June 18, 2012 12:48PM

Niskanen and Discriminatory Democracy

William A. “Bill” Niskanen’s book Bureaucracy and Representative Government (Chicago: Aldine, Atherton, 1971) has not received the attention it deserves. Although Niskanen himself may not have fully realized it, the argument offers explanatory insights into the apparently inexorable growth in the collectivized share of valued resource usage. Until and unless political economists and the citizenry come to understand the workings of the institutional structure, governmental action will continue its dramatic increase that described the twentieth century.

Niskanen concentrated analysis on the role of bureaucratic agency in generating pressures for budgetary expansion. The formation and subsequent existence of a designated agency charged with the functional provision of program services, including transfers, insures the omnipresence of an advocacy group which complements and even initiates identifiable sets of beneficiary end-users. Demands for increasing and ever-larger budgets build up with essentially no opposition.

Consider, by way of comparison, the introduction of a valued good or service in the market sector of the economy. Potentially benefited end-users may exhibit latent demand for the product, and potential suppliers will recognize profit opportunities. Production followed by mutually advantageous exchanges follow in which end-users give up their demands for other valued goods. The process is driven by the offsetting pressures—on demanders to increase their utilities by giving up less preferred for more preferred goods and on suppliers to enter exchanges in the other direction as a means of increasing rents. Through marginal adjustments, the market comes into balance. Exchange ceases at the point where neither demanders nor suppliers see further opportunities for gain. There is no gain to be secured by extending production consumption toward satiety.

For the demander-user of a collectivized good or service, the decision calculus is different, in that there is no direct linkage between the quantity of the good demanded and the nonvoluntary payment exacted as the budgetary size changes. The rent seekers and rent holders in bureaucratic positions join constituency beneficiaries in exerting pressures for budgetary expansion, and they face only vague, disorganized, and nonidentified sets of general taxpayers.

The ultimate fiscal “exchange” is necessarily unfair in that the two sides cannot be brought into some rough but unbiased balance that might generate results closer to widely-accepted efficiency norms. Until and unless, the rules are modified specifically to correct for the bias noted, the collectivized sector must increase in relative size, at least to aggregate supply side limits on revenues.

Both hard-nosed positive analysis and imaginative normative proposals for institutional innovation are needed.

This post is intended as a memorial tribute to Bill Niskanen, surely one of the stalwarts of modern classical liberalism. But it may also be interpreted as a call to arms for an intellectual battle against the natural forces of the cultural evolution that push us toward the discriminatory limits that convert “democracy” into a pejorative term.