Public Borrowing and How Public Choice Approach is Realized According to Political Economy (Part-5)

There are also approaches that combine economics with political science to develop systematic analyses. Public Choice Theory and the Theory of Dependent Development are among these approaches. However, apart from this methodological commonality, the two approaches that combine economics and political science do not agree on basic assumptions, nor on conclusions and policy recommendations. Born as a reaction to traditional development economics, dependent development theories (or Neo-Marxist approach as some sources call it) attribute underdevelopment not only to endogenous but also to exogenous causes and make policy recommendations taking into account international exploitation relations. Neo-Marxist theories of dependent development began to emerge in the 1950s and were influenced by Latin American Structuralism and Marxism (Kaynak, 2005, p. 114).

The dependency approach explains its analysis with the concepts of "periphery" representing the underdeveloped world and "center" representing the developed world. The most important denominator that brings the dependency school theorists together is that they keep the causes of underdevelopment outside the underdeveloped countries (Yavilioğlu, 2002: 62). The underdevelopment of a country in the world can only be possible if the surplus value created by that country is used by developed countries in line with their own interests. According to Baran, the reason for underdevelopment is that today's underdeveloped countries were caught by the capitalist system before they could complete their own development and became colonies over the years. In other words, developed countries have determined the fate of underdeveloped countries by holding the power (BARAN, 1974: 319). Imperialist countries are aware that monopoly profit will disappear with the industrialization of underdeveloped countries. The fact that the raw materials obtained from underdeveloped countries are processed and sold back to these countries in the production process makes the colonial countries an indispensable market. 

Both approaches are theoretical approaches based on political economy analysis. However, the way these approaches perceive the world and the cause-effect relationships they establish between economic events are quite different from each other. While the Theory of Dependent Development developed a theoretical analysis based on Marxism and Structuralism, the road map of the Theory of Public Choice was determined by Neo-classical economics. While the Theory of Dependent Development analyzed the social and economic structure on the basis of "class", the crucial argument of Marxist analysis, it focused on international exploitation relations by dividing the countries of the world into periphery and center. For Public Choice Theory, there are four main groups that make up economic and social life: politicians, bureaucrats, voters, pressure and interest groups. Public Choice Theory emphasizes that all four groups will act towards their own utility maximization and that political equilibrium will be reached through an exchange in which each group will achieve its own self-interest.

According to Public Choice Theory, political science, like economics, is a science of exchange. Accordingly, in politics, as in economics, exchange will ensure the optimal distribution of the utility function. The interest agreements that groups will make with other groups for their own benefit have the power to ensure social welfare. Public Choice Theory assumes that individuals are rational and will only consider personal utility functions in their decision-making. Dependent Development Theory, on the other hand, does not take such a reductionist view of political science. It argues that the individual utility function is not the only factor that individuals take into account when making decisions; political decision-making processes are influenced by a much more complex network of relations, including social structures and ideologies, beyond supply-demand and vote trading mechanisms. 

In this respect, the discourse of the Theory of Dependent Development is similar to that of the New Institutional School of Economics. While the Public Choice Theory claims that individual preferences are rational and independent of each other, the Theory of Dependent Development argues that humans are social beings and therefore their preferences are not independent of social processes. Accordingly, firms in the system impose consumption preferences on individuals by using tools such as advertisements. In other words, consumers' preferences are interfered with not by making them choose between different products, but by using indoctrination and brainwashing methods (BARAN and SWEZY, 1970, p. 147). 

North (1986, p.230), one of the pioneers of the New Institutional School of Economics, is similar to the Theory of Dependent Development by stating that only a two-dimensional analysis such as price and quantity is not sufficient in determining the preference sets of individuals, but a multidimensional analysis that includes the effects of institutions and organizations is required.

Public Debt and Public Choice Approach according to Political Economy

The Fiscal Constitution approach of Public Choice and Constitutional Economics Theory accepts the 'fiscal prudence' of the 18th century classical liberal movement, essentially applying the highly detailed analytical tools and methods of theoretical economics to the state sector, the political sphere and the public economy, and applying the same individual approach of theoretical economics to the behavior of individuals who are involved in various ways with the public sector (BUCHANAN, 1999, p.48). The public debt burden theory, also called the Keynesian theory of public borrowing, rejects the idea that debt will remain a burden on taxpayers in the future. The basic argument of the theory is as follows: If public expenditures are always made and necessary, all citizens should bear the cost of public services regardless of the period, regardless of whether public services are financed by taxation or borrowing (BUCHANAN and WAGNER, 197, p.14). But in the absence of strong tax revenues, budget deficits and debt can put governments in a very difficult position. It is a fact, for example, that in the 1970s and 1980s Italian local governments often exceeded their budgets and turned to the national government for additional transfers, threatening to close critical public services such as hospitals and schools (WEINGAST and WITTMAN, 2008, p.467 In this respect, one of the most important issues to be taken into account in the formulation of the "Economic Constitution" is to take into account that decisions on the two aspects of the fiscal account (budget) (taxes and expenditures) are made within the political process and both aspects should be considered together in order to prevent governments from spending arbitrarily (BUCHANAN, 1991, p 34).

What are the Contributions of Public Choice Theory to the Development of Public Economics?

In continental Europe, economists' economic approach to public sector activities started in England, A.C. Piqou developed A. Marshall's definition that "external economies will prevent competing enterprises from reaching the optimum level of production" and tried to explain by using marginal analysis techniques that public intervention is necessary to improve social welfare in the presence of external economies (AMACHER-TOLLISONWILLET; 1976, p.406). However, it is the Swedish economists who have analyzed the decision-making process and applied the concept of marginal utility to the political process, which is one of the most important issues in public choice theory today. (SÖNMEZ; 1987, p.145)

Criticisms against the Keynesian Macro Theory emerged in the 1960s and 1970s when the state failed with Keynesian policies. Keynesian Macro Theory could not find a solution to problems such as the decline in the growth rate, productivity crisis and the increase in unemployment with inflation, especially in developed industrial countries. It was argued that Keynesian Macro Theory did not address the issue of productivity, ignored capital accumulation and was based on the assumption that there was always an objective economist (SAVAŞ; 1984, p. 8).

In the face of the inadequacy of Keynesian economic policies in solving the aforementioned economic problems, classical economic thought started to produce new policies with new versions. For example, when the Democrats came to power in the USA or when they took over key points in the congress on fiscal issues, or when the Labor Party in the UK or leftist parties in Greece or leftist parties in OECD countries came to power, we can show that serious monetary expansions and huge budget deficits occurred. (MUELLER, 2003, p.448) 

In this direction, approaches such as "Monetarism", "Supply-Side Economics", "Rational Expectations Theory", "Public Choice and Constitutional Economics" came to the agenda as Neo-classical contemporary economic approaches. Many economists, especially within the Public Choice approach, have turned their attention to the political process in which economic decisions are made in the face of economic problems. In the face of the over-expansion of the public sector, which became a clear problem especially in the early 1970s, the danger of losing the functioning of the market economy forced governments to take some measures. In these countries where representative democracy was established, the unpreventable expansion of the public sector and the irresponsible increase in budget deficits by elected governments and politicians led to new searches. Economists such as Buchanan, Tullock, Downs, Breton, Dahl, Lindblom and Niskanen have made extensive analyses by examining the actors involved in the political decision-making process, which do not fully reflect voter preferences.

Public Choice and Constitutional Political Economy

Public choice theory essentially constitutes the substructure of constitutional economics theory. While the development of public choice theory coincides with the 1940s and 1950s following World War II, the emergence and importance of constitutional economics as a discipline coincides with the late 1970s (UZUN and TOK, 2009: 223). The foundations of constitutional economic theory are based on methodological individualism, rationality and the principles of "maximand" and political exchange (DEDE, 2010: 5). The theory of constitutional economics, which makes an economic analysis of the public decision-making process, determines what kind of content the constitutional boundaries that limit political behavior for the solution of economic problems should have. Constitutional economics theory, which advocates limiting the state's spending, taxation and borrowing powers, argues that many issues in the economic field should be regulated by the constitution (IŞIK et al., 2010: 2).

Public choice theorists advocate constitutional economics to prevent economic and political corruption that arises as a result of the understanding of actors in the political sphere to serve their own interests. They envisage that both the political and economic powers, rights and freedoms of the state and individuals should be bound by certain rules in constitutions (AKILLI, 2010: 30-31). The aim is to restrict the powers of the state in the field of economy and emphasizes that the state should use its constitutional rights by securing the rights and freedoms of individuals.

Conclusion

Public choice theory tries to explain decisions and practices in the political process based on the tools, methods and assumptions used by economics. This discipline, called new political economy with Buchanan's contributions, tries to establish a link between economics and political science. This new paradigm, which enables economists to look at the political decision-making process from different perspectives and has a predominantly positive aspect, has brought a new perspective to the political field. Public choice theory attributes the failure of the public economy to voters' ignorance and apathy, rent-seeking activities of interest and pressure groups, vote trading practices, the principle of political myopia, the failure to achieve unanimity, the failure to supply public goods and services as a whole, and the median voter theory. 

Constitutional Economic Theory, which started to develop in the 1970s, is a discipline that examines "how the power and powers of the state can and should be limited". In addition to public choice theory, this theory has also been criticized. Some of these criticisms include those who argue that the constitution should only regulate political life and the criticisms made by bureaucrats who do not accept that their powers and authorities should be limited by the constitution.

Public choice theory also analyzes the decision-making process through microeconomics. In this process, certain assumptions are made. The main ones are that individuals are homo-economicus and that the political process is an exchange. The political process operates according to these rules. Accepting that these rules exist in the political process shows that the political process has a "market-like" functioning. In this market-like functioning, each actor strives to maximize its own interests. This naturally brings along certain problems.

"What I argue is that public choice has a great impact on the way it is consistently understood and interpreted, as anyone can observe anywhere. Governments have failed in holistic programs of excessive state support, but they have made no public promise to fix it. They have made things worse with market interventions without public support." (BUCHANAN, Politics Without Romance, p.18)

Furthermore, recent developments in the theory of public economics are entirely in the form of problems arising as a result of state intervention. As a matter of fact, the issues examined are excessive public expenditures, excessive taxation, rational use of public resources, the role of electoral preferences in the formation of budget preferences, the distorting effects of pressure groups on budget preferences, the behavior of bureaucrats towards utility maximization, economic and political corruption in the political decision-making process, the inadequacy of the majority vote principle in making public decisions, and ultimately the economic theory of democracy. When we look at the evaluations of public sector performance and efficiency, the question arises whether we should have a more social state with a better distribution of income or a smaller but more efficient state. Of course, it is up to countries to make such a choice. However, the general tendency in the world at the moment is for the state to be smaller and more efficient. In our opinion, the first thing to be taken into consideration when deciding on such a thing is the socio-economic conditions of each country. It would be appropriate to make an appropriate choice by taking these conditions into consideration.

For these reasons, as the propositions developed by the public choice approach later became normative propositions in "Constitutional Economics", debates on the legitimacy of the state and the level of public expenditure in democratic societies intensified. Moreover, the extent to which the state's public preferences for excessive public expenditure-excessive taxation-excessive borrowing undermine the sovereign rights of citizens constitutes another dimension of the debate. The role of the state should therefore be redefined. The growth of the state brings with it political corruption and economic corruption. In order to prevent this, as stated, the state should be downsized and fulfill its primary duties. 

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