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Essay of Public Choice

By Alex Añazco*
Free Market or Protectionism: A Review of Issues

Abstract
Government intervention is visible in all economies. A pure free market does not exist. I will refer in this paper to the subsidies which the industrialized countries give to their producers and the effects and discriminations on the less developed countries, since it is very known that developing countries depend on agricultural products. In addition, the high government intervention in developing countries is visible. The actual problems in the poor countries are corruption and emigration, which could be therefore either an effect or a consequence. I will develop this essay with the use and guidance of the book “Public Choice III” by Dennis Mueller. I will focus more on one country, Ecuador, as a developing country, and the Europe Union as a strong developed group where industrialized countries are located. Other issues are involved in the economy that it will be mentioned as well. Opening the market and a minimal intervention of the government will help to create a better environment for the economy.

1. Introduction
Man is by nature a political animal.
Aristotle

The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.


Adam Smith
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* Postgraduate student of University of Economics in Prague, Faculty of Economics and Public Administration, Department of Economic Policy, alexanazco@yahoo.com


In this paper, I will empirically examine the problems of the free market and protectionism. Not only because it is the actual problem, but also because it has consequences the form of more government interventions and more disequilibrium in the democracy. I believe in an open economy as you can find positive effects such as economic growth in several examples throughout the world (Ampuero 2005:3).


In both Ecuador and the European Union (EU) you will find interventionism, but where this governmental influence is concentrated differs in the two entities. In Ecuador, there is interventionism in nearly all key sectors, but in the EU the interventionism in found mostly in the agricultural sector. This kind of intervention and protectionism creates distortions in the economy where the consumers have to pay more money for products and services, when they could increase and develop the economy if there was less interventionism.
I will revise basic concepts and explain with a real life simple example, where it is obvious that with less interventionism, the economy will succeed. However, at the same time, it is not simply that easy. More issues make the economy more complex, as James M. Buchanan, the father of the Public Choice, stated. Is the existence of the state necessary, and is it working well? What about democracies? The influence of the interest groups, lobbying and campaign contributions (Mueller 2003:472) is a review which I am going to make with the support of the book by Dennis Mueller.
Later I will complete the paper with others factors which are indispensable to take into account, as the economy is correlated with everything. In brief, in this paper I will relate all of the factors that are correlated, such as bribes, corruption, migration, poverty, populism, etc., which will be developed before the conclusion.
With all the concepts reviewed, I empirically will reach a conclusion, where I believe that it is indispensable to open the market. Meanwhile in developed countries the agriculture is protected with subsidies, and populist politicians are taking advantage of these arguments and making the environment of the economy and the democracy much worse, especially in Ecuador and in the Andean region in Latin America. In the end, I think that it is necessary to make more studies regarding this matter with a wide and complete research.


2. Conceptual framework
I will briefly develop James M. Buchanan’s interpretation of the history, development and content of the field of public choice. Public choice it is not a method in the usual sense of the term; which means it is neither a group of tools nor a particular application of the standard tools with standard methods, although we are lightly reaching the last description. Public choice is a perspective about the policy that emerges from an extension and application of the tools and methods of the economist based on the public and collective decisions.
In addition, Buchanan interprets the matter in two aspects, which the first is the catallaxy (the economy as the science of the exchange) and the most familiar postulate of the homo economicus about the individual behavior1. What do the economists have to do? This was a question where the answer was to anoint an exorcism of the paradigm of the maximization that occupied our box of tools; give up or stop to define our discipline, our science, in terms of limits of the scarcity. We have to change the definition, to include the own name of the science; and stop worrying about the assignations of resources and the efficiency. We have to concentrate on the origins, the properties and the exchange institutions, considerate in wide terms.
The propensity that Adam Smith felt toward the barter and the exchange of one thing to another is the most classical. Even Professor Hayek suggests that the term catallaxy, which, according to him, it is more close to the Greek origins of the word. Hayek derived the word catallaxy from the Greek verb “katallassein” or “katallattein”, which meant not only “to exchange” but also “to admit in the community” and “to change from enemy to friend” (Hayek 1976:108-9).
Continuing with the theoretical matter, the perspective to public choice by Austrian contributions is important and very interesting (Hayek 1948). Hayek was worried about how socialism changes the demands on democratic systems and how with this process socialism transforms the democratic institutions into institutions of tyranny, and this effect of socialism is evident in the growth of the interest groups.

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1. See La perspectiva de la elección pública by James M. Buchanan in Ensayos sobre Economía Política. Available in: http://www.eumed.net/cursecon/textos/buchanan-elecc-publica.htm

Consequently, as socialism’s popularity grew, the number of special interests pleading for privileges ballooned (Hayek 1945:40). Like public choice theorists, Hayek understood the danger of interest groups in the context of the logic of concentrated benefits and dispersed costs. “Innumerable interests… could show that particular measures would confer immediate and obvious benefits on some, the harm they caused (on others) was much more indirect and difficult to see” (Hayek 1945:17)


Equilibrium most likely exists where the individuals have to resolve a choice of something. The social phenomena are centered around a group of individuals who are faced with a choice of doing what is best for the group or what is best for themselves. “Probably the most important accomplishment of economics is the demonstration that individuals with purely selfish motives can mutually benefit from exchange” (Mueller 2003:9). Here we arrive at instances of the phenomena that are called different names, and the most recognized is the well known “Prisoner’s Dilemma”.
There is also another classic article, The Coase Theorem (Coase 1960), arguing the traditional wisdom in economics referring to taxes, subsidies and externalities. Coase challenged that the existence of an external effect associated with a given activity did not inevitably require governmental intervention in the form of taxes and subsidies. “Pareto-optimal resolutions of externality situations could be and often were worked out between the affected parties without the help of the government” (Mueller 2003:27).
Public Choice theory is directed toward the study of politics based on economic principles. One of the most important contributions of the Public Choice theory is that it recognizes that politicians are motivated by self-interests, the same like a common person or individual. That is the reason then, that citizen’s expectations of politicians changes dramatically. James M. Buchanan and Gordon Tullock are recognized as being the developers of Public Choice Theory, and their book (Buchanan and Tullock 1962) is considered a classic on this matter. Therefore, I am going to quote a question and an answer of one interview2 with Buchanan that could help later in the essay:

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2. Interview with James Buchanan, The Region (1995), Federal Reserve Bank of Minneapolis, September. Available in http://www.minneapolisfed.org/pubs/region/95-09/int959.cfm

“(Question): It appears at first glance that many Public Choice economists are politically conservative and free-market oriented. Would that be an accurate description of those academics in the Public Choice movement?

(Buchanan’s answer): I think it's an accurate description—but it's an accurate description for a reason. If you take the story I've given you, if you recognize that the traditional way we looked at politics had a lot of romance in it, then Public Choice comes along and removes the romance. I think the natural outcome of that is you're going to be more skeptical about government than you would have been otherwise.

Mancur Olson, a good friend of mine, has been influential in Public Choice and objects very strongly to this argument that there is this conservative bias. There is no bias in it as such. But Mancur himself has necessarily had to look at politics differently because of that, despite the fact that his natural proclivity would be more left than mine. There's nothing inherently biased about it. It's just that the fact that if you start looking at the political sector or politics from a non-romantic view, you come to a different view on what has been traditional.

Economists traditionally have been much more pro-market and anti- politics, anti-government than the other parts of the Academy in general. But throughout the decades economists have been frustrated by the fact that they put their ideas out there and nobody pays any attention. Economists have found you can't go out there and sell the idea of a market economy very readily. You have to be sophisticated to understand it. It's difficult to sell the idea of a market economy, so economists haven't been very effective. Potentially, Public Choice, it seems to me, has been effective in a different way altogether. Public Choice does not say that the market is perfect or the market works at all. That's not part of it. But it says that politics fails. There are a lot of people out there who will recognize that politics fails and, therefore, will be in support of a market, who would never have come around to support the market in terms of the pro side. They'll see the anti-politics side, so that's how Public Choice comes in”.

With these, I would like to arrive to another one, which we are lightly going to reach to the sample of this essay. Reviewing a chapter of the book by Mueller, about the interest groups, campaign contributions, and lobbying (Mueller 2003:472-5) he quoted the hypotheses about interest groups as one of the classics of the public choice literature (Olson:1965). Interest groups come in a wide variety of institutional forms and sizes. Often a group is organized to pursue one objective, and then once organized, turns to other forms of activity of benefit to its members. Labor unions came into being to improve the bargaining power of workers vis-à-vis management.

Based on this, a counterintuitive prediction of Olson’s theory is that small interest groups are much more effective at obtaining favors from the government than larger groups are. This is a very dramatic and actual point of this essay that supports the hypothesis of the agricultural policies of nations around the world as explained as follows. In less developed countries, the agricultural sector is large and the group of middle-class urban dwellers is small, and farmers receive small or even negative subsidies for their products, that is, the government often sees that the farmers receive less than world market prices. In the richer nations, farmers in the developed countries make up just a tiny fraction of the workforce, yet they often receive giant subsidies.

In the table 1, we can appreciate the distortions in the prices of food in different countries. While the food prices are positive in most industrial, developed countries, they are actually negative in most developing countries. The levels of protection in this sample, is measured in nominal terms, as Nominal Protection Rate indirect (NPRi), Nominal Protection Rate direct (NPRd) and in Nominal Protection Rate total (NPRt). Direct protection rates vary between 85.9 percent in Switzerland and -26.9 percent in Ghana. Van Bastelaer (1998) developed the Olson hypothesis in a paper and in his paper, he suggests and tests it: “the price of food items is determined by political agendas at the national level, rather than by climatic conditions or variations in global food markets, and the content of these political agendas is the direct result of the conflictual interaction of producer and consumer lobbies” (Van Bastelaer 1998:44).


In the same paper, Van Bastelear suggests a new research supported by one paradox: “although agricultural producers in industrialized countries represent a small proportion of the labor force, their political influence is such that they receive prices for their products which, on average, lie well above international prices. Farmers in developing countries, on the other hand, constitute the majority of the labor force, yet they rarely have the upper hand in the struggle for the influence over the public policies that affect their returns. As a result, they face agricultural prices that are low, relative to the international standards”. Here it is easy to see that the small interest groups are more influential than big interest groups in the design of food policies, and also Van Bastelear made an extra analysis: “as food consumers become richer, they are more willing to implicitly subsidize local farmers”. (The example of the automobile industry is a good one (Mueller 2003:474) to see when the weak or the smaller group “exploit” the strong or the biggest group).

Table 1. Nominal rates of agricultural protection, sample countries, sorted by protection level percent.





This assumption was not new, as it was developed by Olson, as I wrote above, in his classic book (Olson 1965:36). Olson’s book states, “The larger a group is, the farther it will fall short of obtaining an optimal supply of any collective good, and the less likely that it will act to obtain even a minimal amount of such good. In short, the larger the group, the less it will further its common interest”.


Reaching to the aim of the easy I will continue with the hypothesis of Van Bastelear (1998:48). Suppose the farm lobby (could be in a small country in the EU for our paper for example) and the urban coalition is competing for price protection by the government. We assume that there are a million members in the farm lobby and three million in the urban coalition. We suppose that the total population is not fixed and a large number of immigrants (they could be from Latin America (Ecuador) that serve us as example in this paper), let’s say an average of a million people, joins to urban coalition. “The political influence of the farmers (and therefore the level of protection they receive) is likely to increase as a result of the migration”. Inclusive we can assume that the size of the farm group is not fixed, because the urban coalition will include more members, so there is still a million farmers after the immigration, but the share of them in the global population has fallen from 25 to 20 percent. As we see in this paper and as quoted above, the smaller the agricultural sector is, the higher price protection it receives in comparison to the larger agricultural one.
I will not develop this hypothesis, but we have to be conscious of how the public choice works and how public finance is in the real world. A public good can satisfy one group, but on the other hand it could be harmful to the society. That happens when the government intervenes in the economy. As Olson said: “This is equally true when the public-good concept is applied only to governments; for a military expenditure, or a tariff, or an immigrant restriction that is a public good to one country could be a “public bas” to another country, and harmful to world society as a whole” (Olson 1965:15).
The public choice, as I see it, is very complex and has many consequences and came from the men who can manipulate if given the possibility to do so. This is why the democracy in some countries are so vulnerable because the state depends on the legislation, and several times depends on what these powerful groups decide, and does not depend if it is big or small, but rather it depends on how they can take advantage of them.

The ignorance of the majority in the society on the matter of how public choice really works creates confusions and in many times, creates frustration.


Meanwhile the rich countries talk about opening the market which they still protect, especially the agricultural sector. Moreover, as I described above, it does not depend on the governors but rather, it depends on the lobby that is around the government. This kind of protectionism creates a special environment on the affected countries. It is well known, that in developing countries, the farmers constitute the majority of the labor force, and in the developed countries, farmers constitute a minority of the labor force. Therefore, in spite of the policies of protectionism and policies of immigration in the rich countries, people from the developing countries try to emigrate (in these unfair conditions the laborers can not compete and do not have any choice).
Moreover, politicians in developing countries take advantage of this and create this environment of protectionism too, as a kind of reprisal, but it leads to even worst reality reaching the extreme and very unusual populism and anti-imperialism in the less developing countries. This kind of populism is very dangerous because it is manipulated very well with a sentimental rhetoric by this populist group, which I will refer to later before my conclusion in brief.



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