The Limitations of Neoclassical Price Theory and the Implications of Austrian Theories of Competition and Entrepreneurship for Public-Choice Theory

Public choice can be defined as the application of economic theory and methodology to the study of politics and political institutions, broadly defined. Neoclassical price theory has been one of the principal tools of the public-choice theorist, having been applied to address such questions as why people vote, why bureaucrats bungle, the effects of deficit finance on government spending, and myriad other questions regarding the operations and activities of governments. There has indeed been a public-choice "revolution" in economics. But neoclassical price theory has its limitations, many of which have been investigated by Austrian economists. These limitations have implications for the study of public choice. Namely, if neoclassical price theory is itself flawed, then perhaps its applications to the study of political decision making has produced uncertain results.

I shall explore two strands of Austrian economics—theories of competition and of entrepreneurship—and their implications for public-choice theory. I do not claim to provide an exhaustive examination of public-choice theory from an Austrian perspective, but only to offer a few insights. The first section notes some limitations of applying the neoclassical competitive model to the study of political decision making. The next discusses the implications of placing more emphasis on the role of political entrepreneurship in the study of public choice.

--Thomas J. DiLorenzo, "Competition and Political Entrepreneurship: Austrian Insights into Public-Choice Theory," Review of Austrian Economics 2, no. 1 (1988): 59.