David Henderson’s takeSchuck explicitly defends public choice from its critics, writing, “[P]ublic choice theory’s rational actor model explains and predicts far more observed official behavior than its main rival, public interest theory.” He then lays out how well public choice predicts the destructiveness of many government programs–programs that are destructive precisely because of the many perverse incentives that motivate politicians, bureaucrats, special interests, and voters. Schuck gives many historical and contemporary examples of government programs that cause large inefficiencies, including unemployment insurance (creates the incentive to stay unemployed); disability insurance (creates the incentive to claim disability and quit work); and the Dodd-Frank Act (creates moral hazard by broadening the government’s safety net for risk takers).

My take:

Schuck has an impressive grasp of neoclassical economics, but I think he gives it too much weight. Neoclassical economics is obsessed with the concept of equilibrium, and in turn it pays little attention to innovation. I believe that one of the biggest lessons of economics is the value of trial-and-error learning through entrepreneurial activity.

Incidentally, that is one of the important ideas that is, for all practical purposes, outside mainstream economics. The process of innovation has three steps: introducing experiments, learning from experiments, and evolving as a result of those experiments. The government is particularly inferior to the market when it comes to both experimentation and evolution. The government does not have the ability — or the will — to attempt as many experiments as private actors do. In the marketplace, when one organization won’t explore alternatives, another one often will.

Yuval Levin calls this the three-E’s model–experimentation, evaluation, and evolution.