Both forms of entrepreneurship are risky.

• Business entrepreneurs run the risk of failure. They might fail to produce a good that people are willing to buy. They might fail to generate enough revenue to cover the costs of production. They might go bankrupt.


• Political entrepreneurs also run the risk of failure. They might fail to implement policies that the voting population supports. They might fail to generate sufficient tax revenue to implement policies. They might lose elections.

Utility Maximizers

And what is it that provides political entrepreneurs with utility?

• Income and Wealth: Like every other person who has ever existed, political entrepreneurs receive utility from the consumption of goods and services; from food, clothing, shelter, entertainment, and every other conceivable commodity; from the goods and services that can be obtained with income. Politicians pursue greater income and wealth.


• Power: Political entrepreneurs are also motivated by nonmonetary rewards; by utility that can be achieved through political authority, by increased self-esteem, or by a sense of historical legacy. More than a few aspiring leaders aspire to a position of authority that only an elected office provides. Others aspire to elected office hoping to leave a legacy that ends with their likenesses etched on coins and currency.


• Altruism: However, political entrepreneurs, also like a lot of other people, receive utility from helping others, from improving society, from making the world a better place. For many politicians, this is as important if not more important than personal satisfaction. Many political entrepreneurs are actually willing to sacrifice personal gain for the "public good."

Election Seekers

Consider what it takes to be elected and what this means for efficiency.

• First, the majority wins: A politician is elected with a majority of the votes cast. This means that successful politicians only need to represent the interests of just over half of the voters and thus can presumably ignore the interests of the remaining voters.


• Second, not everyone votes: In addition, only a portion of the population is actually eligible to vote (children and felons are excluded). Moreover, only a portion of the eligible voters register to vote. And finally, only a portion of registered voters actually cast votes. This means that politicians need to represent only the interests of a surprisingly small fraction of the population to be elected to office. A majority of the population is not needed for victory at the ballot box.

This means that the preferences of over four-fifths, 80-plus percent, of the population can be largely ignored when implementing policies, imposing taxes, and providing public goods. The lack of society-wide representation is a recipe for inefficiency. If politicians need not consider the preferences of everyone, then generating the greatest level of satisfaction for ALL members of society, the standard for efficiency, is hard to accomplish.

The Principal-Agent Problem

The principal-agent problem is commonly discussed in the context of corporations in which the principal is the stockholder or owner of the corporation and the agent is the executive hired to manage the business. The problem arises if the agent (executive) pursues actions, such as greater personal wealth, that conflict with the profit-maximizing goal of the principal (owner).

In the political arena, the principal is society and the agent is the politician. With this illustration of the principal-agent problem, the agent (politician) pursues actions, again such as personal wealth, that conflict with the efficiency goal of the principal (society). And once again, this is a recipe for inefficiency.

Other Sources of Government Failure

• Voters: People, citizens of a nation, also seek to maximize their own utility. Two rational choices they make in this pursuit are to NOT be informed (rational ignorance) and to NOT participate in the political process (rational abstention). Such "apathy" means that elected leaders can ignore their preferences.


• Interest Groups: While some people have little or no involvement in the political process, others have a great deal of involvement. These people, who also seek to maximize utility, have more to gain or lose from particular government actions and are thus motivated to act accordingly, usually by forming special interest groups.


• Bureaucracies: Government policies are usually implemented by complex organizations. Those who work in these bureaucracies are also, you guessed it, utility maximizers. Their pursuit of utility can and does conflict with the efficient implementation of government policies.