek Among Researchers and Institutions
The federal government provides approximately 50% of the funds for research and development in the United States (Martino 1992), and a much higher percentage of all research funds at American universities. Whether these funds are appropriated directly or peer reviewed, the existence of a large federal presence in science funding creates tremendous incentives for both individuals and institutions to rent-seek. The pressures on faculty at all ranks to submit grants to federal agencies, for example, are well known to any professor.
Most of us too, I suspect, have been asked at one time or another to show support for increased appropriations for agencies that fund our work. The American Physical Society, for example, recently distributed an electronic communiqué informing researchers that the Administration's requested increase in the Research and Related Activities for NSF had been reduced from 18% to 10%, and urged recipients to "alert Senate Appropriators to [their] concerns" (American Physical Society 1993). While anecdotal, I suspect this evidence is typical of that encountered by most researchers at one time or another who have been asked to support increased federal funding of science.
A much stronger incentive to rent-seek, however, exists at the institutional level, provided by existing arrangements to support "indirect cost" recovery. Indirect costs, because they are borne by the federal government, create a different set of incentives than funds provided to universities by private industry. This latter group is not concerned with indirect or direct costs, but only with the research being purchased. If a private company or foundation does not believe it is supporting research in a cost effective manner, it will use its resources elsewhere.
By contrast, federal funds award a blanket percentage of direct research costs to universities, at a rate negotiated with one of a few federal agencies. This functions as a subsidy for the modern research university, and creates strong incentives to rent seek by increasing the recovery rate. In fact, indirect cost rates have increased dramatically since the federal government assumed a major role in supporting research. The percentage of NIH funds going to indirect costs, for example, has doubled in the two decades since 1966 (National Science Board 1987). Other studies show similar increases, increases greater than both the inflation-indexed GNP and federal expenditures (Chubin and Robinson 1992).
Attempts to slow the growth of indirect costs meet, as predicted by public choice theory, with vocal protests from the affected groups (Norman 1986). As a public choice economist and former NSF official jointly observed:
"The university-based scientific-research cadre is increasingly linked to federal monies, to the point that some regard their support as an entitlement, and others, whose positions rely on federal 'soft money', have grown ever more responsive to the "needs" of the funding bureaucracy. This dependency promotes extreme fear of loss of funding ..." (Aronson and Sommer 1987)
This phenomenon is particularly pronounced at the top fifty research universities, which have received more than 2/3 of all federal monies allocated to academic science. Aronson and Sommer also note that the list of the top 100 universities for receipt of federal funds has averaged one replacement per year over the past twenty years. This is a rate considerably lower than, for example, the top 100 entries on the Fortune 500 list of America's largest companies.
Finally, with regard to indirect costs, it has been our experience that researchers tend to support lower indirect costs, whereas administrators do not. This dichotomy has been reported elsewhere (Martino 1992). In our judgment, the continuing presence of a source of tension between researchers and administrators at universities is not, we believe, symptomatic of good science policy, and is an example of an unintended policy consequence predicted by public choice theory.
3.3 Other Aspects
Public choice theory predicts many other aspects of the government funding of science, including
1) Increased red tape and reporting requirements
2) Increased pressure to allocate research funds geographically
to achieve "fairness"
3) Strong incentives favoring applied research over basic research
4) Strong incentives favoring low risk research to high risk research.
Briefly, these issues arise from the incentive structures faced by members of the bureaucracy, elected officials, and voters as they interact through the political process. Increased red tape and reporting requirements evolve through the desire of both bureaucratic officials to expand their influence and of elected officials attempting to respond to taxpayers to ensure their funds are used wisely. "Fairness" questions arise whenever federal funds are at issue, since there is no reason to expect meritorious research sites to be distributed on a geographically even basis. Applied research is seen by legislators as giving increased likelihood of results that are visible to constituents and can increase the chances of reelection, while risk aversion can be seen as the approach most likely to maximize the utility of agency managers and politicians, neither of whom wish to be seen as managing the taxpayers money unwisely (Cohen and Noll 1991).
3.4 A Counterexample: The Congressional Testimony of T.J. Rogers
Public choice theory, like any other social science, does not posit universally applicable rules for human behavior. Counterexamples to the predictions made by the naive application of public choice theory can indeed be found. One recent example concerns the testimony of T.J. Rogers before the U.S. House Committee on Science, Space, and Technology. Rogers is president and CEO of Cypress Semiconductor Inc. and was asked by the House to share his perspectives on the Administration's proposed "information superhighway".
Surprisingly, Rogers' testimony explicitly denounces rent-seeking. He stresses repeatedly that neither he nor his company are interested in special benefits, but are instead more concerned with the reduction of generally harmful governmental activity. Nor is he alone in this regard. Other CEO's and entrepreneurs in Silicon Valley have voiced similar sentiments. A complete copy of Rogers' testimony and the views of similar entrepreneurs is available in (Rogers 1993). We mention it here to caution against the naive application of public choice principles, and to encourage speculation as to whether the political and social culture of entrepreneurs and/or silicon valley may provide different influences than those predicted by public choice theory.
4.0 Implications for Engineering Education and Public Policy
It is our judgment that the predictive value of public choice theory is sufficiently high that it should be incorporated into public policy curricula at engineering schools. It suggests, among other things, a healthy skepticism towards the efficacy of government activity in science and engineering and an increased awareness of the shortcomings of the political processes inherent in solving technical problems.
We cannot as yet present a detailed list of curricular recommendations. However, should students in an engineering class be debating a solution to a public policy problem, we believe that the key elements of public choice theory could be brought to bear by suggesting the following topics for discussion:
1) Will the proposed solution require the collection and/or disbursement of resources?
2) If so, will the resources be collected and disbursed through government agencies?
3) If so, what kind of incentives will the individuals charged with implementing this solution face?
4) Will the resulting solution encourage rent-seeking behavior?
5) What will happen to any proposed institutional and regulatory structures once the problem is solved?
6) In light of the incentive structures created, what is the likelihood that negative externalities of the proposed solution will exceed the negative externalities of the problem it was intended to solve?
7) Is there a way to alter the incentive structure faced by the participants to permit an alternative solution?
We believe these and similar questions could be profitably discussed in many engineering and science policy case studies, with fruitful and surprising results.
Until approximately 20 years ago, public policy models viewed government as essentially a neutral actor, capable of assessing social costs and benefits and intervening in cases of market failure. The deficiencies of this model were indicated by proponents of public choice theory, who applied the tools of economic analysis to individuals acting in their public capacities. The resulting model has, we believe, strong predictive power, particularly when applied to the federal government in the 1990's.
In our judgment, public choice theory has received insufficient attention from engineering educators and researchers interested in public policy. The reasons for this are difficult to ascertain, although we speculate that they are due at least in part to difficulty in bridging the cognitive gap between the social and physical sciences. But whatever the cause, we believe public choice theory has a useful contribution to make to the teaching of public policy.
Accordingly, we believe that science and engineering schools should begin the incorporation of public choice theory into their curriculum, and have presented some sample discussion questions to motivate basic issues. Engineers interested in public policy will, we believe, propose better technological solutions to social problems if equipped with the tools of public choice theory.
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