This article introduces untrained readers to modern political economy, also known as public choice, rational choice, and the economic theory of politics. It is an intellectual history approach, meaning it clearly associates the principal insights to specific individuals. It provides some brief context that reaches back to the still-relevant ideas of classical economics. The main focus is, however, on the concepts developed by the first generation of public choice theorists from about 1950 to 1970.

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This article builds on a companion piece (Jakee, 2022), which introduced untrained readers to the history of modern political economy, or public choice. While the other article focused on the concepts developed by the first generation of public choice theorists—from about 1950 to 1970—the current article focuses on several major issues that the sub-discipline continues to wrestle with. These issues include collective action, voting, constitutions, bureaucracy, game theory as a tool, representative government (including political parties and interest groups), regulation, and non-coercive solutions to collective choice problems.

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Venezuela was the fastest-growing economy of the twentieth century until the 1970s, and it still has the world’s largest known oil reserves. Yet in recent years, it has experienced the greatest economic collapse in South America’s history, condemning 96 per cent of its people to poverty. Much of the existing literature blames foreign sanctions or a decline in oil prices, or both. We disagree, arguing the breakdown was caused by explicit institutional changes that politicised the oil industry and replaced market mechanisms with central planning. The institutional restructuring also disregarded monetary stability and basic infrastructure, including electricity supply, telecommunications, and even security.

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In modeling state failure, many international relations and development scholars focus on formal institutions, which we take to be largely synonymous with the “rule of law.” By contrast, we argue that failed states—and particularly the persistence of failed states—cannot be understood without accounting for informal social norms that underpin the rule of law. We operationalize social norms in failed states by positing the absence of a norm to comply with national laws. Specifically, we argue that political leaders and high-level ministers, civil servants, and citizens in failed states lack a generalized social norm to adhere to national laws. Without such a norm, socio-political dynamics in these states lead to incapacity, autocratic leadership, an inefficient and exploitative bureaucracy, a constant threat of violence, and poverty. Our approach explains why state failure is, despite many interventions, so persistent, and why state incapacity is a consequence of other, more deeply-seated social phenomena, not a cause of them..

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Abstract: Defying an international trend among industrialized nations, Sweden is one of the few countries to fundamentally restructure its public pension system. This reform spurred interest in explaining why the Swedish political system accomplished these changes when so many other nations have not. Anderson claims it was possible because politically-powerful unions and industrial groups supported government efforts, while Feltenius counters that Anderson underestimates the influence of smaller, issue-oriented pressure groups, the pensioners’ organizations. The Anderson-Feltenius dispute reflects disagreement over Pierson’s theory of welfare state development and retrenchment, as well as the persistence and influence of corporatism. We reexamine, in detail, the argument proffered by Feltenius and suggest, as a theoretical matter, both he and Pierson neglect the importance of informal rules in political decision-making. We also present additional evidence, ignored by Feltenius, that unions—and by inference corporatism—remained influential during Sweden’s reform. We thus argue Sweden’s experience is unlikely to be instructive for non-corporatist countries.

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The debate over whether corruption “sands” or “greases” the wheels of income growth has generated a substantial empirical literature; the “greases” argument—that corruption may help firms overcome deleterious governmental obstacles—seems to be advancing, recently. However, as virtually all empirical studies in this area depend upon often-criticized aggregate corruption indices, they fail to take account for the multifarious nature of corruption. We revisit the dispute using newer and more nuanced data that allow for disassembly of corruption into a number of specific types. We also improve upon the problem of missing data, afflicting most related studies, with the use of a better imputation method. We find that although certain types of corruption may help “grease” business transactions, evidence in favor of the “sand” hypothesis is stronger.

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Many observers have expressed concern that low voter turnout reflects an acute shortcoming in democratic politics. One proposed remedy, making voting compulsory, has garnered increasing attention among academics over recent years. Our article focuses on some of the technical properties of compulsory voting rules (CVR) while ignoring the philosophical debate over whether voting should be an obligation or a right. Using basic probability analysis, we compare a voluntary voting rule (VVR) to a compulsory one. We show that, under certain conditions, an electoral seat or district can become safer—or less competitive—with the imposition of a CVR. We also discuss some political implications of our analysis. For example, when generalized to, say, the national political system, this result implies fewer competitive seats in a CVR compared to a VVR, everything else equal. We contend that, because fewer seats will be “in play” in a CVR, CVRs should exhibit lower turnover of seats. Also, political suppliers can be expected to more narrowly focus their attention—and resources—on this smaller set of competitive seats than we would expect under a VVR.

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Lijphart (1997) endorses compulsory voting as a means to increase voter turnout. Considering the likely effects of the role of information (including its costs) on the decision to vote and taking an expressive view of voting, however, compels us to investigate two unexamined claims by such advocates: (i) that individuals are transformed by forcing them to vote, and (ii) that a compulsory electoral outcome is a more accurate reflection of community preferences.We argue that compelling those who are not particularly interested in, or informed about, the political process to vote increases the proportion of random votes and we show that under simple majority rule, compulsory voting may violate the Pareto principle; the less popular candidate is more likely to be elected. Our results cast doubt on the “miracle of aggregation” argument, which optimistically concludes that as long as uninformed votes are not systematically biased, they will have no effect on voting outcomes. We also briefly consider how information cascades can exacerbate this problem.

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External habit formation explains why welfare states can be expected to exhibit increasing dependency over time expressed in the share of the population receiving welfare transfers. At the same time, the average number of hours worked decreases. Under plausible parameter values, the rate of taxation and the welfare expenditure share of national income monotonically increase over time and asymptotically approach a steady state. A positive interactive feedback loop between slow moving external habits and welfare policies makes the extent of redistribution a ‘‘moving target’’. Consequently, setting arbitrary redistributive goals may never satisfy redistributional demands in future periods. Technological progress may mask the underlying dynamic effects of the welfare state.

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A mounting empirical literature clearly indicates that the core programs of the welfare state are unsustainable in their present form. The proximate cause of this growing fiscal instability is a demographic imbalance between younger contributors and older beneficiaries. The authors argue, however, that the ultimate cause is the institutional structure of the welfare state itself. Specifically, if its fiscal institutions are modeled as a common pool resource, the tools and analysis emerging from the growing literature on common pools can be used. Such an analysis suggests that the apparent non-sustainability of current welfare state programs is rooted in the failure to resolve two distinct problems in institutional design. The first problem concerns how to limit the scope of opportunism among rational self-interested individuals. The second problem concerns how to limit the adverse effects of the knowledge problem among boundedly rational individual actors.

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The principal aim of our study is to contribute to the debate over whether regulation is enacted in the interest of consumers, producers, political agents, or some combination of these. We examine the legislative debates and subsequent regulatory bills surrounding road transportation regulation in Ireland in light of the three dominant theories which purport to explain the existence of regulation: the public interest theory and the so-called Chicago and Virginia theories. A unique feature of our study is an attempt to integrate specific rhetorical concepts used in the public policy debates into the theoretical analysis of regulation. One noteworthy conclusion of our study is that theories of economic processes affect the shaping and results of public policy.

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We contend microeconomic theory’s inability to confront the essence of entrepreneurship is due, at least in part, to marginal analysis, which implies infinitely fine adjustments as external parameters change. If, as we argue, entrepreneurs make decisions over complex bundles of choices, entrepreneurial decisions will be discrete or inframarginal. Marginal analysis will, in this setting, be unworkable and even misleading. Building on Yang and colleagues’ inframarginal approach, we model entrepreneurs as consumer-producers who weigh expected total net benefits across their bundled decisions rather than marginal ones. Introducing real time gives rise to path dependence—or a status quo bias—because of the transaction costs of acquiring/liquidating assets and the change in entrepreneurial productivity from learning-by-doing. This path dependence does not however imply inefficiency.

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This article highlights the normative bias in the entrepreneurial theories of Schumpeter and Kirzner. This bias, while significant, has remained largely implicit, and the approaches of both authors, we argue, entail “Panglossian” views of entrepreneurial processes. We trace these problems to each of the theories’ teleological foundations and suggest that defining entrepreneurial “outcomes”, and normatively judging those outcomes, will be more problematic than commonly admitted. We suggest analysing entrepreneurship from a non-teleological approach that decouples the entrepreneurial act from the complex and unpredictable processes that follow from that act. Such an approach should eliminate the normative priors that currently exist and should open up a range of new areas to explore under the rubric of “entrepreneurship”. We also hope to stimulate discussion between entrepreneurship and new classical theorists, since, as we argue, there appear to be affinities between the approaches. In particular, our approach to entrepreneurial analysis implies the kinds of discontinuities that have become the hallmark of the new classical method. Our arguments are briefly illustrated by references to several brief examples at the end of the article.

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It is surely Israel M. Kirzner who has promoted the role of the entrepreneur more than any other author in the second half of the twentieth century. His description of the market process and entrepreneurship in his Competition and the Market Process (1973) represents a seminal contribution to Austrian thinking, although it has been slow to catch on in broader circles. The standard core of microeconomics allows little room for entrepreneurial elements, particularly if the latter are defined in terms of uncertainty, intuition, ignorance, and disequilibrium. In light of this intellectual discord and given his recent retirement, it is timely to reconsider Kirzner’s unceasing efforts to resurrect the role of the entrepreneur, and especially his effort to reconcile this role with conventional neoclassical approaches.

We shall see that Kirzner has not avoided criticism even from like-minded travelers. Radical subjectivists labeled his early descriptions of the entrepreneurial process as deterministic and questioned their worth in the wider context of market process theories. Further developments in his theory (e.g., 1979, 1980, 1982, 1985a, 1992) were instrumental in generating additional academic debate regarding the role of equilibrium. And, while Kirzner has attempted to modify his position over time, for example in describing the equilibrium concept as representative of ‘‘market induced tendencies’’ (see Kirzner 1992, pp. 25–30), we will argue that he has not been entirely convincing.

We intend to re-examine Kirzner’s strong methodological assertions regarding praxeology, the study of ‘‘human action.’’ This methodological statement will be examined in the context of the methodological discussions that were dominating the broader discipline at that time. One of the paper’s principal emphases is on Kirzner’s theory of the market process and the entrepreneurial role. We trace its development from its original conception (1967) and the seminal contribution (1973), through to more recent descriptions (i.e., 1992). We will argue that by introducing the entrepreneurial element, Kirzner was able to alleviate a glaring shortcoming in neoclassical theory by explaining the mechanics of arbitrage. We will also attempt to show that while Kirzner may not have always explicitly intended to describe the market process as deterministic, his repeated use of certain economic concepts signaled otherwise. Finally, while identifying the limitations in Kirzner’s notion of entrepreneurial ‘‘alertness,’’ we will also underline the need to build on this valuable contribution.

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While there exist numerous theories of entrepreneurship, we aim to construct an account of that is thoroughly process-oriented and is thus consistent with non-teleological evolutionary foundations. To accomplish this, we combine theories of structural uncertainty with recent work in the theory of social institutions. From such a perspective, creatively thinking and acting entrepreneurial individuals can account for endogenous social change through their effect on institutions. Our approach helps to clarify many of the inconsistencies that arise in the existing entrepreneurial literature and we are able to clarify issues of entrepreneurial failure, self-employment versus entrepreneurship, entrepreneurs versus managers, and incentives for entrepreneurs in formal versus informal institutional settings.

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While competitive balance is often assumed to be a primary objective of all sport leagues, this assumption should be questioned, particularly if it conflicts with revenue or profit-maximizing objectives. Indeed, many of the collective decisions made by league executives have distributional consequences that might be inconsistent with promoting competitive balance. We analyze the allocation of game-day scheduling slots to teams—a largely overlooked aspect of league scheduling—in the Australian Football League and ask whether more lucrative slot allocations to certain teams are consistent with competitive balance or revenue maximization goals. A key aim of our study is to determine whether the introduction of a historically lucrative broadcasting contract in the early 2000s altered game-day scheduling since broadcasters prefer matches between strong or popular teams over match ups that might better promote competitive balance. We find the broadcasting contract did alter scheduling allocations and that none of the other variables consistent with competitive balance were statistically significant. As such, the redistributions likely run in the direction of financially weak teams to strong ones, contrary to some previous suggestions.

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How do economic ideas formulated by academics manifest themselves in policy debates? To answer this question, we turn to Sweden, a country that experienced an overwhelming economic and financial crisis in 1992-93, which presaged the experiences of many countries during the Global Financial Crisis of 2008 and its aftermath. Using an ideational framework, we analyze the Swedish crisis of the 1990s using personal interviews with social science experts involved directly or indirectly in a vigorous public debate over profoundly altering the path of Sweden’s famous welfare state. We rely on a range of literatures, including personal accounts of policymaking economists, the rhetoric of economics literature and several lines of inquiry by non-economists. We focus on four themes: (i) economist “insider” versus “outsider” interpretations of the crisis; (ii) a high degree of consensus among economists about the causes of the crisis; (iii) exaggerations of economic claims; and (iv) the tendency to portray economic thinking as scientifically based. In addition to offering insights into nearly a century of Swedish academic economists’ involvement in the public sphere, we argue the Swedish experience provides numerous insights to more recent events, such as the 2008 Financial Crisis and even the climate change debate that frequently spills over into the public sphere.

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The “social turn” in the sociology of science emphasizes the historical, social and institutional context of the scientific endeavor. Despite this conceptual advance, formal analyses of how scientific knowledge develops and is transformed have remained underdeveloped in both the sociology and the economics of science. In an attempt to rectify this disparity, we integrate into a formal model the social and evidential influences that Kuhn, Merton, and others suggest will impact scientists’ choices between competing theories. We use this model to analyze the scholarly legacy of a fierce intellectual battle among economists over the feasibility of central planning, known as the calculation debate. We empirically test, using citation analysis, the hypothesis that both evidence and socio-professional factors affected economists’ choice of central planning theories over a span of 36 years. We present a number of influences that acted upon economists as they shifted from a more pro-planning stance around the mid-20^th century to a more market-oriented position several decades later. Each of the variables tested significantly affected economists’ theoretical choice.

This paper examines James Buchanan’s intellectual development between The Calculus of Consent (1962) and The Limits of Liberty (1975), focusing specifically upon several of his lesser-known works on higher education in the 1960s. We trace several key concepts Buchanan would come to fully develop and analyze in Limits. For example, we show that Academia in Anarchy (with Devletoglou) and “The ‘Social’ Efficiency of Education” (1970) cast informal social norms in a central role in the maintenance of social order; these ideas, moreover, anticipated the notion of “ordered anarchy” that would be later expressed in Limits. We also demonstrate that Buchanan explored a version of law-as-public-capital in Academia before he expanded on the concept in Limits. And finally, we show that Buchanan had a concern for the inheritors of constitutions in “Student Revolts, Academic Liberalism, and Constitutional Attitudes” (1968a) akin to his concern over the “second generation” problem in Limits. We thus conclude that Buchanan’s lesser-known work on education served a pivotal role in exploring and developing the constitutional thinking he later expressed in considerably more nuanced form in Limits.

Of all the entrepreneurial activities that occur on a daily basis, very few are profoundly successful. Even accounting for various interpretations of “success,” the odds are not in favor of the individual entrepreneur. Following Buchanan and Vanberg (1991) and Jakee and Spong (2003), we propose that entrepreneurial activity is driven by an innate desire to act in a creative and innovative manner, despite the uncertainty and potential risks of failure. This approach de-emphasizes the notion that entrepreneurs are motivated purely, or even principally, by profit. This study supports such a view by summarizing qualitative data collected through interviews with a number of entrepreneurs.

Research and research writing are inordinately difficult to teach, which probably accounts for why so few courses exist to teach this specific process at an advanced level. This paper describes a research/writing class, evolving for 20 years, that is designed specifically to teach undergraduate research skills, although the insights are equally applicable to graduate students. Rather than focusing on the mechanics of writing per se, it attempts to convey the key properties of a productive writing process. Among other things, the class employs a well-established device used by professional writers, the writing workshop, as it attempts to convey the point that “practicing” writing improves quality. The class design provides students with tools to meet the following 10 objectives: (1) to start writing “somewhere” (and very early), (2) to separate the stages of writing: Brainstorming, Organizing (outlining), Drafting, Revising after feedback, (3) to demystify research/thesis process, (4) to appreciate that writing is for others (not for the writer or even writer’s advisor), (5) to understand that writing entails different problems than oral discussion: what one writes is not always what readers read, (6) to realize that providing critical feedback on others’ work develops one’s own critical writing skills, (7) to learn that the claim/hypothesis is the anchor to any research (virtually all nonfiction), (8) to accept that responding/revising to criticism is vital to becoming an effective writer/researcher, (9) to acquire research skills that can be applied very generally to other projects in many professional settings, (10) to internalize the value of precision/detail.

A significant number of countries are experiencing a new demographic trend, “population aging,” that can be expected to impact key markets, such as housing. We use regression analysis to determine the relationship between house prices and population in the United States and Japan to assess the impact of population aging on housing in each country. Using the estimated parameters for each country, along with population projections for the period 2015–2050, we simulate future house price trends. While our regression and simulation tests integrate aspects of past models on population aging and housing, they also provide a comparative aspect since Japan and the United States have diverging future population trends. In addition, we extend the forecast later than previous studies, which allows us to update what was once a hotly contested debate in the literature over future house prices. After comparing the effects of population on real house prices in the United States and Japan, we find that the effect of population aging on real house prices depends crucially on assumptions about the change of housing stock in each country. Nonetheless, consistent with intuition, the results of our model predict that, compared to the United States, Japan’s real house prices trend below the United States in all cases.

We argue Coase’s central insights are fundamentally underappreciated because he uses a methodology unsuited to standard neoclassical analysis. We advance Coase’s main line of research by clarifying some modeling details he left opaque. Specifically, we argue a crucial set of transaction costs are never fully anticipatable, ex ante; this special class of transaction costs manifest as productivity shocks that involve unanticipated losses in production and wealth. Following Yang (2001, 2003), we trace an approach to specialization and a class of transaction costs we call unanticipated transaction costs, but which Yang largely ignored in his own prodigious work. Defined as such, unanticipated transaction costs cannot affect choice on the margin, but they do affect choice among paths of future choices. A key implication that emerges is the sequential, or path-dependent, nature of decision making. Using our advances on Coase and Yang, we revisit and reinterpret the Fisher Body case. Interpreting transaction costs in this light explains numerous economic puzzles and reinvigorates Yang’s call for an inframarginal revolution in economics.