Public Choice Theory and Neoliberal Economic Policies

Public Choice Theory and Public Sector Inefficiency

It has been shown that certain policies failed to lift countries out of poverty. Public Choice Theory, pioneered by James Buchanan, highlights the waste derived from the operational logic of the public sector.

The public sector does not function according to the principle of profit maximization, which governs the private economy. In many cases, it provides services on an exclusive basis, and there are often occasions where no direct price is exchanged for the services provided. Consequently, control over public spending does not stem from market discipline; the public sector does not depend on controlling these costs to survive in a competitive environment.

The Logic of Public Spending Growth

Public Choice Theory starts from the hypothesis that the criterion of individual utility maximization also applies to the processes of democratic choice. The result is a systematic growth of public spending, driven not by economic efficiency, but by the personal objectives of those involved in the process.

Supply-Side Policies and Neoliberal Ideology

Ronald Reagan and Margaret Thatcher executed a liberal counter-revolution against the excessive interventionism of previous decades. Their implementation of neoliberal ideology included several key pillars:

• Reducing the power of unions: This was exemplified by the removal of coal sector unions in Britain and how Reagan ended the U.S. air traffic controllers' strike.
• Industrial Restructuring: Mature heavy industries saw their traditional role in the economy become marginal.
• Privatization of public enterprises: The prevailing thinking in recent years, coupled with the financial needs of states facing heavy losses and debt from economic crises, led to the sell-off of the bulk of public enterprises in the developed world throughout the 1980s and 1990s.
• Zero deficit and tax cuts: For instance, the Stability and Growth Pact governing the EU requires that the deficit of countries in the euro area does not exceed 3 percent of GDP.
• Tight monetary policy.
• Trade openness and Globalization: Economic globalization accelerated in the 1970s, characterized by the absolute freedom of capital movement and a general reduction of trade barriers.

The Advent of New Economic Powers

The result of these shifts has been the rise of new emerging economic powers, such as China, India, and Brazil. These nations are occupying increasing economic space while simultaneously stressing the planet's capacity to provide necessary resources.