Beyond Perfect– Reforming the Economic Analysis of Public Policy

It is impossible to effectively analyze public policy without considering the decision-making processes that will define and implement public policy and, more importantly, the choice of which of these decision-makers will decide what issues. Or so I have argued for over 50 years. I have referred to these decision-making processes– such as markets, political processes and courts– as institutions and the choice between them as institutional choice.I have used economic analysis to create an approach to institutional behavior for use within a comparative institutional analysis of public policy. But I have not turned to a critical examination of the existing economic analysis of public policy itself. I will here.Focusing on the behavior of decision-making processes, especially the market, is second nature to those who use economics to understand law and public policy. The notion of market malfunction is the core of welfare economics as well as institutional economics and behavioral economics. Yet these economic analyses suffer from a problem that haunts all forms of analysis of public policy: single institutional analysis– the notion that showing that a given institutional alternative is highly defective tells us much of value for the analysis of public policy. Analyzing institutional choice by focusing solely on the characteristics of only one alternative is an empty exercise. Like the real market, real nonmarket alternatives are a long way from perfect. Moreover, these institutional imperfections are correlated. Where one alternative is at its worst, it is likely that the others will also be at their worst.The first sections of the paper examine these parallel imperfections and seek a mode of understanding institutional behavior in the political process, the adjudicative process and the market that works for comparative institutional analysis. Armed with this analytical framework, the next sections show the parallel nature of institutional behavior and malfunction in the context of externalities and public goods and, in turn, use the issue of consumer protection to examine rent seeking in both the political process and market settings and to show how the dynamics of participation cast doubt on the rent-seeking theories about waste in political process decision-making. The closing section shows how the dynamics of participation and comparative institutional analysis impact basic constructs, such as resource allocation efficiency, and established approaches to economics such as welfare, institutional and behavioral economics