During his inaugural address as the fortieth president of the United States of America in January 1980, Ronald Reagan spoke of the ‘economic ills we [Americans] suffer that have come upon us over several decades’

In a line that was to become emblematic of his presidency he went on to suggest that ‘in the present crisis, government is not the solution to our problem; government is the problem’.

Rational or public choice theory, I will use the terms interchangeably here, was developed by a number of American economists in the 1960s. At first mainstream political scientists simply ignored this new approach to the study of politics. By the early 1980s it had however acquired a growing influence in American political science departments and some British and European outposts. In 1967 around 5 per cent of the articles published in America’s most prestigious political science journal, the American Political Science Review, used public choice theory (Green and Shapiro 1994: 3). By 1982 this figure had risen to around 20 per cent. By 1992 it stood at nearly 40 per cent.

Public choice theorists do not have a particularly well thought-out account of what the state is. Practitioners constantly slip between talking about the state, the government and the public sector without ever indicating whether these are meant to refer to different entities. What they do however possess is a distinctive and distinctively hostile account of what the state does and why it does it. Stated simply, public choice theorists regard the state as a source of inefficiency. Indeed James Buchanan (1988: 3), who in 1986 was awarded the Nobel Prize for his work in developing the theory, defines public choice as ‘the science of political failure’.

Once public choice theory had begun to establish its academic credentials, right-wing think-tanks like the Cato Institute in America and the Institute for Economic Affairs in Britain (Cockett 1995) began to popularize and publicise its arguments. At a time when the post-war social democratic consensus was beginning to crumble, public choice theory, together with the monetarism of Milton Friedman (1963), the economic liberalism of Friedrich Hayek (1978) and the social conservatism of writers like Irving Kristol (1983), provided intellectual ammunition and a burgeoning policy agenda for New Right politicians like Reagan and Thatcher (Dunleavy and O’Leary 1987; King 1987; Self 1993; Stretton and Orchard 1994). At this point, James Buchanan (1984: 21) is, once again, worth quoting:

The rapidly accumulating developments in the theory of public choice... have all been influential in modifying the way that modern man views government and political processes...at all levels... limiting the expansion of government power.

As I will be at pains to emphasize throughout this chapter, public choice remains a controversial way of studying politics. Elitism, pluralism, and other state theories have of course attracted their critics. But with the possible exception of its polar political opposite, Marxism, no theory has attracted as much criticism as public choice. As the fortunes of the New Right waned in the 1990s with the election of New Democrats and New Labour, public choice theory came under increasingly heavy fire. In America this culminated, in January 2001, with the launch of a petition berating public choice theory’s influence within political science (Jacobsen 2001). No doubt many of the readers of this chapter will also regard public choice theory’s arguments about the state as a one-dimensional caricature of a messy political reality. But even those who want, instinctively, to dismiss public choice theory out of hand need first to understand it. For whilst the heyday of public choice theory may now have passed, this still remains a intellectually and politically influential approach whose analysis and prescriptions deserve to be taken seriously whether or not they are thought valid.

I proceed as follows. In the following section I define public choice as involving the application of the methods of economics to the study of politics and, in particular, as requiring the assumption of self-interested behaviour. I then place the development of public choice theory within the broader context of post-war economic theory and, in particular, of the theory of market failure used by many economists to justify state interven­tion in the 1950s and early 1960s. In these first two sections the argument is pitched at a very general level. To compensate for this I go on to intro­duce some specific accounts of state failure as they relate to the behaviour of politicians, firms and public servants. I close the chapter by rehearsing one obvious but nevertheless still powerful criticism of public choice theory: that people do not behave, or at least do not always behave, in a purely self-interested way. I show how public choice theory can actually, albeit unexpectedly, be used to reach the same conclusion about people’s motives and how an alternative public choice research agenda might be extracted from this insight.