Conclusion

The purpose of public choice is to discover what a society of individuals prefers. Nineteenth-century utilitarians thought that individual utilities could be measured and aggregated.

The first and still most significant scholar of public choice is Kenneth Arrow with his treatise on Social Choice and Individual Values (1951 [1963]). Arrow shows that consistent social preferences cannot be derived from individual wants if they are to be compatible with four fundamental axioms: (1) the domain of individual preferences is unrestricted; (2) dictatorship is absent; (3) Pareto efficiency obtains; and (4) the social preferences are independent of irrelevant alternatives. No society can fulfil all four axioms together. All societies of all times have to compromise.

The history of mankind can be regarded as a mirror of how people have coped with Arrow’s axioms. Primitive societies of primeval times were mostly dictatorships. They disregarded the axiom of non-dictatorship as well as most of the other axioms. Later in history, individuals became more mobile increasing their domain of individual prefer­ences. However, with different beliefs, they developed different ideologies, which gener­ated wars and other cruelties inflicting the Pareto axiom. This was an endless tragedy. Arrow’s fourth axiom, the independence of irrelevant alternatives, however, seems immune against the above intricacies of human conflicts. Arrow has introduced the independence axiom because he wanted to avoid comparisons between more than two alternatives and hence cardinal (strategic) evaluations (Arrow 1951 [1963]: 110). But the restriction to pairwise comparisons has its price.

This can be illustrated by the actual euro crisis. If a bank is systemically interconnected with other banks, a single drop out may generate a large and endless crisis. Suppose banker of country X declares: “I fail”, then this is enough for the rest of the euro bankers to ask: how can we survive? They approach the European Central Bank (ECB) to bail them out. The ECB bailout may encourage moral hazard of the first banker who starts a new round of failure and bailout and so on. These sorts of externalities show that once the independence axiom is violated, an endless chain of crises may follows. The example illustrates the dismal message of Kenneth Arrow: a crisis is not an exception. It is the ordinary stem of the tide.

Charles B. Blankart

See also:

Kenneth Joseph Arrow (I); Jeremy Bentham (I); Abram Bergson [Abram Burk] (I); James M. Buchanan (I); Marie-Jean-Antoine-Nicolas Caritat de Condorcet (I); Antonio De Viti de Marco (I); Friedrich August von Hayek (I); Social choice (III); Knut Wicksell (I).