UNIT 22
ECONOMICS, POLITICS, AND
PUBLIC POLICY
AS AN ECONOMIC ACTOR, A DEMOCRATIC
GOVERNMENT IN A CAPITALIST ECONOMY CAN
PROMOTE IMPROVED LIVING STANDARDS, WITH
GAINS FAIRLY SHARED. OFTEN, THOUGH, THIS DOES
NOT HAPPEN
• In this unit, we look at how institutions and policies are chosen. Why are
some institutions and policies adopted, and not others?
• Like firms and families, the government of a nation is an important eco-
nomic actor whose actions can be understood by studying the
preferences of government leaders, and the constraints under which
they operate.
• A government is distinct from other actors in society in that it can
require citizens to abide by its decisions, using force if necessary (for
example, police powers).
• Governments also have obligations that they owe to their citizens as a
matter of right. As a result, they use tax funds to provide goods and
services (such as police protection or basic schooling), which are usually
free of charge.
• Ideally, democracy empowers citizens by extending voting rights in
competitive elections to everyone, and limits what governments can do
by ensuring individual rights of speech and association.
• Ideally, governments should adopt policies to ensure that possibilities
for mutual gains (for example through exchange) are realized, and that
economic outcomes are fair.
• Even in a democracy, inefficient or unfair economic outcomes occur
because there are limits to what public policy can accomplish. Even
when public policies are economically feasible, they may still not be
implemented because powerful groups oppose them, or governments do
not have the capacity to implement them.
People queuing to cast votes in election, South Africa
1013
The year that he became deputy president of South Africa, Cyril
Ramaphosa was ranked the 29th-richest person in Africa. During his
twenties and thirties Ramaphosa was a militant trade unionist who became
general secretary of the National Union of Mineworkers and was deeply
involved in the anti-apartheid movement. He probably did not anticipate
that by 2012 he would be worth more than $700 million. And he probably
did not anticipate that in 2018 he would become President of South Africa.
Born in 1952 in Soweto, then a poor black township outside
Johannesburg, Ramaphosa grew up during the apartheid system of racial
segregation. Because he was black, he was excluded from the best schools,
healthcare, and even public bathrooms. Like others in the majority black
population, he had no right to vote. The per capita income of black African
families in the late 1980s was around 11% of that of white families. It had
been stuck at this level for at least 50 years.
Resistance to the apartheid regime, together with the international
support it generated, was one of the major social movements of the late
twentieth century. But within South Africa it was brutally repressed from
the beginning. In 1960, police fired on protesters against apartheid at
Sharpeville. Sixty-nine unarmed people died. The African National
Congress (ANC) was banned. Four years later Nelson Mandela, one of the
leaders of the ANC, was imprisoned for life.
Ramaphosa was part of the next generation of anti-apartheid activists.
As general secretary of the National Union of Mineworkers he was part of a
wave of strikes and community protests in the mid- and late 1980s that
convinced many white business owners that apartheid had to go. Eventually
the government conceded defeat, releasing Mandela from prison.
Figure 22.1 shows how the size of the South African public old age
pension received by different groups changed over the last 50 years. It tells
a dramatic story of apartheid and its demise. Under apartheid, the govern-
ment awarded different pensions to each of the ‘racial’ groups making up
the population. In 1975, for example, the pension received by a white
person was more than seven times that received by a black African person.
The gradual equalization of the pension was dramatically achieved at the
beginning of 1993 even before the first democratic election, with the
abolition of all race-based distinctions in pension policy.
In 1994, South Africa’s first democratic election made Mandela
president. Ramaphosa was elected to parliament.
The transition to a democratic political system led to economic gains for
the black population. For the first time, black workers were able to work in
skilled jobs, which raised their wages. Schooling and healthcare were
desegregated. Piped water and electricity became available to many more
families.
But the transition to democratic rule did not narrow the gap between
rich and poor. The Gini coefficient for income stood at 0.66 the year before
the first democratic election, the highest of any major country in the world
at the time. Fifteen years later (in 2008), it had risen to 0.70.
Though by most measures economic disparities between the major pop-
ulation groups had declined, inequalities within the groups dramatically
increased. This was especially true among black Africans, with a new class
of the very rich pulling away from the rest.
Murray Leibbrandt, Ingrid Woolard,
Arden Finn, and Jonathan Argent.
2010. ‘Trends in South African
Income Distribution and Poverty
since the Fall of Apartheid’. OECD
Social, Employment and Migration
Working Papers, No. 101. Paris:
OECD Publishing.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1014
democracy A political system, that
ideally gives equal political power
to all citizens, defined by individual
rights such as freedom of speech,
assembly, and the press; fair
elections in which virtually all
adults are eligible to vote; and in
which the government leaves office
if it loses.
Cyril Ramaphosa’s life story, and South Africa’s recent history, show
some of the many ways that political power affects the economy and how
the economy shapes political power. The economic inequality between
blacks and whites was a consequence of political institutions that prevented
black South Africans from voting and restricted their political activities.
These undemocratic measures united the opposition to apartheid from
trade unions, neighbourhood organizations and students, the ANC, and
other opposition parties, and finally brought democracy to South Africa.
Yet after more than 20 years of democracy, no party other than the ANC
has governed the country, and South Africa remains one of the world’s
most unequal countries. The arrival of democracy, the abolition of
apartheid, and the change in distribution of political power, did not lead to
the reduction in inequality that might have been expected.
The government and the public policies it adopts have played a role in
every unit in The Economy. But until now we have not asked why some poli-
cies are adopted and some are not, and how these policies change as the
distribution of power changes, as it did so dramatically in South Africa over
Cyril Ramaphosa’s lifetime.
This unit will first consider the nature of the government as an eco-
nomic actor: what the government wants, how it achieves its goals, and how
its actions are constrained. We will then consider democratic institutions in
more depth. We will develop a model for how parties in a democracy
choose their policies, and consider how differences between democratic
institutions can affect political outcomes. Finally, we will explain how eco-
nomic, administrative, and political barriers can prevent efficient and fair
policies, even in highly democratic countries.
ANC leader Nelson Mandela
elected president of South Africa
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
1965 1975 1985 1995 2005
Year
O
ld
-a
ge
pe
ns
io
ns
(2
00
9
So
ut
h
Af
ri
ca
n
ra
nd
)
Whites
Africans
Coloureds and Indians
All
Figure 22.1 Apartheid and its demise: The value of South Africa’s old age pension
(1965–2009).
Murray Leibbrandt, Ingrid Woolard,
Arden Finn, and Jonathan Argent. 2010.
‘Trends in South African Income Distribu-
tion and Poverty since the Fall of
Apartheid’, OECD Social, Employment
and Migration Working Papers, No. 101,
OECD Publishing, Paris. Note: The names
of the population groups are the official
South African census terms. ‘Coloured’ is
the South African term meaning people
of mixed European, Asian and African
origin.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1015
government Within a given
territory, the only body that can
dictate what people must do or not
do, and can legitimately use force
and restraints on an individual’s
freedom to achieve that end. Also
known as: state.
22.1 THE GOVERNMENT AS AN ECONOMIC ACTOR
A government allows people to do things together that they could not do
individually, notably going to war. But governments also engage in
activities that vastly improve living standards and the quality of life for
their citizens. Examples include:
• Poverty: Fifty years ago, even in rich countries, many retired or elderly
people were trapped in poverty. For example, in 1966, 28.5% of US cit-
izens aged 65 and over were classed as ‘poor’. Government transfers in
many countries have virtually eliminated serious economic deprivation
among the elderly. In 2012 just 9.1% of elderly people in the US were
poor.
• Economic security: The increased size of government spending, as well as
the policy lessons from the Great Depression and the golden age of
capitalism, have reduced economic insecurity by making the business
cycle less volatile.
• Increased life expectancy and the dramatic reduction in child mortality in
many countries: When these occurred in the late nineteenth and early
twentieth century, they were not primarily the result of advances in
medicine, most of which came later. They followed government policies
that improved sanitation and water supply.
Like firms and families, the government is an economic actor. Its taxes,
spending, laws, wars, and other activities are as much a part of economic life
as the investment, savings, buying, and selling activities of families and firms.
Coercion and providing public services
The government is an actor that dwarfs families and most firms. The US gov-
ernment, federal and local, employs almost 10 times as many people as the
country’s largest firm, Walmart. However, governments were not always eco-
nomic actors on this large a scale. In Figure 22.2 we show the total tax rev-
enues collected by the government of the UK as a fraction of gross domestic
product—a measure of the size of the government relative to the size of the
economy—over more than 500 years. The figure rises from about 3% in the
period prior to 1650 to 10 times that amount after the Second World War.
Not only is the government a much bigger economic actor than any
family or firm, it is also unique among actors in any society. Within a given
territory, it can dictate what people must do or not do and can use force
and restraints on an individual’s freedom to achieve that end. Because cit-
izens generally see the use of the government’s coercive powers to maintain
order, regulate the economy and deliver services as legitimate—meaning
that they accept the government’s authority—most citizens comply with
government-made laws. One application of government’s coercive power is
the collection of taxes, which can be used to fund government operations.
To distinguish governments from private economic actors like firms,
families, individuals, trade unions, and professional organizations, we
define the government as the only body in a geographical territory (the
nation) that can legitimately use force and the threat of force on citizens of
that nation. Governments routinely do things—locking people up, for
example—which, if done by a private individual, would be considered
wrong.
To see why the government’s monopoly on the use of force is important,
return to Bruno and Angela, whom you met in Unit 5.
Angus Deaton. 2013. The Great
Escape: health, wealth, and the
origins of inequality. Princeton:
Princeton University Press.
Peter Lindert. 2004. Growing
Public: Social Spending and Eco-
nomic Growth since the Eighteenth
Century. Cambridge: Cambridge
University Press.
Jon Bakija, Lane Kenworthy, Peter
Lindert, and Jeff Madrick. 2016.
How Big Should Our Government
Be? Berkeley: University of
California Press.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1016
Initially, Bruno was heavily armed and Angela was at his mercy. Bruno
was not a government official. He was acting only as a private citizen. He
used the threat of force to control the labour of others and to enjoy the
fruits of their labour. As an economic actor, the only constraint Bruno faced
was biological. He could not force Angela to work under conditions that
would result in her death, not because that would have been murder, but
because it would have deprived Bruno of ‘his’ worker.
Then we introduced a government that imposed laws on both Angela
and Bruno, disarming Bruno. If he wanted Angela to work for him, he now
had to make her an offer that she would accept without threat of harm from
him. The government, in other words, came to monopolize the use of force.
It used its force to protect Bruno’s private ownership of the land, which is
why Angela could not simply farm the land herself, keeping all of the crops
that she produced.
In the next stage of the story, the government became democratic, and as
there were many more ‘Angelas’ than ‘Brunos’ in the population, Angela
improved her economic position.
Beyond its legitimate use of coercive powers, a second feature of the
government, one that also distinguishes it from firms and other private eco-
nomic entities, is that it has obligations to its citizens based on civil and
human rights. To advance and protect these rights, governments use tax
funds to provide services such as national defence, police protection, and
schooling. These services are often provided without restrictions to those
who use them, and without charging a price.
People differ greatly in their income and wealth, and therefore in the
taxes they pay, but because they are citizens, they are equally entitled to
many of the services of the government. This is the cause of many debates
about the appropriate ‘size’ of the government: people with less income and
wealth benefit from many government services but, as we saw in Unit 19,
Creation of the
British Empire
1688
Glorious Revolution
1756–63
Seven Years War
1800–15
Napoleonic Wars
1815–1914
Pax Britannica
1914–18
World War I
1928
Universal suffrage
enacted
1939–45
World War II
1945
Labour party
Clement Attlee
elected
1979 Conservative party
Margaret Thatcher elected
0
10
20
30
40
1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000
Year
To
ta
lt
ax
re
ve
nu
e
(%
of
G
D
P)
Figure 22.2 The growth of government in the UK (1500–2021).
See more https://tinyco.re/1110943
UK Public Revenue; Patrick K. O’Brien
and Philip A. Hunt. 1993. ‘The rise of a
fiscal state in England, 1485-1815’.
Historical Research 66 (160): pp.129–76.
Note: Pax Britannica refers to the
century between the end of the
Napoleonic Wars and the beginning of
the First World War, in which (compared
to earlier or subsequent periods) Europe
and most of the world was relatively
peaceful, with the UK the militarily
dominant nation. The Glorious Revolu-
tion deposed King James II in 1688 and
increased the independent power of
parliament.
22.1 THE GOVERNMENT AS AN ECONOMIC ACTOR
1017
people with more wealth and income pay more (in absolute terms) of the
taxes that finance these services.
The tax, transfer, and expenditure systems of democratic governments
typically redistribute income from those with higher to those with lower
incomes, as shown in Figure 5.16 for a large sample of countries, and in
more detail for the case of Mexico in Figure 19.29a. At the same time,
ecologically and socially damaging practices are often used by those with
higher incomes to increase their income further, at the expense of the poor.
Part of the solution
In Figures 12.8 and 12.9, we looked at a variety of decisions made by
private actors in the economy that affect others by imposing an
uncompensated external cost or benefit. We also examined possible
remedies for these market failures, often through government intervention.
We also saw that governments adopt policies to correct the unfairness that
sometimes results from private economic interactions. Governments may
adopt the twin objectives that we have used in this course:
• ensuring that the mutual gains possible through our economic
interactions are as large as possible and are fully realized
• sharing these gains in a fair manner
Examples of policies to address market failures and unfairness include:
• Competition policies: To reduce the price-setting powers of monopolies.
• Environmental policies: To reduce emissions of pollutants.
• Subsidies: For R&D.
• Policies that establish the expectation that aggregate demand will be relatively
stable: So that firms will invest.
• Public provision of healthcare or compulsory insurance.
• Providing information: To allow people to make better decisions, such as
the risks associated with financial products, children’s toys, and foods.
• Central bank policies: That require commercial banks to minimize their
risk exposure by restricting the leverage of their balance sheets.
• Minimum wage laws: That prohibit contracts that pay below a stated
minimum.
Governments pursue these objectives by some combination of four means:
• Incentives: Taxes, subsidies, and other expenditures alter the costs and
benefits of activities that have external effects, which would lead to
market failures or unfair outcomes if left unaccounted for.
• Regulation: Direct regulation of economic activities such as the degree of
competition, including mandatory universal participation in social and
medical insurance, and regulation of aggregate demand.
• Persuasion or information: Altering available information and people’s
expectations about what others will do (for example, their belief that
their property is secure or that other firms will invest) so as to allow
people to coordinate their actions in a desirable way.
• Public provision: In-kind provision or through monetary transfers,
including merit goods such as basic education, legal representation in
court proceedings, and income transfers to alter the distribution of
living standards.
Jean Tirole, an economist who
specializes in the role of
intervention and regulation,
describes the way that govern-
ments can intervene in his Nobel
prize lecture (https://tinyco.re/
2393310).
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1018
Figure 22.3 brings together many of the examples of policies studied in
earlier units. In each case, the policy targets a particular market failure or
perceived unfairness. We identify the objective of the policy and the
instrument used. The further readings to be found in the units and videos
shed light on the extent to which the policy objectives were achieved.
Whilst such policies have been effective in addressing concerns of
inefficiency and unfairness in some countries, in Section 22.9 we discuss
why market failures and economic outcomes viewed as unfair by many cit-
izens can still persist in democracies.
Part of the problem
To accomplish these valuable policies, governments must have
extraordinary powers to acquire information and to compel compliance.
This creates a dilemma. For the government to be a successful problem-
solver, it must also be powerful enough to potentially be a problem itself.
Examples from history, and today’s news, show governments using their
monopoly on the use of force to silence opposition and to acquire huge
personal wealth for their officials and leaders.
Before the French Revolution, Louis XIV of France, called the ‘Sun King’
by his subjects, claimed ‘L’etat, c’est moi’ (I am the state). The word ‘state’ is
sometimes used—as the Sun King did here—to mean ‘government in
general’, distinguishing it from any particular body such as the government
of France. In neighbouring Britain, at almost the same time, William Pitt
had a different view of his King, declaring that ‘The poorest man may in his
cottage bid defiance to all the forces of the Crown,’ as we saw in Exercise
1.6 (page 24).
Well-governed societies have devised ways to limit the damage that the
use of government powers can inflict without undermining the govern-
ment’s capacity to solve society’s problems. These have generally included a
combination of:
• Democratic elections: To allow citizens to dismiss a government that is
using its powers for its own benefit, or the interests of some other small
group.
• Institutional checks and balances: Plus constitutional restrictions on what
the government can do.
The second point is why Pitt could observe that while the farmer may have
difficulty keeping rain out of his cottage, he could confidently exclude the
King of England.
In a capitalist economy, barring exceptional circumstances, the govern-
ment cannot seize what you own, which limits its capacity to enrich itself at
your expense. This is an essential limit on arbitrary government powers. An
example of a special case would be if you owned a piece of land that was the
only possible site for a bridge that was needed to solve a traffic problem.
Most governments would have the right to acquire the land at what is
independently judged to be a fair price, even if you were unwilling to sell.
This power to take private property for public use has many names. For
example it is known as the ‘right of eminent domain’ in the US or a
‘compulsory purchase order’ in the UK.
Even with well-designed limits on government powers, and provision
for exceptions allowing governments to better serve the public, we will see
that governments, like markets, sometimes fail.
22.1 THE GOVERNMENT AS AN ECONOMIC ACTOR
1019
Policy Unit Market failure or
unfairness
Policy objective Type of policy
instrument
Example referred to in the text
Tax on sugary drinks 7 Too much sugar
consumption;
negative external
effects from health
consequences
Reduce sugar
consumption
Incentives;
information
Denmark; France
Progressive structure of
taxes; monetary and in-
kind transfers
19 Unfair inequality of
market incomes
Reduce unfair
inequality of final
incomes
Incentives;
public
provision
Mexico; South Africa; Brazil; EU
Reduce tariffs 18 Too few imports are
purchased (P > MC)
Exploit all possible
gains from trade
Incentives Globalizations I and II; (Dani Rodrik video
(https://tinyco.re/2901543))
R&D subsidies 12,
21
Too little R&D Increase R&D Incentives Germany
Cap and trade or
carbon tax
20 Too much CO2
emissions (common-
pool resource)
Reduce CO2
emissions
Regulation
(cap);
incentives
(trade)
EU and US (cap and trade)
Ban on CFCs 4 Emissions damaging
ozone layer
(common-pool
resource)
Eliminate use Regulation Montreal Protocol 1989
Patent protection but
limited in length
21 Too little R&D Encourage R&D but
ensure timely
diffusion
Regulation
(monopoly on
innovation);
incentives (for
R&D)
Copyright on 19th century operas; US
pharmaceutical patents; (Petra Moser
video (https://tinyco.re/1357924);
(F. M. Scherer video (https://tinyco.re/
1054830))
Competition policy to
address monopoly
7 Too low a quantity is
sold (P > MC);
monopoly favours
owners over
consumers
Bring price closer
to MC
Regulation European Commission (Volvo/Scania); US
Department of Justice (Microsoft)
Land tenure reform 5 Poverty among
share-croppers;
unfair distribution of
the crop
Raise farmers’
income as higher
share of harvest
goes to farmer
Regulation Operation Barga; West Bengal
Minimum wage 19 Incomes at the
bottom of the
income distribution
are too low
Reduce poverty Regulation US state legislation (Arin Dube video
(https://tinyco.re/6661119))
Eliminate ethnic,
gender, or racial
discrimination in
labour markets
19 Unfair inequalities in
labour earnings
Raise incomes of
targeted groups
Regulation;
information
South Africa
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1020
Policy Unit Market failure or
unfairness
Policy objective Type of policy
instrument
Example referred to in the text
Mandatory purchase of
health insurance or
public provision
12,
19
Adverse selection:
Too little insurance
offered; premiums
too high for high-risk
people
Improve access to
health care
Regulation;
public
provision
UK; US; Finland
Capital requirements
on banks
17 Excessively risky
lending with external
costs for others (for
example taxpayers)
Reduce risk to the
financial system
and to government
finance
Incentives;
regulation
Comparison between pre- and post-
global financial crisis regulation (Joseph
Stiglitz video (https://tinyco.re/8982378);
Anat Admati video (https://tinyco.re/
7801884))
Inflation-targeting
monetary policy
15,
17
Unemployment
higher than the
inflation-stabilizing
rate
Keep
unemployment
close to the labour
market Nash
equilibrium
Incentives;
persuasion
Bank of England, Federal Reserve, and
other central banks during the great
moderation
Labour market reforms
(active labour market
policy, shorter-duration
unemployment
benefits)
16 Unemployment too
high
Improve matching
between vacancies
and unemployed
Incentives;
regulation;
information
Hartz reforms in Germany
Aggregate demand
management policy
14,
17
Coordination failure
among firms about
expected demand
Stabilize aggregate
demand
Persuasion;
public
provision
Comparison between Great Depression
and post-Second World War policy
regimes (Barry Eichengreen video
(https://tinyco.re/7843200))
International
cooperation
14 Coordination failure
among countries
about fiscal stimulus
Prevent collapse in
aggregate demand
Persuasion 2009 London G20 Summit
International
cooperation
20 Coordination failure
among countries
about climate
change mitigation
Reduce CO2
emissions
Persuasion 2015 Paris Climate Agreement
R&D public funding 21 Too little R&D Increase publicly
funded R&D
(university and
other)
Public
provision
US military and higher education; UK
government; CERN consortium
Early childhood
intervention in
education
19 Non-level playing
field for children
Increases
opportunities for
poorer children to
attain more
advanced
schooling
Public
provision
Interventions in US (James Heckman
video (https://tinyco.re/2099156))
Figure 22.3 Economic policies aimed at mitigating market failures or addressing
unfairness, discussed in earlier units.
22.1 THE GOVERNMENT AS AN ECONOMIC ACTOR
1021
natural monopoly A production
process in which the long-run
average cost curve is sufficiently
downward-sloping to make it
impossible to sustain competition
among firms in this market.
economic accountability
Accountability achieved by eco-
nomic processes, notably
competition among firms or other
entities in which failure to take
account of those affected will
result in losses in profits or in busi-
ness failure. See also:
accountability, political
accountability.
political accountability
Accountability achieved by polit-
ical processes such as elections,
oversight by an elected govern-
ment, or consultation with affected
citizens. See also: accountability,
economic accountability.
market failure When markets
allocate resources in a Pareto-
inefficient way.
government failure A failure of
political accountability. (This term
is widely used in a variety of ways,
none of them strictly analogous to
market failure, for which the
criterion is simply Pareto
inefficiency).
To see why neither markets nor governments may provide ideal
solutions to economic problems, think about the case of a natural
monopoly that we studied in Units 7 and 12. An example would be the
provision of tap water in a city, or electricity transmission over a national
network. In these cases, economies of scale means that the most efficient
solution would be to have a single entity—a private firm or the govern-
ment—provide the service.
If it was privately owned as a monopoly, we know that the firm would
face a downward-sloping demand curve, which would limit the price at
which it could sell its goods. The monopoly firm would both seek to reduce
costs and restrict output so that it could charge a higher price. The result
would be a price above the marginal cost of production, which would mean
that some consumers who value the service at more than its marginal cost
would not consume it.
Would the government do a better job?
Ideally a government-owned natural monopoly would set the price
equal to the marginal cost and finance the fixed costs through well-
designed taxation. But the government may have little incentive to reduce
costs. The publicly owned water or electricity supply company may be
under pressure to overstaff the company with well-paying jobs for polit-
ically connected individuals. As a result, the costs may be higher than they
otherwise would be. Wealthy individuals or firms may lobby the govern-
ment-owned monopoly to provide its services on favourable terms to
special-interest groups.
This case illustrates both the similarities and differences between the
economic accountability provided by the market and the political
accountability provided by a democratic form of government. Both the
monopoly firm and the government may act to further their own interests
at the expense of the consumer or taxpayer, but they would both operate
within constraints. The monopoly firm would not be free to charge
whatever price it wished. Its profits were limited by the demand curve. The
government would not be free to inflate the costs of provision by only
hiring or catering to ‘friends of the government’, because it may suffer an
election defeat.
These two cases—private or government ownership of a natural
monopoly—illustrate the problem of market failure (the monopoly
charging more than the marginal cost) and what is sometimes called gov-
ernment failure (the failure to minimize the cost of providing the service),
and the problem of adopting policies in a real world in which neither issue
can be avoided entirely.
Which works better? There is no general answer to this question. And
there are many choices besides private ownership or government
ownership, including:
• private ownership under public regulation
• public ownership with competition among private firms for the time-
limited right to produce and price the service
Viewing the government as an economic actor that pursues its objectives,
but is constrained by what is feasible, helps us clarify which factors can
influence a government to be more of a problem-solver, and less of a
problem.
Andrei Shleifer. 1998. ‘State versus
private ownership’. Journal of Eco-
nomic Perspectives 12 (4):
pp. 133–150.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1022
EXERCISE 22.1 BUILDING SELF-CONTROL INTO GOVERNMENT
James Madison, a leading figure in the debates about the US Constitution
after the formerly British colonies in the United States of America won its
war of independence, wrote in 1788:
In framing a government which is to be administered by men over
men, the great difficulty lies in this: you must first enable the gov-
ernment to control the governed; and in the next place oblige it to
control itself.
How does democracy (including the rule of law) address Madison’s
concerns to oblige the government to ‘control itself’?
EXERCISE 22.2 THE RELATIONSHIP BETWEEN ECONOMIC DEVELOPMENT
AND SIZE OF GOVERNMENT
Use Figure 22.2 (page 1017) to help you answer the following questions:
1. Why was Pax Britannica a period of smaller government?
2. Compare Figure 22.2 (page 1017) with Figure 1.1a (page 2). Why do you
think that the growth of the size of government coincides with both the
emergence of capitalism as an economic system in the seventeenth
and eighteenth century, and the increase in output per capita?
3. Compare two ‘peacetime’ periods—Pax Britannica, and the period
since the end of the Second World War. Why do you think the size of
government was so much larger in the second?
22.2 GOVERNMENT ACTING AS A MONOPOLIST
As mentioned in the previous section, governments have the power to solve
problems, but also cause them. Heads of governments and their associates
often misuse their power for personal gain:
• France: The ‘Sun King’ Louis XIV ruled France from 1643 to 1715.
Between 1661 and 1710 he constructed a luxurious palace and grounds
for himself at the Palace of Versailles, which is now one of the top tourist
attractions of the world.
• Ivory Coast: As president from 1960 to 1993, Felix Houphouet Boigny
accumulated a fortune estimated to be between $7 and $11 billion, much
of it held in Swiss bank accounts. He once asked, ‘Is there any serious
man on earth not stocking parts of his fortune in Switzerland?’
• Romania: Nicolae Ceausescu, the head of state under Communist Party
rule for over two decades, amassed extraordinary wealth, the most
visible parts of which were more than a dozen palaces that had
bathrooms with gold-tiled baths and solid-gold toilet paper holders.
• Russia: Personal connections with President Vladimir Putin have
allowed a class of business people called oligarchs to obtain hundreds of
millions of roubles worth of assets.
Other governments, even undemocratic ones like the ones just mentioned,
sometimes provide valuable public services and rule without extravagant
personal gain.
Alexander Hamilton, James
Madison and John Jay (1961). The
Federalist. Middletown, Ct.,
Wesleyan University Press.
22.2 GOVERNMENT ACTING AS A MONOPOLIST
1023
Preferences and feasible sets
To understand why governments do what they do, we first model the gov-
ernment as a single individual, and use the usual concepts:
• his preferences
• the constraints which determine which actions and outcomes are feas-
ible for him
We consider the government as a single actor, but in fact it is made up of a
large number of actors. And just as managers and owners of firms have a
wide variety of motivations, so do those in government. The following
motives are common among those in leadership roles in government:
• Benevolence: To improve the wellbeing of citizens.
• Nepotism: To give special importance to a particular group, such as the
region from which government leader comes, or a particular religion.
• Self-interest: Using the power of the government position for personal
enrichment.
To begin, we model the government as a ‘political monopolist’, which means
there is no competition from elections that could remove it from power. We
call this the ‘government as monopolist’ model, and a government like this
is referred to as a dictatorship. Even in the absence of elections, the dictator
faces a feasibility constraint: his powers are not unlimited, because if he
takes too much from the population, he may be removed from office by an
uprising of citizens.
Depending on its preferences and the constraints it faces, the govern-
ment may use the tax revenues it collects for a variety of purposes, which
may include:
• The provision of services to virtually all citizens: These include schooling
and health.
• The delivery of government services or other benefits to a narrowly targeted
group: These might be well-paying jobs, or special reductions in tax
obligations.
• Granting substantial incomes to themselves: Or other economic benefits, to
themselves or their families.
A rent-seeking dictator
As with all models, we simplify greatly so as to focus on the most important
aspects of the problem:
• the ‘dictator’ is entirely selfish
• he decides on a tax that he will collect from the citizens …
• … and keeps the tax revenue, apart from his spending on a public service
(such as basic health services or schooling) for the citizens …
• … whom he provides for because if he keeps too much, a popular
uprising may remove him from office
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1024
political rent A payment or other
benefit in excess of the individual’s
next best alternative (reservation
position) that exists as a result of
the individual’s political position.
The reservation position in this
case refers to the individual’s situ-
ation were he or she to lack a
privileged political position. See
also: economic rent.
While simple, this model captures some key realities:
• The Romanian people revolted against Nicolae Ceausescu in 1989 after
he had been in office for 29 years. The armed forces joined the revolt,
and he and his wife were executed.
• Louis XVI of France was removed from power in a revolution in 1789,
during which thousands of armed men and women besieged the Palace
of Versailles. He was executed by guillotine in 1793.
The costs of the public service include what the dictator would earn as a
normal civilian. The amount the dictator receives (taxes in excess of the
costs of the public service) is called a political rent:
• It is a rent: This is what the dictator gets above and beyond his next best
alternative (namely, working as an ordinary civilian).
• The rents are political: They exist as a consequence of the political institu-
tions in force. The dictator receives an income above his reservation
income because he occupies a position of power in government.
These rents are an example of persistent (or stationary) rents (as in Figure
11.23). Unlike the stationary rents that encourage workers to work hard
and well, or the dynamic rents received by successful innovators, these
rents do not play a useful role in the economy. They are simply a reward for
having power.
Rent-seeking by the dictator (activities to enlarge or to perpetuate these
high incomes) often involves using the economy’s resources to police the
population in order to keep the dictator in power, rather than to produce
goods and services. These are similar to some of the rent-seeking activities
of a profit-maximizing firm—advertising or lobbying the government to
gain a tax break, for example—but are different from other rent-seeking
activities such as innovation, which often creates substantial economic
benefits.
To simplify the dictator’s decision-making problem, we assume that the
dictator does not choose the public service to supply—the public service is
taken as given. The dictator only chooses how much to collect in taxes.
Even a dictator faces constraints on what he can do
As in Unit 5, when Bruno was using his coercive powers to exploit Angela,
the dictator will not want to collect so much in taxes that the citizens would
lack the strength and ability to produce. But the dictator will face an addi-
tional constraint: if the taxes are too high, the citizens will try to remove
him from power, by revolting or engaging in other forms of civil unrest.
We assume there are two reasons for removing the dictator:
• Performance-related reasons: He collects too much tax, for example.
• Reasons unrelated to performance: The dictator has no control over these.
The dictator wants to maximize the total political rent that he can expect to
get over his period in office, not the rent he can get in any particular year.
So he has to think about how long he is likely to last. Of course, this is
impossible to predict, but he will reasonably expect that if he is providing a
given amount of the public service, then the lower the taxes he imposes, the
longer his duration in office will be.
22.2 GOVERNMENT ACTING AS A MONOPOLIST
1025
Figure 22.4 illustrates how a forward-looking dictator would evaluate
two possible levels of taxation. With the higher tax, the dictator gets a larger
rent per year but for a shorter time in office, because the likelihood of being
removed is greater.
Assuming the private sector does not also provide this service to the
public, you can think about the government as a monopolist providing the
public service at a ‘price’ (the tax), which citizens are legally obliged to pay.
The dictator faces a constraint similar to a demand curve. Just as the
amount a monopolistic firm is able to sell is inversely related to the price
that it sets, the duration of the government’s time in office is inversely
related to the tax rate it sets.
Figure 22.5 shows how the tax rate imposed by the dictator affects the
expected duration of the government, defined as the number of years he
may expect to stay in office following this year.
What is the longest time (Dmax) that the dictator could expect to remain
in office? To figure this out, imagine that our dictator suddenly lost interest
in money and simply wanted to remain in office as long as possible. What
would he do?
He cannot reduce the probability that he will be removed for reasons
unrelated to his performance. But he can reduce the ‘performance-related’
probability of being removed by only collecting enough taxes to meet the
production costs of the public service. In Figure 22.5, Dmax is therefore
where the duration curve meets the cost line. It is the expected duration
when only considering factors unrelated to the dictator’s performance. Any
tax rate above the cost of production will reduce the expected duration
below Dmax, as shown by the downward slope of the duration curve.
To
ta
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T
If he collects less in taxes
he will remain in office longer
If the dictator collects T2in taxes
he anticipates that he will remain
in office D2years
D2 D1
T1
T2
X
YRent2
Rent1
Future duration of the dictator’s time in office, D (years)
Cost per year of public service suppliedC
Figure 22.4 The forward-looking dictator contemplates the total political rent he
will get with two different levels of annual taxation.
1. Higher tax
If the dictator collects T2 in taxes, he
anticipates that he will remain in office
for D2 years. His total political rent is
(T2 − C)D2, where C is the cost of
supplying the public good.
2. Lower tax
If he collects less in taxes, he will
expect to remain in office longer. His
total political rent is (T1 – C)D1.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1026
The duration curve goes through points X and Y in Figure 22.4 and does
not go below the cost line because if it did, the dictator would be paying out
of his own pocket toward the cost of the public service. A dictator in a
country with a stronger rule of law—and therefore a lower likelihood of a
coup unrelated to performance—would face a duration curve that meets the
cost line to the right of the one shown.
The duration curve is the feasible frontier for the dictator. Points in the
feasible set above the cost curve result in positive rents for him. The curve
represents a familiar trade-off:
• Higher taxes: More rents in the short run at the cost of a greater
likelihood of an early dismissal from office. A shorter duration in office
is the opportunity cost of higher rents per year.
• Lower taxes: The dictator earns rents for longer, but at a lower level per
year. Lower rents per year is the opportunity cost of a longer duration in
office.
The dictator chooses a tax to maximize his total rents
How does a dictator facing a duration curve decide the tax rate to impose
on the citizens? The answer is similar to the way that a monopolistic firm
decides on the price to charge for its product. This can be seen in Figure
22.6.
The dictator will find the tax that maximizes his total expected political
rent, which as in Figure 22.6 will be
This is analogous to the profit-maximizing firm that chooses the price that
allows it to get the highest expected profits equal to (P − C)Q, where P is the
price charged by the firm and Q is the quantity sold.
Leibniz: Expected duration of the
dictator or governing elite
(https://tinyco.re/L220201)
To
ta
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ax
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T
Future duration of the dictator’s time in office, D (years)
Cost per year of public service supplied
Duration curve
Dmax
X
Y
Figure 22.5 The duration curve: The dictator sets the tax given the cost of the public
service.
22.2 GOVERNMENT ACTING AS A MONOPOLIST
1027
Just as we used the firm’s isoprofit curves to determine the price it
would charge in order to maximize profits, we can now use the dictator’s
isorent curves shown in the figure to determine the tax rate it will impose
on the citizens. The shape of the isorent curves is similar to the isoprofit
curves:
• Higher isorent curves are further from the origin.
• The absolute value of their slope is (T − C)/D.
• They are ‘bowed inward’ (convex) towards the origin, as shown in the
figure.
• The ‘no rent’ isorent curve is the horizontal cost line (its slope is zero).
Now suppose the dictator is considering setting a modest tax and expecting
a long tenure in office, indicated by point A. Because the isorent curve is
flatter than the duration curve at this point, we can see that he would do
better by raising the tax and bearing the opportunity cost associated with
doing so (a shorter expected stay in office).
Continuing this reasoning, we can see that the tax rate indicated by
point F on the duration curve gets the dictator a large surplus per year, but
not enough to offset the short duration of his government. A lower tax rate
would increase his expected rent.
To maximize his political rent, the dictator will select point B, imposing
the tax T* and expecting to stay in office for D* years, making a total rent of
(T* − C)D*. At this point, the slope of the highest isorent curve is equal to
the slope of the feasible frontier (the duration curve):
Convexity means that for a given
value of D, moving upwards in the
figure (increasing T) makes the
curves steeper, while for a given T,
moving to the right (increasing D)
makes the curves flatter.
Leibniz: How the monopolist sets
the rent-maximizing level of taxes
(https://tinyco.re/L220202)
To
ta
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T
Future duration of the dictator’s time in office, D (years)
Cost per year of public service supplied
Duration curve
DmaxD*
B
F
C
T*
A
Isorent1
Isorent2
Figure 22.6 The dictator chooses a tax level to maximize his political rents.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1028
QUESTION 22.1 CHOOSE THE CORRECT ANSWER(S)
Consider Figure 22.6 (page 1028). Which of the following statements is
true?
A self-interested dictator will maximize the annual tax revenue they
collect.
Moving from A to B in the diagram is a Pareto improvement,
improving outcomes for both citizens and the dictator.
At T*, an increase in the tax rate will increase total expected rent.
Dictators use some tax revenues to provide essential public
services.
22.3 POLITICAL COMPETITION AFFECTS HOW THE
GOVERNMENT WILL ACT
Just as competition disciplines firms in the economy by limiting the profits
they can get by setting too high a price, competition to win elections is the
way that a democracy disciplines its politicians to provide the services
desired by the public at a reasonable cost (in terms of taxes). Below we give
some evidence of this from the US.
There is also evidence from other countries that the prospect of being
removed from office affects what politicians do. The introduction of
village-level elections in China led to increased provision of local public
services such as health services and schooling, and arguably a reduction in
corruption.
Even in undemocratic settings, the threat of losing office can discipline
politicians. In China, provincial governors and Communist Party
secretaries are not subject to review by voters but instead by higher officials
in the central government. Governors and party secretaries are frequently
promoted and almost as frequently fired. The records of all terminations
over the period 1975–1998 show that those whose provinces experienced
rapid economic growth were promoted, while those whose provinces
lagged behind in growth were dismissed.
HOW ECONOMISTS LEARN FROM FACTS
Does electoral competition affect policy?
Think of a politician as wanting to stay in office and knowing that she
must satisfy a majority of voters when seeking re-election. But she also
has her own objectives: to advance a particular project that she favours,
or to maintain good relations with wealthy individuals who will support
her political campaigns or employ her when her political career is over.
Does the threat of ‘give the voters what they want or get thrown out’
lead her to emphasize the public’s interests, instead of her own?
Just comparing the policies adopted by politicians in districts that are
non-competitive (for example, there will be no other candidate for the
seat) with those who face electoral competition will not answer the
question. The reason is that competitive and non-competitive political
districts, and the politicians who represent them, are different in so
many ways that the comparison would mix the effects of political com-
petition with the effects of these other differences.
Monica Martinez-Bravo, Gerard P. i
Miquel, Nancy Qian, and Yang Yao.
2014. ‘Political reform in China: the
effect of local elections.’ NBER
working paper, 18101.
22.3 POLITICAL COMPETITION AFFECTS HOW THE GOVERNMENT WILL ACT
1029
governing elite Top government
officials such as the president,
cabinet officials, and legislative
leaders, unified by a common
interest such as membership in a
particular party.
Economists Tim Besley and Anne Case devised an ingenious way to
answer the question (https://tinyco.re/2599264). Some state governors
in the US are limited to two four-year terms of office. This means that at
the end of their first term they will face electoral competition when they
ask voters to re-elect them. During their second term, the prospect of
political competition does not affect them, because they are not allowed
to stand for re-election.
Considered as an experiment, the ‘treatment’ is the prospect of
electoral competition, the governors in the first term are the ‘treatment
group’ and the same governors in the second term are the ‘control
group’. As in any good experiment, other important influences are held
constant. We are measuring the same individuals, in the same districts,
under a treatment and a control condition.
They found that during their first terms (the treatment period),
Republican and Democratic governors implemented virtually identical
levels of total taxation per capita. But during their second terms (the
control period), Democratic Party governors, who tend to favour more
public expenditures and taxation, implemented much higher levels of
taxation than Republicans did. And Republican governors, when not
facing political competition, implemented much lower levels of the state
minimum wage.
Whether Democrat or Republican, governors faced with electoral com-
petition in their first term implemented very similar policies to those
favoured by the ‘swing’ voters who tend to change who they vote for, and
so tend to decide many elections—lower taxes and higher minimum
wages. But they diverged according to their own political preferences or
economic interests when electoral competition was removed.
Political competition as a constraint
Next, we introduce political competition to the model to see how it affects
the government’s choice of tax level. The government leadership is no
longer represented by a dictator, but instead by what we call a governing
elite, that is the top government officials and legislative leaders, unified by
a common interest such as membership in a particular party. Unlike a
dictator, the elite can only be removed from office by losing an election, and
not by a citizen uprising or some other non-electoral means.
When we speak of its removal from power or the duration of its time in
office, we do not mean the removal of an individual (as might have been the
case with a dictator), but rather the entire group and its affiliation with a
political party. In the US, for example, the Republican Party governing elite
was removed from office in 2008, when President Obama was elected. The
Democratic Party governing elite associated with President Obama was
removed from office when President Trump was elected eight years later.
In the model, there are now two ways that a governing elite can be
removed from office, both of which occur through elections (although, of
course, reality is more complex):
• Performance-related reasons: It collects too much tax, for example.
• Reasons unrelated to performance: Even governing elites that serve the
interests of their citizens often lose elections.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1030
Figure 22.7 illustrates a few of examples of governing elites’ duration in
office and the reasons that they eventually left office. The longest
continuous rule by a governing elite was the government of the Mexican
Institutional Revolutionary Party (PRI), which governed Mexico from the
time of the Mexican revolution in the early twentieth century right into the
twenty-first century. The longest rule by an individual at the head of a
governing elite was by Fidel Castro (49 years) in Cuba, who was then
succeeded by his brother Raul. The shortest period in office in this table is
the elected government of Gough Whitlam in Australia, which was
removed by the Governor General (not an elected official) following a
parliamentary impasse over the budget.
The key idea in our model is that political competition makes the likeli-
hood of losing an election more dependent on the government’s perform-
ance. This means that it makes the duration curve flatter. In other words, an
increase in taxes by the government will have a larger effect on the elite’s ex-
pected duration in office than it would if there was no political competition.
The response of expected duration to the change in taxes is:
This is the inverse of the slope of the duration curve. If we have weak political
competition, the duration curve is steep, just as a steep (inelastic) demand
curve indicates weak competition in a market for goods or services.
The flatter, more competitive, duration curve that you see in Figure 22.8
shows a situation in which raising taxes above the cost of providing the
public services is associated with a reduction in the current governing
elite’s period in power.
The model helps show why governing elites, and the wealthy and
powerful members of society who are allied to these elites, have so often
resisted democracy, and attempted to limit the political rights of the less
Governing elite Country Rule Came to power by Left power by
Congress Party India 1947–1977 Election (end of colonial rule ) Election
Communist Party Cuba 1959– Revolution Still in power as of 2017
Social Democratic Party Sweden 1932–1976 Election Election
Second Republic Spain 1931–1939 Election Military coup civil war
Francisco Franco Spain 1939–1975 Military coup, civil war Natural death; return to
democracy
Institutional Revolutionary
Party
Mexico 1929–2000 Election Election
Democratic Party US 1933–1953 Election Election
Sandinista Party Nicaragua 1979–1990 Revolution Election
African National Congress South
Africa
1994– Non-violent revolution &
election
Still in power as of 2017
Australian Labor Party Australia 1972–1975 Election Dismissed by (unelected)
executive
Figure 22.7 Examples of governing elites, their period of rule, and reasons for their
end.
22.3 POLITICAL COMPETITION AFFECTS HOW THE GOVERNMENT WILL ACT
1031
substitution effect The effect that
is only due to changes in the price
or opportunity cost, given the new
level of utility.
income effect The effect that the
additional income would have if
there were no change in the price
or opportunity cost.
well off. In Figure 22.9, voting is initially restricted to the wealthy and as a
result, the elite faces little political competition (the duration curve is steep),
and maximizes its rents at point B. But now suppose that everyone has the
right to vote and that opposition political parties are allowed to challenge
the elite. This increase in political competition is represented by the flatter
duration curve, indicating that the feasible set of the elite has shrunk. It
now chooses point G, and collects lower taxes per year.
Notice that, in the figure, the governing elite in a more competitive
political system implements lower taxes but has the same expected duration
as the elite in the less competitive system (with higher taxes). But this need
not be the case. Generally, the duration could be longer or shorter if condi-
tions become more competitive.
You are already familiar with the reason why the expected duration
might not change after increase in political competition. There are two
offsetting effects:
• Raising taxes bears a heavier risk of the governing elite being dismissed: We
can see the duration curve is flatter. This is the substitution effect:
leading the governing elite to choose a higher expected duration and
lower rent per year.
• The governing elite has lost some of its power: The inward shift of the
duration curve means that it will now receive lower rents whatever it
does. This is the income effect that results in the governing elite
choosing a lower expected duration, and lower tax rate.
Future duration of the governing elite's time in office, D (years)
Dmax0
C
T’
Cost per year of public service supplied
Duration curve
(less competitive)
Duration curve
(more competitive)
To
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T
Figure 22.8 The feasible set for taxes and government duration in a relatively
uncompetitive and competitive political system.
1. A dictatorship
In a dictatorship, the duration curve is
steep.
2. A flatter curve
The more competitive duration curve
(darker) is flatter.
3. A rise in taxes
Raising taxes to T’ above the cost of
providing the public services is
associated with a more substantial
reduction in the current government’s
expected lifetime when political com-
petition is stronger.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1032
In the case we have shown, the substitution effect happens to exactly offset
the income effect.
EXERCISE 22.3 COMPARING DURATION CURVES FOR GOVERNMENTS
AND MONOPOLISTIC FIRMS
How is the duration curve in Figure 22.8 (page 1032) similar to and dif-
ferent from the demand curve faced by a monopolistic firm that you
studied in Unit 7?
EXERCISE 22.4 INCOME AND SUBSTITUTION EFFECTS
Applying what you learned about income and substitution effects and how
they can be analysed in a diagram with indifference curves and feasible
frontiers (from Unit 3), redraw Figure 22.9 to show the decomposition of
the final choice after increased competition into the income effect
(reduction in duration, D) and the substitution effect (increase in D).
22.4 WHY AN ERSTWHILE DICTATOR MIGHT SUBMIT
TO POLITICAL COMPETITION
We have now seen two versions of the ‘government as monopolist’ model:
one in which the ‘government’ is a dictator who may be overthrown, as
Louis XVI and Nicolae Ceausescu were, and the other in which the
governing elite is subject to electoral competition, with the possibility that
another political party may defeat it in an election and become the new
governing elite.
Over the course of the past 200 years, many countries have seen an
increase in the degree of political competition so that the ‘political competi-
tion’ version of the ‘government as a monopoly’ model applies more often
than the ‘dictator’ version.
Leibniz: The income and substitu-
tion effect of an increase in
political competition
(https://tinyco.re/L220301)
To
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T
Future duration of the governing elite's time in office, D (years)
Cost per year of public service supplied
DmaxD*
B
C
Tn
Td
G
Isorent1
Isorent2
Duration curve
(less competitive)
Duration curve
(more competitive)
Figure 22.9 Choice of taxes under less and more competitive conditions.
22.4 WHY AN ERSTWHILE DICTATOR MIGHT SUBMIT TO POLITICAL COMPETITION
1033
This has happened in many cases because governing elites have found it
in their interest to concede to a more competitive political system, or even
introduce one on their own initiative:
• South Africa: You already read that the population of European origin
(those who were both business and governing elites) responded to waves
of industrial strikes, community protests, and student stay-away-from-
school demonstrations by extending the vote to all adult South Africans,
irrespective of race.
• El Salvador: After 10 years of civil war, and faced with an armed
insurrection that they could not defeat, the economic, political, and
military elites of El Salvador conceded to the demands of their
opponents that the country should adopt a democratic political system.
• The US: At the time of adoption of the US Constitution in the late
eighteenth century, James Madison, the author of The Tenth Federalist
Paper, thought that the only way to ensure stability was to increase
democracy. He persuaded his fellow wealthy landowners (and slave
owners) to take a chance on democracy for this reason. The result was
the ratification of the US Constitution in 1788, which despite its
recognition of slavery as a legal institution, is considered to be a
landmark on the long journey to a full democracy.
Faced with unrest, one way the governing elite in an undemocratic political
system could increase the stability of the system would be to use the
coercive powers of the government to imprison and intimidate opponents
who would expose the extent of the government’s political rents.
Nevertheless, there are limits to the effectiveness of these ‘police state’
strategies, as illustrated by the white governing elite under apartheid in
South Africa, who attempted to do this, and failed. The elite of the
Communist Party of the German Democratic Republic (East Germany) also
discovered the limits to its ability to impose stability by force. Popular
demonstrations and challenges to the government were successful, in part
because the police and armed forces eventually could not be counted on to
defend the incumbent government.
An alternative way to ensure stability is to introduce changes in the
political system that make it more democratic, providing the dissatisfied
with legal means to seek a change in government.
A greater degree of democracy will ‘flatten’ the duration curve, thereby
reducing the size of the elite’s feasible set, as we showed in Figure 22.9. If
greater democracy also increased the stability of the political system how-
ever to the extent shown in Figure 22.10, it might allow the elite an even
greater expected rent at the point A′. This would be possible because the
increased expected duration of the government, due to increased stability,
would more than offset the reduced taxes that could be imposed due to the
increased power of the citizens to dismiss the government for excessive
rent-taking. In Figure 22.10, the greater expected rent at A′ is shown by the
larger area of (T** − C)D** as compared with (T* − C)D*.
Read more on South Africa’s and El
Salvador’s transitions to
democracy in this book: Elisabeth
Jean Wood. 2000. Forging
Democracy from Below: Insurgent
Transitions in South Africa and El
Salvador. Cambridge: Cambridge
University Press.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1034
EXERCISE 22.5 EFFECTS OF COST-SAVING IMPROVEMENTS TO PUBLIC
SERVICES
Suppose the elite can introduce a policy that will provide the same level of
public services at a lower cost. This would be called an increase in the
effectiveness of the government. An example might be that the govern-
ment could adopt teaching methods that are more effective, or find ways
to motivate teachers to improve their teaching. Or the government could
require that the construction firms that build public infrastructure, such as
roads, compete with each other rather than colluding in setting high
prices.
1. Which curves in the diagram will this change alter? Draw a figure
depicting this new situation. Hint: The (absolute value of the) slope of
the isorent curves is (T − C)/D.
2. Explain why the governing elite would want to introduce these policies.
3. Can you say if the elite will levy the same level of taxes, higher taxes, or
lower taxes?
4. Can you think of reasons why these policies might not be introduced?
QUESTION 22.2 CHOOSE THE CORRECT ANSWER(S)
Consider Figure 22.10. Which of the following statements is true?
Moving from A to A’ in the diagram is a Pareto improvement,
improving outcomes for both citizens and the governing elite.
Increased competition will always improve outcomes for the
governing elite.
Increased competition would make the elite worse off if they did
not reduce tax rates in response.
The ‘substitution’ effect will cause elite that is facing greater com-
petition to charge higher tax rates.
To
ta
l t
ax
re
ve
nu
e
pe
r y
ea
r,
T
Cost per year of public service supplied
D*
A
C
T*
T**
Isorent1
Isorent2
D**
A’
Future duration of the governing elite's time in office, D (years)
Duration curve
(less competitive)
Duration curve
(more competitive)
Figure 22.10 Effect of greater stability and competition: A case where the elite
gains.
22.4 WHY AN ERSTWHILE DICTATOR MIGHT SUBMIT TO POLITICAL COMPETITION
1035
political institutions The rules of
the game that determine who has
power and how it is exercised in a
society.
22.5 DEMOCRACY AS A POLITICAL INSTITUTION
We have seen that like firms, the government (treated in the model as if it
were a single person) is an important economic actor. As an actor, the gov-
ernment imposes laws, fights wars, collects taxes, and provides public services
such as the rule of law, stable currency, roads, healthcare, and schools. But,
like firms, the government is also a stage. On the stage of government, politi-
cians, political parties, soldiers, citizens, and bureaucrats interact according to
the informal and formal rules that constitute political institutions.
The political institutions of a country are the rules of the game that
determine who has power and how it is exercised in a society. Democracy is
a political institution, which means it is a set of rules that determine
• who makes up the government
• the powers they can use when governing
Political institutions differ from country to country and over time. But major
categories of political institutions include democracy and dictatorship.
The key value motivating democracy is political equality. Citizens should
have substantially equal opportunities to be able to express their views in
ways that can shape the policies and other activities of the government.
Democracy is sometimes advocated as a means to ‘let the people rule’, or
in Abraham Lincoln’s words, a ‘government of the people, by the people and
for the people.’ But who ‘the people’ are and what ‘the people’ want is
difficult to determine. Kenneth Arrow is the economist who contributed
most to our understanding of the problems that elections sometimes
encounter in selecting between different courses of action.
In Unit 1 we explained that we use the word democracy to refer to a
form of government in which three political institutions exist:
• Rule of law: All individuals are bound by the same laws, and nobody—not
even the most powerful government official—is ‘above the law’.
• Civil liberties: The members of a society are guaranteed rights of free
speech, assembly, and the press.
• Inclusive, fair, and decisive elections: Fair elections in which no major pop-
ulation group is excluded from voting, and after which the losing party
leaves office.
Ideally, in a democracy those who have power are elected in an inclusive
and open competitive process, and the rule of law and civil liberties limits
the things they can do with that power.
Democracy has been advocated as a good political system on two quite
different grounds:
• Democracy in its own right: As a political system consistent with indi-
vidual dignity and freedom.
• Democracy as a way of addressing national problems: As a system that
works better than other methods.
Here we focus on the consequences of democracy for addressing problems
(the second point), not on its intrinsic merits (the first point).
No existing government fulfils the democratic ideal of political equality,
where each citizen has equal influence over an outcome. Similarly, no gov-
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1036
Kenneth J. Arrow .1978. ‘A cautious
case for socialism’
(https://tinyco.re/4741014). Dissent
25 (4): pp. 472–480
Steven Durlauf. 2017. ‘Kenneth
Arrow and the golden age of eco-
nomic theory’ (https://tinyco.re/
9029504). VoxEU.org. Updated 8
April 2017.
There is by now a long and … imposing line of economists from
Adam Smith to the present who have sought to show that a
decentralized economy motivated by self interest and guided by
price signals would be compatible with a coherent disposition of
economic resources that could be regarded … as superior to a
large class of possible alternative dispositions. … It is important to
know not only whether it is true but whether it could be true.
(original emphasis) (General Competitive Analysis, 1971)
GREAT ECONOMISTS
Kenneth Arrow
Kenneth Arrow (1921–2017) was
born in New York City to
Romanian-American parents. His
essay ‘A cautious case for socialism’
explains how the Great Depression
and the Second World War
influenced his ideas, especially those
of ‘freedom and avoidance of war’.
A good summary of Kenneth
Arrow’s explanation of the
problems of using voting to
determine which action is
preferred, and his broader
contributions to economics and social science, are in Steven Durlauf’s
essay ‘Kenneth Arrow and the golden age of economic theory’.
In addition to his work on voting systems, he was among the first to
demonstrate that there were conditions under which something like
Adam Smith’s ‘invisible hand’ would work. Characteristically scholarly
and detached from ideological rhetoric, he later wrote:
Arrow was a pioneer in the study of many of the themes in The Economy,
including asymmetric information and the economics of knowledge, and
helped broaden the scope of economics to include insights from other
disciplines. A year before his death, Arrow co-taught a course about
inequality at Stanford University using an early draft of Unit 19 of this
book, which was revised in light of his comments.
ernment today can be said to perfectly match the three political institutions
that define democracy.
Think about inclusive elections. Some population groups—those
convicted of major crimes, for example—are excluded from voting in many
countries, but we still consider the country’s political system as democratic.
However, exclusion of a major population group—women, for example, as
was common in recent history—is a sufficiently serious violation of the
‘inclusive elections’ criterion to disqualify a country from the club of
democratic nations. Some examples include:
• West Bengal: To see how important restricting the right to vote can be,
recall that in Unit 5, we examined the implementation of a land reform
in West Bengal called Operation Barga and used the Lorenz curve to
22.5 DEMOCRACY AS A POLITICAL INSTITUTION
1037
illustrate the effect of the reform in Figure 5.18. We can now see how
inclusive elections could affect the likelihood that reforms like this take
place. In the hypothetical case that only landowners have the vote, then
if they vote in their own economic interests, they would not support a
party pledged to implement such a reform (recall that in the example
shown in Figure 5.18, the landowners’ share of the crop fell from 50% to
25% following the reform). Since the landowners make up only 10% of
the population, if there was universal suffrage, the result would be dif-
ferent. The farmers making up the majority of the electorate would vote
for a party proposing the land reform. In real life, the political party that
introduced the reforms in West Bengal went on to win elections and, as
a result, control of the state government for three decades.
• The US: The Voting Rights Act of 1965 secured the vote for large
numbers of effectively disenfranchised African American citizens. The
result was a substantial shift in educational spending in districts with
large numbers of previously excluded black voters.
• Brazil: In Brazil, before the mid-1990s, casting a valid ballot required that
voters could read and write reasonably well (which perhaps a quarter of
the population could not). Around 11% of ballots cast were declared
invalid due to communication barriers, most of them cast by poor voters.
New electronic voting introduced in 1996 used pictures of candidates, an
interface similar to phone keypads or ATM screens, and prompted the
voter through the process step by step. The effect was to increase the
number of valid votes made by the poor. The resulting change in the
nature of the electorate led elected political leaders to prioritize the kinds
of spending predominantly benefiting the less well off. Expenditure on
public health, for example, increased by more than a third.
As we will see in the following sections, how a government actually works
is not determined solely by the presence or absence of civil liberties, the
rule of law, and inclusive fair elections.
22.6 POLITICAL PREFERENCES AND ELECTORAL
COMPETITION: THE MEDIAN VOTER MODEL
One of the puzzles of politics is that in two-party electoral systems, parties
often offer programs that are remarkably similar. It provokes the criticism
that democracy doesn’t offer a real choice. Here are some examples:
• What size should the government be?: Substantial differences in party
objectives and political values—about the appropriate size of the govern-
ment, for example—have divided Britain’s Labour and Conservative
Parties since the end of the Second World War. But look again at Figure
22.2, showing the size of the UK government. The big change was an
increase during the Second World War. Since then, one can detect the
ups and downs of spending in the Labour and Conservative years, but
the size of the government has not changed much.
• What should the government do?: In the Indian state of Kerala, for the past
half-century the elected state government has alternated between the
centrist Congress Party (and its allies) and the Communist Party (and its
allies). Since the first elected Communist-led government, power has
changed hands seven times. In this time, the fundamental priorities of
the government have changed little, affirming a strong emphasis on
education, health, and other public services.
Thomas Fujiwara. 2015. ‘Voting
technology, political
responsiveness and infant health:
Evidence from Brazil’.
Econometrica 83 (2): pp. 423–464.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1038
median voter model An economic
model of the location of businesses
applied to the positions taken in
electoral platforms when two
parties compete that provides con-
ditions under which, in order to
maximize the number of votes they
will receive, the parties will adopt
positions that appeal to the median
voter. See also: median voter.
Nash equilibrium A set of
strategies, one for each player in
the game, such that each player’s
strategy is a best response to the
strategies chosen by everyone else.
To understand why political parties sometimes adopt ‘lookalike’ policies, we
borrow a model from economics. Just as firms compete for purchases from
customers, in democracies, political parties compete for votes from citizens
by offering party platforms, which consist of policies that they say they will
enact if elected. We will consider a simple majority-rule system in which
the party or candidate with the most votes wins.
The median voter and party platforms in an ideal democracy
Imagine a situation in which there are only two parties, one of which
represents the ‘left’ of politics (favouring higher taxes and government
spending, for example) and the other the ‘right’ (favouring lower taxes and
government spending). If the parties care only about winning an election, in
what conditions will they offer distinctive platforms tailored to their
respective core supporters? And if they offer similar programs, at which
point on the political spectrum will that be?
We can provide some answers to these questions using a model
developed by Harold Hotelling, an economist. He had imagined the location
of stores along a railway line. In his article, Hotelling also applies his model
of competition to the political platforms of the Democratic and Republican
Parties in the US.
We will apply Hotelling’s model to ice creams. Imagine a stretch of beach
along which bathers are spread evenly. They can purchase ice cream from
one or more mobile ice cream stands. Initially we assume that every bather
will buy one ice cream, and that all ice creams cost the same. If there is
more than one vendor, they will purchase the ice cream from the vendor
located closest to them.
Understanding where the ice cream sellers choose to locate on the beach
(to the right, to the left, in the middle) will help us understand where polit-
ical parties would locate along the high tax (left) to low tax (right)
continuum. This is called the median voter model.
To begin, a single vendor, April, is at the beach. She has the entire market
to herself so it doesn’t matter where she is located. Suppose she is at a
location shown by A0 in Figure 22.11, on the left of the beach.
Along comes Bob, a second seller who is identical in economic respects
to April. Where will he locate in order to maximize his sales, and hence his
profits? He might reason that the market to the right of April is larger than
the market to the left, so he will locate in the middle of the stretch of beach
to the right of April, at point B0. He would then get all of the bathers to his
right and as well as of those to his left who are closer to him than to April.
But Bob would immediately see that he could expand sales by shifting to
the left, towards April. While the customers to his right will now have to
walk farther to get ice cream, they would certainly not switch to April who
is even farther away. He will therefore be able to gain a few customers to his
left, who were previously closest to April but are now closest to him, while
losing none of those customers to his right.
How far would he go?
He will end up standing just to the right of April, so that he gets all of the
sales along the longer stretch of beach to the right. Could Bob or April
make more profits by changing their location? In other words, is this a
Nash equilibrium?
It is not.
April, understanding the profit-maximizing logic that Bob has just acted
on, will shift immediately to the right-hand side of Bob, to A1. Then she will
Harold Hotelling. 1929. ‘Stability in
Competition’. Economic Journal
39, pp. 41–57.
22.6 POLITICAL PREFERENCES AND ELECTORAL COMPETITION
1039
get the larger market. But then Bob will do the same, and they will keep
leap-frogging over each other until they are back-to-back in the middle of
the beach.
At this point, neither has an incentive to move as they have divided the
customers exactly in half. Both locating halfway along the beach is a Nash
equilibrium under the rules of the game. The bathers located near to the
An’Bn’
AnBn
A0 B0
A0
A0B1
A0B1A1B2
Left
Left
Left
Left
1
2
3
4, 5
6, 7
8
Left
Left Right
Centre
Right
Right
Right
Right
Right
Not buying (voting)
Figure 22.11 Ice cream sellers at the beach: The median voter model of electoral
competition and party platforms.
1. A single vendor
A single vendor, April, arrives at the
beach and locates her ice cream stand
at A0.
2. A second seller
A second seller, Bob, arrives and sets up
at B0, midway between April and the
right-hand end of the beach.
3. Bob shifts to the left
Bob realizes he could expand his sales
by shifting to the left towards April, to
point B1.
4. April responds …
Because her customer base has shrunk,
she shifts immediately to the right-
hand side of Bob, to point A1.
5. … and Bob responds again …
But then Bob will do the same.
6. The two sellers keep leap-frogging
They will keep leap-frogging over each
other until they are ‘back-to-back’ in
the middle of the beach.
7. The middle of the beach
At this point, neither has an incentive to
move as they have divided the
customers exactly in half. This is a Nash
equilibrium under the rules of the
game we have set out.
8. A parallel with politics
Imagine that the bathers on the far-left
part of the beach are not going to buy
ice cream under any condition (they
are like the citizens who do not vote).
Then April and Bob will locate in the
centre of those who do vote at points
An′ and Bn′.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1040
median voter model An economic
model of the location of businesses
applied to the positions taken in
electoral platforms when two
parties compete that provides con-
ditions under which, in order to
maximize the number of votes they
will receive, the parties will adopt
positions that appeal to the median
voter. See also: median voter.
centre of the beach benefit from this. Their trip to the ice cream stand is
shorter than those on the extreme left or right of the beach.
To return to politics, we can think of voters as arranged along a left-to-
right spectrum much as the customers are arranged on a beach. If there are
two parties competing for votes, and voters will always vote for whichever
party offers policies that are closest to their views, the model tells us that
the only Nash equilibrium would be for both parties to propose policies in
the middle of the left-right spectrum.
On this basis, we would expect to see that voters in the middle of the
left-right political spectrum would be offered two party platforms very
much to their liking. Those more distant from the centre would have to
choose between two platforms. One would be a little better than the other,
but they wouldn’t like either platform very much.
The citizen in the centre—called the median voter—has two
advantages. First, she gets to choose between two platforms very close to
her preferences.
Second, she is a ‘swing voter’. To understand why this is the case, con-
sider a family on the far right of the beach. If the family choose to move
slightly to the left, would this affect the Nash equilibrium position of the ice
cream stands? Provided that half of the customers are to Bob’s right and
half are to his left, he would gain nothing by relocating, because half the
customers would still be closest to him, and half would still be closest to
April. By contrast, if a family who were previously slightly to Bob’s right
moved to the left, they would be likely to end up closer to April than to Bob.
April would now have more customers than Bob, and Bob would want to
relocate to the left.
In politics, when swing voters change their political preferences just a
little, by moving to the other side of the parties in the centre, the parties in
the centre move too. Changes in the political preferences of other voters
make a difference too, but someone distant from the centre does not make a
difference to party platforms unless he changes his preferences by enough
to cross the centre to the ‘other side’.
EXERCISE 22.6 ROCK-PAPER-SCISSORS POLITICS
Suppose that April and Bob are happily selling ice cream on the beach,
standing side by side, with April getting all of the customers to the left and
Bob getting all of those to the right. They will remain there because this is
a Nash equilibrium. But now, along comes Caitlin, a third ice cream
vendor.
1. Where will she stand?
2. What will happen next? And then?
3. Will this process ever end?
4. Is there a Nash equilibrium?
5. In the ‘Rock-Paper-Scissors’ game, the best response to Rock is Paper,
the best response to Paper is Scissors, and the best response to Scissors
is Rock. How is the situation of ‘Caitlin-April-Bob-on-the-beach’ similar
to ‘Rock-Paper-Scissors’?
22.6 POLITICAL PREFERENCES AND ELECTORAL COMPETITION
1041
22.7 A MORE REALISTIC MODEL OF ELECTORAL
COMPETITION
The median voter model of ice cream sellers on the beach as an illustration
of political competition predicts similar party platforms that reflect the
median citizen’s preferences. This presents a very limited view of the com-
petitive process. Not surprisingly, we see that parties often do not all move
toward the centre, or offer identical platforms. For example, two-candidate
elections in the US in 2016 and France in 2017 occurred between a
nationalist, anti-immigration candidate (Donald Trump and Marine Le Pen)
and a candidate who was in favour of global trade and supported tolerance
to ‘outsiders’ (Hillary Clinton and Emmanuel Macron).
Recall that the model of perfect competition among firms that you
studied in Unit 8 ignores many of the ways that firms actually compete (for
example, advertising, innovation, or lobbying the government for
favourable legislation). Similarly, the median voter model leaves a lot out.
Four facts will lead us to quite different conclusions from the median voter
model:
• Not everyone votes: If neither party’s platform is attractive to a voter, they
may abstain, and in many countries the least well off—those who would
benefit from greater public expenditure—are less likely to vote.
• Winning votes is not the only reason a party or candidate chooses a platform:
It may win financial contributions from citizens, or persuade volunteers
to work for the campaign.
• The leaders of political parties care about other things: Getting elected isn’t
the only reason they are in politics.
• Voters are not evenly distributed: The political spectrum is not like the
beach.
In our beach example from Figure 22.11, we looked at what would happen
if the bathers on the furthest left of the beach were not going to buy ice
cream under any circumstances (they are like the citizens who do not vote).
Then April and Bob would locate in the centre of those who do vote, namely
at points An′ and Bn′ to the right of the centre in the figure. If this is the way
politics works, then the platforms are similar, but the advantaged voter is
now not the median citizen but a voter to the right of centre.
Next, suppose that not all families will buy exactly one ice cream. Some
families will buy lots of ice cream, whereas others will buy less. Where
would April and Bob stand if bathers wanted to buy lots of ice cream at one
end of the beach, but not the other?
Both April and Bob would locate side-by-side as before, but nearer to
these ice-cream-loving families. In politics, this means that parties would
move their platforms toward voters who could contribute to their election
campaign. These contributions could be money, or time spent campaigning.
This would lead them to locate further right, if those voters were prepared
to make contributions to the party’s election funding.
The same would occur if dissatisfied citizens at one end of the political
spectrum were more likely to engage in other political activities—
demonstrating, or criticizing the party platforms. The desire to attract, or
perhaps silence, these ‘alienated’ voters would be another magnet pulling
the platforms of both parties in their direction.
But when these things happen, both parties still have similar platforms.
Now suppose there is one more condition. Instead of bathers uniformly
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1042
spread along our beach, there are few in the centre and most are in two
groups. One is on the left, and the other on the right. To make sure as many
bathers don’t have to walk too far and so are more likely to buy an ice
cream, then April and Bob would choose to move away from the centre to
be closer to the distant potential buyers on the left or right.
Politics is very different from selling ice cream for another reason. As
well as wanting to win elections, party leaders typically do care about the
platform. They would be willing to risk losing voters at one end of the
political continuum to take a position more in line with their personal
values.
The ‘bathers on the beach’ model, when amended to take account of:
• the problem of voter abstention
• the importance of money and political activities beyond voting
• the fact that voters may not be evenly distributed along the political
continuum
• the fact that party leaderships care about the content of their platforms
helps us understand which political platforms will be Nash equilibria in the
process of political competition by means of elections.
There is, however, another important difference between elections and
ice creams. April and Bob split the market and both survive, one perhaps
taking slightly more of the market. In a majoritarian political system, if both
parties offer similar platforms, the party that gets just one vote more than
the other forms the government. The winner appoints all of the govern-
ment ministers, for example, not just 51% of them.
Accountability through political and economic competition:
Summing up
At the beginning of this unit we considered how a natural monopoly might
be run if it were in private or government hands, contrasting two ways that
power in the hands of the monopolist or the government official can be
made accountable. The key idea is that customers facing a monopoly are
not powerless. They have the option to buy less, or even not at all. Citizens
facing a government-owned firm similarly have ways of fighting back
against inadequate service, by seeking to replace the government in an
election.
The models we have studied have clarified the similarities and differ-
ences between the profit-maximizing behaviour of a monopoly firm and
the political-rent-maximizing behaviour of a governing elite. These are
summarized in Figure 22.12, along with the ways in which each provides
some combination of what Albert Hirschman called ‘exit’ and ‘voice’ as a
way to make power accountable to those affected.
In the table, we represent ‘ideal democracy’ in the ‘government as
monopolist model’ with a situation where the duration curve is flat (similar
to the firm in a perfectly competitive market facing a flat demand curve).
This means that any governing elite that sought to skim off any rents at all
would be removed from office at the end of the year, just as any firm
charging a higher price than the competing firms would lose all of its
customers at once, and go out of business.
22.7 A MORE REALISTIC MODEL OF ELECTORAL COMPETITION
1043
Albert O. Hirschman. 1970. Exit,
voice, and loyalty: Responses to
decline in firms, organizations, and
states. Cambridge, MA: Harvard
University Press.
GREAT ECONOMISTS
Albert O. Hirschman
Albert Hirschman (1915–2012)
lived an extraordinary life. Born in
Berlin in 1915, he fled to Paris in
1933 after Adolf Hitler won power
in Germany, and joined the French
Resistance in 1939, helping many
artists and intellectuals to escape
from the Nazis. He migrated to the
US in 1941.
Given this history, it’s hardly
surprising that Hirschman’s career
as an economist did not follow a
conventional path. He crossed
disciplinary boundaries with ease, grappled with questions that lay well
outside the professional mainstream, and developed ideas that were
imaginative, profound, and enduring.
Among Hirschman’s many influential contributions, he is best known
for the thesis laid out in his 1970 book Exit, Voice and Loyalty. He was
concerned with how the performance of entities such as firms and gov-
ernments could be improved.
He identified two forces—exit and voice—that could serve to alert an
organization that it was facing decline and provide incentives for
recovery. ‘Exit’ refers to the departure of a firm’s customers to a
competitor. And ‘voice’ refers to protest, the tendency of disappointed
customers to ‘kick up a fuss’. When a company performs poorly or
unethically, shareholders can sell their shares (exit) or campaign for a
change of management (voice).
Hirschman observed that economists had traditionally extolled the
virtues of exit (competition), while neglecting the operation of voice.
They favoured exit-based policies, for example those that made it easier
for parents to choose which school their children attended so that
schools would have to compete to enroll students.
He considered this an omission, because voice could allow a lapse to be
reversed at little cost (parents could usefully seek changes in school poli-
cies, in this example), while exit might waste physical capital and human
capabilities. Also, exit is not an option in some case, for example tax ad-
ministration, so the free exercise of voice is critical to good performance.
After making this distinction, Hirschman explored how exit and
voice interact. If exit was too readily available, voice would have little
time to act. A repairable lapse could end up being fatal to an
organization. This effect would be even stronger if those most sensitive
to performance decline were also the fastest to exit. As he put it, the
‘rapid exit of the highly quality conscious customers … paralyzes voice
by depriving it of its principal agents.’
The fact that easy exit undermines voice has some paradoxical
implications. A monopolistic firm might welcome a modest amount of
competition, allowing it to get rid of its more ‘troublesome’ customers. A
national railway system might perform better if roads were poor, so that
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1044
For further reading on Albert
Hirschman, see these blogs by
Rajiv Sethi:
• Rajiv Sethi. 2010. ‘The
Astonishing Voice of Albert
Hirschman’ (https://tinyco.re/
2899363). Updated April 7
2010.
• Rajiv Sethi. 2011. ‘The Self-
Subversion of Albert
Hirschman’ (https://tinyco.re/
2163474). Updated April 7
2011.
• Rajiv Sethi. 2013. ‘Albert
Hirschman and the Happiness
of Pursuit’ (https://tinyco.re/
5203731). Updated 24 March
2013.
True, he cannot exit … but just because of that he … will be
maximally motivated to bring all sorts of potential influence into
play so as to keep … the party from doing things that are highly
obnoxious to him … “[T]hose who have nowhere else to go” are
not powerless but influential.
angry customers could not easily exit, and would work to improve it
instead. And the availability of private school options might result in
worse public school performance if the most quality-conscious parents
took their children out of the system.
The interplay between exit and voice works through a third factor,
which Hirschman called loyalty. Attachment to an organization is a
psychological barrier to desertion. By slowing exit, loyalty can create the
space needed for voice to do its work. But loyalty can hinder
performance too if it becomes blind allegiance, because that stifles both
exit and voice. Organizations may promote loyalty for precisely this
reason. But if they are too effective repressing exit and voice, they would
‘deprive themselves of both recuperation mechanisms’.
Hirschman was deeply critical of the claim that, in a two-party
system, both parties would adopt similar platforms that reflected the
preferences of the median voter. This claim relies on reasoning that
accounts for exit and neglects voice. Voters on the extreme fringes of a
political party had no viable exit option, Hirschman agreed, but he
rejected the implication that such a voter was powerless:
Albert Hirschman loved to play with language. English was the fourth
language in which he gained fluency (after German, French, and
Italian) but he still managed to coin the most wonderful expressions.
He invented palindromes (words like ‘eve’ that read the same
backwards as forwards) as a hobby, and presented a collection of
these—using the title Senile Lines by Dr. Awkward—to his daughter
Katya as a birthday gift. The right to ‘life, liberty and the pursuit of
happiness’ in the US Declaration of Independence was his inspiration
for the memorable phrase ‘the happiness of pursuit’, by which he
meant the joy of engaging in collective action. Hirschman’s own
playful exercise of voice was itself a demonstration that people often
act not simply to get something, but also to be someone.
EXERCISE 22.7 NASH EQUILIBRIA IN THE MEDIAN VOTER MODEL
Would locating at the middle of the beach still be a Nash equilibrium in
the following cases? In each case, explain the political analogy to the ice
cream seller example.
1. Suppose people will not walk very far to get their ice cream.
2. Suppose instead of being spread evenly along the beach, there was a
concentration of bathers at each end.
3. Suppose the bathers are evenly spread along the beach, but those at
the left end of the beach will not walk very far to purchase ice cream,
while those at the right end of the beach will surely purchase a cone,
no matter what the distance.
22.7 A MORE REALISTIC MODEL OF ELECTORAL COMPETITION
1045
QUESTION 22.3 CHOOSE THE CORRECT ANSWER(S)
Consider Figure 22.11 (page 1040). Which of the following statements
are true?
When April is positioned at A0 and Bob is at B0, April will attract
more customers than Bob.
When April is positioned at A1 and Bob is at B1, April will attract
more customers than Bob.
The Nash equilibrium would change if all of the customers to the
far right of the beach moved halfway towards Bn.
Beachgoers that never buy ice cream have no effect on the position
of the stalls.
22.8 THE ADVANCE OF DEMOCRACY
Social unrest and universal suffrage
By extending the model of the government as monopolist to include polit-
ical competition, we have a framework for understanding the emergence of
representative institutions and eventually universal suffrage, as described at
the beginning of this unit. Governments survived if they provided citizens
with essential public services at reasonable tax rates, rather than through
palace intrigues or the threat of force.
For example, in the US, the school committee in the textile city of
Lowell, Massachusetts advocated an expansion of free public education in
its 1846 Annual Report with these words: ‘Let then the influence of our
Common Schools become universal; for they are … our surest safety
against internal commotions.’
Fear of instability that prompted some of the wealthy in the US and
elsewhere to advocate greater democracy also helped spread democracy (in
Figure 22.13). As you saw in Figure 19.2, inequality grew in the years
following the capitalist revolution in the countries for which we have data.
During this period, farmers, industrial workers, and the poor demanded
greater political equality—and especially the right to vote—as a means of
gaining a larger share of the output and wealth of the rapidly growing eco-
Varieties of political and economic
competition
Demand/duration
curve
Accountability
(exit/voice)
Price/tax and
cost
Profits/rents Comment
Limited political competition
(dictator)
Steep None T > C Political rents
> 0
‘Govt. as
monopolist’
Limited economic competition
(monopoly)
Steep Limited exit P > MC Economic
profits > 0
Unit 7
Ideal democracy (competition
among parties)
Flat Voice and exit T = C Political rents
= 0
Section 22.3
‘Perfect competition’ among firms Flat Exit P = MC Economic
profits = 0
Units 8 & 11
Figure 22.12 Comparison between models of monopolistic and competitive firms
and governments. Notation: T = total taxes raised in a year; C = cost of providing
the public good for a year; P = price of the good; MC = marginal cost of the good.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1046
nomies. In 1848 there were attempted revolutions against the monarchy in
Sicily, France, Germany, Italy, and the Austrian Empire. At the same time,
Karl Marx was writing The Communist Manifesto. One of the revolutionary
leaders, James Bronterre O’Brien, told the people:
Gaining political power according to O’Brien was the route to gaining a
larger slice of the economic pie, not the other way around.
In the late nineteenth and early twentieth century the wealthy in many
countries concluded that extending democracy might be prudent, much as
the leaders of the South African government were to conclude a century later.
Figure 22.13 shows that democracy, as defined by all three of the
characteristics (rule of law, civil liberties, and inclusive fair elections), is a
recent arrival in human history.
The first democratic nation was New Zealand, which became fully
democratic just before the turn of the twentieth century, although it
remained a British colony until 1907. At that time elections were held in
many countries but women, those without property, or other disadvantaged
groups were denied the right to vote.
South Africa, Mexico and some of the countries once ruled by the
Communist Party (Poland, for example) are relatively recent additions to
the club of democratic nations. Switzerland is also a recent addition. By the
time that Swiss women finally won the right to vote in 1971, the prime
ministers of Sri Lanka, India, and Israel were all women. Universal male
suffrage in Switzerland had been granted 90 years earlier. If universal male
suffrage were considered sufficient for an ‘inclusive’ election, then
Switzerland and France (1848) would have been the first democracies, but
Alfred Plummer. 1971. Bronterre: A
Political Biography of Bronterre
O’Brien, 1804–1864. Toronto: Uni-
versity of Toronto Press.
Knaves will tell you that it is because you have no property, you are
unrepresented. I tell you on the contrary, it is because you are
unrepresented that you have no property …
End of WWI,
Russian Revolution
End of WWII and
decolonization
Democratic (polity IV index at least 6,
women’s suffrage)
Democratic with voting restrictions
Undemocratic intervals
Indonesia
Mexico
South Africa
South Korea
Brazil
Nigeria
Switzerland
Chile
Japan
India
Costa Rica
Belgium
Turkey
Italy
France
UK
Sweden
US
Netherlands
Germany
Poland
Austria
Canada
Denmark
Norway
Finland
Australia
New Zealand
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Years
Figure 22.13 The advance of democracy in the world.
Center for Systemic Peace. 2016. Polity
IV annual time series ; Inter-
parliamentary union. 2016. ‘Women’s
Suffrage’. Initial periods of democracy of
less than five years are not shown in the
chart.
22.8 THE ADVANCE OF DEMOCRACY
1047
the exclusion of major population groups means that elections are not
inclusive, and so they fail our test.
Excluding women from voting makes a difference in the policies that
elected governemnts adopt. The feature in the next section, ‘Women’s
suffrage and the reduction in child mortality in the US’, shows that
excluding women from the vote had significant effects on government poli-
cies, and also on the wellbeing of citizens.
The US enfranchised women in 1920 but had denied the vote to black
people in many states before 1965. We indicate the complicated status of
the US using a light green bar. We have done the same for Australia, where
indigenous Australians were denied the right to vote before 1962, and for
Canada, which restricted the voting rights of Native Americans for a brief
period.
The world’s most populous democracy (by far) is India, since it gained
independence from the UK in 1947. The most populous country that is not
a democracy is (also by far) China.
Notice in the figure the two waves of countries that became democratic.
The first wave occurred at the time of the First World War and the Russian
Revolution, which tripled the number of democracies in the world in less
than 10 years. The First World War provided much of the impetus for the
spread of democracy during this first wave.
If you look at the figure, you will see that the US was not democratic at
this time, because the right to vote was restricted to men. The other
winning countries in the First World War (France and the UK) were not
democracies either at the time. In both countries, women and those without
property were denied the right to vote.
A second wave of democracies emerged after the Second World War.
Many former colonies, including India and Indonesia, became democratic
at this time.
The extension of suffrage in the early years of the twentieth century
made many countries in northern Europe and New Zealand into
democracies. In those countries, the rule of law and civil liberties—the
other two criteria for a democratic political system—had been in force long
before the introduction of universal suffrage.
After the Second World War, most countries had already granted the
right to vote to virtually all adults (though in Saudi Arabia, for example,
women gained voting rights only in 2015). Today, countries judged to be
undemocratic (such as Russia) often do not fail our test because of
restrictions on the electorate. They are not democracies because the rule of
law and civil liberties are inadequate.
The blue patches in the bars show that there have been some
interruptions in democracy, including the period of dictatorship in Chile
following the military overthrow of the democratic government, and the
period of Fascist rule in Germany between 1933 and 1945, but most coun-
tries that have become democratic have continued to be democracies.
All the countries in the figure can be decribed as democratic because
they are sufficiently close to the criteria we have laid out. But in some cases,
there is a large difference between our three criteria of rule of law, civil
liberties, and inclusive fair elections, and how the system functions in
practice. In the US for example:
• In 2000 and 2016, the winner of the presidential election received fewer
votes than his opponent.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1048
SPENDING PRIORITIES IN A
DEMOCRACY
Joseph Schumpeter (see Section
2.5) once wrote that the public
budget is the ‘skeleton of the state
stripped of all misleading
ideologies’. He argued that the way
in which a government spends its
money reveals its true priorities,
much in the way that an indi-
vidual’s spending pattern is a lens
through which to study his or her
preferences.
Joseph Schumpeter. 1918. ‘The
crisis of the tax state.’ Reproduced
in Swedberg R. (ed.) 1991. Joseph A.
Schumpeter, The Economics and
Sociology of Capitalism. Princeton
University Press.
social insurance Expenditure by
the government, financed by
taxation, which provides protection
against various economic risks (for
example, loss of income due to
sickness, or unemployment) and
enables people to smooth incomes
throughout their lifetime. See also:
co-insurance.
• Private contributions from wealthy individuals and groups play a major
part in the financing of political campaigns (see the feature ‘Does money
talk?’ in Section 22.14 to see how this may undermine the democratic
value of political equality).
As we have seen, before the twentieth century a major activity of govern-
ments was defence (in some cases, predation on other nations), and raising
the taxation to support it. But well before that time, some ruling institu-
tions came to understand that they would benefit from providing
conditions for the growth of the economy—building canals, roads and
schools in the nineteenth century, for example. Economic development
could be an asset either by creating a larger tax base, a more scientifically
oriented cadre of citizens, or by building financial institutions that could
loan money to the government.
During the twentieth century large-scale production in firms was easy
for the govenment to see, and happened in one place. This made taxation
and regulation of firms easier, and governments could also use the
accounting books and payroll records of firms to find out who was paid
what. This meant that taxing individuals became easier too. Governments
in many countries deducted tax directly from the pay of their citizens, and
many workers were taxed explicitly for ‘social security’, that is, to fund
pensions and sometimes healthcare.
Changes in the structure of the economy also made it easier for govern-
ments to levy taxes, not on a specific good such salt or imports, but on
consumption in general and ultimately on value added in production. These
broad-based taxes play an important role in the public finances of advanced
economies. With the extension of voting rights to virtually all adults, gov-
ernments became accountable to their citizens for delivering services.
This historical processes of transition from political monopoly to polit-
ical competition have produced most of the modern governments in the
world, with their distinctive patterns of spending.
Figure 22.14 shows how the democratic governments of the US, South
Korea, and Finland spend their money.
The size of the government of Finland’s expenditure is 57.5% of its GDP,
which is the largest among the three countries. For the US, it is 38.8%.
Note: this does not mean that the US spends less than Finland in absolute
terms, just that government expenditure is a smaller fraction of the
country’s GDP. Expenditure by South Korea’s government is 31.8% of its
GDP.
This is what the categories mean:
• Public services: These include funds for running parliament, congress,
local councils, also foreign aid and public debt transactions.
• Military: As previously stated, one of the motivations for government
has been for protection or to wage war.
• Economic affairs: This includes expenditures on infrastructure such as
roads, bridges, and the Internet.
• Public order and safety: This includes police, fire, prison services, and law
courts.
• Social protection: We discussed the social insurance spending that a gov-
ernment might make in Unit 19, and those are labelled ‘Social
protection’ in the figure.
The 2010 Mirrlees Review
(https://tinyco.re/6726989) offered
proposals for a comprehensive
reform of the UK’s tax and transfer
system, addressing the scope for
better addressing market failures
and unfairness.
22.8 THE ADVANCE OF DEMOCRACY
1049
• Schooling: All governments are responsible for at least some education
provision.
• Health: This includes medical equipment, hospital and outpatient
services, and public health.
There are many reasons why governments differ in their spending patterns.
One reason is that political institutions differ, even among democracies.
EXERCISE 22.8 PAST INFLUENCES ON CURRENT GOVERNMENT
SPENDING PATTERNS
1. How would you characterize the two biggest differences in the pattern
of spending between the three pairs of countries (the US vs South
Korea, the US vs Finland, and Finland vs South Korea)?
2. Can you think of differences in the countries and their histories that
might account for these differences? You will need to do some research
to support your claims.
13.37 15.06
24.45
12.5
10.56
15.35
15.46
12.5
45.12
22.18
19.87
12.5
3.7
8.79
2.02
12.5
2.2
3.795.1
12.5
7.9
14.078.98
12.5
2.25 7.82
8.7912.5
14.89 12.9515.3312.5General public services
Military
Economic affairs
Public order & safety
Other
Social protection
Schooling
Health
Legend Finland
53.2% of GDP
US
38.1% of GDP
South Korea
33.9% of GDP
Figure 22.14 Patterns of public expenditure in Finland, the US, and South Korea
(2019).
OECD. 2021. ‘Government at a Glance’
(https://tinyco.re/2331814). This dataset
takes data from OECD National
Accounts Statistics (https://tinyco.re/
9200122) and from Eurostat government
finance statistics (https://tinyco.re/
4616738).
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1050
democratic accountability Political
accountability by means of
elections and other democratic
processes. See also: accountability,
political accountability.
EXERCISE 22.9 COMPARING GOVERNMENT EXPENDITURES
Go to the source of Figure 22.14, OECD statistics (https://tinyco.re/
2331814), and see if you can find different countries for each of the follow-
ing criteria (for the year 2015, or the most recent year available).
1. General government expenditure (as a percentage of GDP) is greater
than South Korea’s, but less than Finland’s.
2. Government expenditure on health (as a percentage of GDP) is greater
than the US’s.
3. Government expenditure on social protection (as a percentage of GDP)
is greater than Finland’s.
4. Government expenditure on defence (as a percentage of GDP) is
greater than South Korea’s.
22.9 VARIETIES OF DEMOCRACY
In Unit 1, we defined capitalism as an economic system and pointed to the
important differences among capitalist economies, in terms of the extent of
government involvement and the degree of inequality in the economy.
Democracy as a set of political institutions (a political system) comes in
many varieties, too.
Accountability and transfers of power
The conditions under which one government leaves office and is replaced
by another illustrate the varieties of democracy. There are two principles
that are essential to democratic government:
• Democratic accountability: A governing party that is not serving the
interests of a majority of its citizens will lose an election and must leave
office. Democratic accountability ensures that citizens, through their
right to vote, can remove government that they think is performing
poorly and replace it with one more to their liking.
• No non-electoral transfer of power: Removal from office is (with rare
exceptions) the result of losing an election rather than a military coup,
assassination, breakdown of social order, or impasse in the process of
government.
You have already seen these two principles in the model of the government
presented earlier in this unit. In the model, democratic accountability was
represented by a flatter duration curve, as there was a greater likelihood that
the government would be dismissed if it were collecting large political rents.
Countries differ considerably along these two dimensions (Figure
22.15). Many conform closely to both. Some barely conform to either and
their status as a democracy is contested.
• Singapore: An example of extraordinary political stability where the
likelihood of transfer of power by any means other than an election
appears very small. Yet in more than 50 years there has not been a single
electoral transfer of power. The same political party has ruled over the
city-state since 1959. This remarkable political durability is undoubtedly
in part due to the fact that living standards in Singapore have increased
rapidly. But if citizens were to seek a transfer of power to a different
22.9 VARIETIES OF DEMOCRACY
1051
Germany Singapore
Italy Pakistan
Strong Weak
Democratic accountability
Al
so
b
y
no
n-
el
ec
to
ra
l m
ea
ns
By
e
le
ct
io
ns
o
nl
y
Tr
an
sf
er
s
of
p
ow
er
Figure 22.15 Democratic accountability and transfers of power.
party, the lack of press freedom, and other undemocratic practices of the
ruling party, would make it difficult to do so.
• Italy: Without question a democratic nation, Italy struggles to meet the
second principle. Governments that disappoint voters are regularly
replaced. But governments are also replaced as a result of parliamentary
disputes and the intervention of the president, who can dissolve the
parliament.
• Pakistan: An example of a country in which democracy is not strong in
either dimension. The governments of Pakistan have been notoriously
unresponsive to the concerns of the electorate, and non-electoral
transfers of power in Pakistan have included three successful military
takeovers.
EXERCISE 22.10 HOW DEMOCRACY HELPS PROTECT
THE GOVERNED
In 1943 there was a famine in West Bengal, India, while
the country was under colonial rule from the UK. At
least 2 million people died as a result. Amartya Sen, an
economist who won the Nobel Prize, said that: ‘No
famine has taken place in the history of the world in a
functioning democracy.’
1. What defining features of a democracy might
account for this?
2. How would colonial rule by a foreign power differ
from democracy?
3. How might these differences help explain why the
1943 famine occurred, and why no famine has
occurred since the transition from colonial to
democratic rule?
4. Read this article (https://tinyco.re/2624341), and re-
read the introduction to Unit 2 about the Irish famine.
Explain how economic thinking at the time may have
contributed to the limited response of the British
colonial government to famine during that period.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1052
Grant Miller. 2008. ‘Women’s
suffrage, political responsiveness,
and child survival in American
history’. The Quarterly Journal of
Economics 123 (3): pp. 1287–1327.
22.10 DEMOCRACY MAKES A DIFFERENCE
Our model of the government also allows us to understand the impact of one
of the major developments in twentieth-century economics and politics: the
extension of voting rights to virtually all adults. In consequence, governments
have increasingly devoted tax revenues to public services and other
expenditures that differentially helped the poor. As we saw in Unit 19, the
result has been that people have acquired more of their wellbeing by right, as
a citizen, rather than purchasing it as a marketed good or service.
The growth of various forms of social insurance is a big part of the two
steps up in the size of the government that you saw in the UK in Figure
22.2, the first taking place after the extension of the suffrage in 1928, and
the second in the aftermath of the Second World War.
Friedrich Hayek (page 459) warned in his book Road to Serfdom that the
growing size of government would undermine democracy and the rule of
law, pointing to the experience of Germany under fascism and Russia under
communism. This does not appear to be the case in general: the countries
ranked highest on measures of rule of law—Norway, Finland, Sweden,
Denmark, and the Netherlands—all are notable for their high levels of gov-
ernment tax revenues as a fraction of GDP. The US and the UK, with a
smaller government, are ranked lower.
But this correlation does not show that a larger government promotes
the rule of law and democracy. The most that can be said is that
longstanding democracy, rule of law, and a large government (relative to the
size of the economy) can coexist.
Friedrich A. Hayek. 1994. The Road
to Serfdom. Chicago: University of
Chicago Press. A condensed
version is also available
(https://tinyco.re/6168556).
Daniel Kaufmann, Aart Kraay,
Massimo Mastruzzi. 2010. ‘The
Worldwide Governance Indicators:
Methodology and Analytical
Issues’, Policy Research working
paper WPS 5430, World Bank.
Freedom House. 2016. ‘Freedom in
the World 2016. Anxious Dictators,
Wavering Democracies: Global
Freedom under Pressure’.
Washington, DC.
HOW ECONOMISTS LEARN FROM FACTS
Women’s suffrage and the reduction in child mortality in the US
Recall James Bronterre O’Brien who, when campaigning against
property ownership as a requirement for voting in nineteenth century
Britain, wrote: ‘Because you are unrepresented … you have no property’.
But does getting the right to vote increase the wealth and wellbeing
of groups previously excluded from voting?
This is not a simple question to answer. Consider South Africa.
Throughout its history prior to 1994, people of non-European origin
were denied the right to vote, but they were also discriminated against
by employers, landlords, schools, and medical institutions. Were the
racial disparities in wealth, health, and other dimensions of wellbeing in
that country a result of race restrictions on democratic political rights?
In behavioural experiments and in other evidence, women on average
place a higher value on child welfare and public services. In that case, we
would expect that public policy would change when women got the vote.
A natural experiment to assess the importance of voting rights is
women’s suffrage in the US, because voting laws differ by state. As a
result, women gained the right to vote at different times, starting from
1869 in Wyoming. In 1920, an amendment to the US Constitution
granted the vote to women in all states. Grant Miller used information
on when women got the right to vote to do a before-after comparison on
actions taken by elected officials, public expenditures related to child
health, and health outcomes for children.
Miller chose to focus on child healthcare policies because women had
campaigned to expand health services for children. It is therefore
22.10 DEMOCRACY MAKES A DIFFERENCE
1053
Women get the vote
Elected officials vote
for new government
spending
Effects on child
health programs
Other than an increase in the size of government, are there other effects of
the advance of democracy on the functioning of the economy? The exper-
ience of many countries suggests a positive answer. For example, the golden
age of capitalism (the three decades following the Second World War) was
the first period in which all of the major economies were governed by
democracies.
While it seems reasonable that democracy was partly behind these success
stories, for example through greater political stability, it is impossible to
establish democracy as the only or main cause. Too many other things
changed at the same time that might account for the economic changes.
reasonable to assume that women would have chosen different policies
at this time than men would have chosen. During the nineteenth century
and before, however, those who argued that only men should vote often
claimed that women were represented through their husbands, brothers,
and fathers.
The logic of the natural experiment is shown below, with each of the
arrows representing possible causes that Miller explored:
Here is what Miller found:
• Looking state-by-state at the date women got the right to vote,
enfranchisement had no apparent effects on state public spending in
other areas, but it boosted social service spending by 24%. At the
federal government level, within a year of the passage of the
Nineteenth Amendment, the US Congress voted a substantial
increase in public health spending, especially aimed at children. A
historian of the legislation concluded that ‘the principal force moving
Congress was fear of being punished at the polls … by women voters.’
• The deaths of children under the age of nine fell by somewhere
between 8% and 15%, primarily as a result of drops in the kinds of
diseases related to the public programs that had been adopted,
especially large-scale door-to-door hygiene campaigns. To put these
numbers in perspective, in 1900 one in five children did not live to
the age of five. The passage of healthcare programs prevented an
estimated 20,000 child deaths per year.
These effects were possible because of the nineteenth-century revolu-
tion in scientific knowledge of bacteria and disease, advances that had
yet to be brought to the public in improved health. Women’s suffrage
helped to do this.
Miller’s research shows that a big change in public policy resulted
when women in the US were directly represented. This is why for
Switzerland, where men got the right to vote earlier than any other
nation, we nonetheless dated democracy from 1971, the time that
women got the vote (Figure 22.10), because who can vote matters.
Adam Przeworski and Fernando
Limongi. 1993. ‘Political regimes
and economic growth’. The Journal
of Economic Perspectives 7 (3)
pp. 51–69.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1054
The countries that took the lead in advancing political equality have a
different balance now between work time and free time, as Figure 22.16
shows. This is not surprising, given that the reduction in working hours
over the past 100 years was not simply a matter of individuals choosing
shorter workdays. As we saw in Unit 3, it was also the result of political
parties (especially after the extension of the vote to workers) seeking
legislation to limit the number of hours a person could be asked to work
without additional pay.
But the countries with the fewest work hours in 2014 and the highest
number of years of democracy (Denmark, Sweden, and the Netherlands)
had longer work hours at the time they became democracies than the
average of other countries for which we have data. This is evidence to
support the case that democracy had an effect on work hours.
Figure 22.17 shows that countries that were the first to give the vote to
all—Finland, Norway, Sweden, Denmark, and the Netherlands—today have
more equal disposable incomes than countries with a shorter experience of
this kind of political equality. In many cases, reduced inequality in
disposable income was the result of government programs that benefited
poorer voters (women and workers, for example) who had previously been
excluded from voting (as we have seen in Figures 19.1 and 5.16).
Mexico
South Africa
South Korea
Brazil
Poland
United States
Switzerland
Japan
Australia
India
Belgium
Italy
France
Austria
Germany
United Kingdom
Canada
Netherlands
Sweden
Denmark
Norway
Finland
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
0 10 20 30 40 50 60 70 80 90 100 110
Years of democracy
Av
er
ag
e
an
nu
al
ho
ur
s
w
or
ke
d
Figure 22.16 The duration of democracy and working hours (2014).
View this data at OWiD https://tinyco.re/
2748360
Penn World Tables.
22.10 DEMOCRACY MAKES A DIFFERENCE
1055
Mexico
South Africa
South Korea
Brazil
Poland
US
Switzerland
Australia
Japan
India
Belgium
Italy
France
Austria
Germany
Canada
UK
Netherlands
Sweden
Denmark
Norway
Finland
0.2
0.3
0.4
0.5
0.6
0.7
0 10 20 30 40 50 60 70 80 90 100 110
Years of democracy
D
is
po
sa
bl
e
in
co
m
e
G
in
i
Figure 22.17 The duration of democracy and inequality in disposable income
(2015).
View this data at OWiD https://tinyco.re/
2384637
Cross National Data Center. LIS
Database. Household market (labour
and capital) income and disposable
income are equivalized and top- and
bottom-coded.
EXERCISE 22.11 WORK TIMES AND INEQUALITY IN
LESS DEMOCRATIC DEMOCRACIES
1. Redraw Figure 22.16 and 22.17 using a different
definition of democracy, over the same period as in
Figure 22.13 (1890–2015). For example, allow a
country to be ‘democratic’ even if women and some
ethnic minorities were excluded from voting (you
already know that this will affect the duration of
democracy of Australia, US, Canada, Switzerland,
and France). You can download the Polity IV dataset
(https://tinyco.re/3970843) that was used to create
Figure 22.13, and consider a polity score of 6 or
above as democratic. The data on working hours and
inequality are shown below.
Country Average hours
worked (2014)
Disposable
income Gini
Australia 1,803 0.330
Denmark 1,438 0.247
Germany 1,371 0.287
Netherlands 1,420 0.254
US 1,765 0.390
Sweden 1,609 0.236
UK 1,675 0.335
France 1,474 0.288
Country Average hours
worked (2014)
Disposable
income Gini
Italy 1,734 0.327
Belgium 1,575 0.282
Canada 1,688 0.317
Switzerland 1,568 0.291
Finland 1,643 0.262
Norway 1,427 0.244
Austria 1,629 0.268
Brazil 1,711 0.462
South Korea 2,124 0.310
India 2,162 0.502
Japan 1,729 0.302
Poland 2,039 0.307
South Africa 2,215 0.605
Mexico 2,137 0.437
2. Would you reach a different conclusion about how
democracy is statistically related to the following,
under this alternative, less strict, definition of
democracy?
(a) work time
(b) inequality
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1056
economically feasible Policies for
which the desired outcomes are a
Nash equilibrium, so that once
implemented private economic
actors will not undo the desired
effects.
administratively feasible Policies
for which the government has
sufficient information and staff for
implementation.
22.11 A PUZZLE: THE PERSISTENCE OF UNFAIRNESS
AND MARKET FAILURES IN DEMOCRACIES
Contemporary South Africa is just one example of a society in which there
are opportunities for mutual gain that are not exploited—for example,
More than one-quarter of the labour force are unemployed. And it is widely
held—even by many well-off South Africans—that the distribution of the
economy’s burdens and benefits is still grossly unfair.
The previous units have shown similar cases in which economic out-
comes are Pareto inefficient, so potential mutual gains remain unrealized,
as the summary table in Figure 12.8 (page 526) showed. Figure 22.3 (page
1020) listed policies aimed at addressing inefficiency and perceived
unfairness. And we know that citizens in many countries think the distri-
bution of wealth or income is unfair.
This is a puzzle. If government action could realize potential gains, and
the citizens in a democracy would prefer that it did, why do these
inefficiencies persist in a democratic society with a capitalist economy? The
short answer is that just as markets fail, so too do governments.
Government failure
Fixing some problem of Pareto inefficiency or perceived unfairness will
happen only if:
• It is economically feasible: The policy to fix the problem, if implemented,
must work.
• It is administratively feasible: The government must have the capacity to
implement the policy.
• Special interests allow it: Those who control government policy must
want to see the policy implemented.
Economic infeasibility
Given people’s preferences and the information available to private eco-
nomic actors, there may not be a feasible set of policies that would sustain
an efficient and fair outcome. For a policy to have economic feasibility, it
must be a Nash equilibrium, which means no actor can improve its position
by changing its behaviour.
For example, a government that tried to enforce perfect competition in
every industry would fail. Since firms are free to advertise, and to dif-
ferentiate their products, it is impossible for the policymaker to legislate
that demand curves be horizontal. We have also seen that no macroeco-
nomic policy can entirely eliminate unemployment, given that the threat of
unemployment motivates people to work hard and well.
Administrative infeasibility
Even if there is an economically feasible policy that would address a
problem if it were adopted and implemented, this may be impossible in
practice due to the limited information and capabilities of government
officials, which means it lacks administrative feasibility. By failing to
understand the incentives of the relevant economic actors or other aspects
of the problem, policies adopted by the government may be ill-suited to the
objectives of all the actors. So governments may lack the capacity to collect
tax revenue efficiently and honestly, to enforce its policies through the
judiciary (including anti-monopoly policy), and to deliver public services
such as schooling and health.
22.11 A PUZZLE: THE PERSISTENCE OF UNFAIRNESS AND MARKET FAILURES
1057
ceteris paribus Economists often
simplify analysis by setting aside
things that are thought to be of less
importance to the question of
interest. The literal meaning of the
expression is ‘other things equal’. In
an economic model it means an
analysis ‘holds other things con-
stant’.
Special interests
Even if a policy is economically feasible (a Nash equilibrium) and could be
implemented administratively, the government may choose not to adopt it
because of opposition by groups (including members of the government
itself) that would be harmed by the change, which would be the case if
certain groups benefit from the unfairness or the inefficiency.
In the next three sections, we will consider in turn how economic
infeasibility, administrative infeasibility, and special interests can prevent
fair and efficient policies from being introduced.
22.12 ECONOMIC INFEASIBILITY
Many important economic actions cannot be simply enforced by the gov-
ernment. The government can use its powers of tax collection to provide
for schools and order that all children must attend those schools until age
16. But it cannot mandate that students study hard and learn a lot, or that
teachers teach effectively.
As we saw in Section 22.1, the government uses regulation and public
provision, but can also provide incentives and information that are
intended to lead people to act in a way consistent with its objectives. For
example, the central bank can lower the interest rate at which it lends to
commercial banks, with the intention of inducing them to lend to house-
holds and businesses at a lower rate, and, in this way, to stimulate spending.
Or the government can impose a tax on fuel to alter the opportunity cost of
driving, providing people with their own reasons to drive less.
Two examples of important but ‘difficult to command’ economic
activities are investing and working hard. Governments do not have the
information or the legal authority to command wealthy individuals to use
their financial resources to invest in infrastructure (other than in excep-
tional circumstances such as wartime), or workers to work hard and well.
How policies work by shifting the Nash equilibrium
Understanding how private actors respond to public policy is essential
when addressing social and economic problems. For example, the govern-
ment official who imposes a tax on sugary drinks in order to reduce obesity
does not control the responses of consumers. An economically feasible out-
come of the tax must be based on how consumers respond if it costs more
to have another soda drink. The policy needs, for example, to take account
of consumers who switch from sugary drinks to other sources of sugar that
have not been taxed. Economic research surveyed in Section 7.9 (page 303)
gives the policymaker some guidelines about how successful the policy
might be in controlling diabetes through its effect on relative prices.
To be economically feasible, the intended outcome of the policy must be
a Nash equilibrium, that is, all individuals affected are doing the best they
can do, given how all other actors are acting in response to the policy. Many
of the models economists use include the ceteris paribus condition, which
means other things being equal. But as economists like to point out, in
many important applications of economic theory, ‘ceteris ain’t paribus’. All
other things aren’t ever equal before and after the policy is implemented.
Checking whether a policy is economically feasible means relaxing the
ceteris paribus condition to consider the full set of strategies available to
actors under the new circumstances.
To understand the ways that economic feasibility constrains policy-
makers, consider the case of the proposal to introduce an unemployment
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1058
benefit financed by a tax on profits. The aim of the policy is to improve the
standard of living of the unemployed without increasing the unemployment
rate.
Unintended consequences
We begin by identifying the Nash equilibrium in the initial situation before
the policy is introduced. In Figure 22.18a, the economy is at the point
marked N, where the wage- and price-setting curves intersect. As we
confirmed in Unit 9 (Section 9.6), this is a Nash equilibrium because neither
a worker (employed or unemployed) nor a firm could be better off by
setting a different wage or price, offering to work at a different wage, or
hiring a different number of workers.
First, we look at the short-run impact of the policy using Figure 22.18a.
• Initial situation: The Nash equilibrium is at point N.
• Voters demand a new policy: The workers—employed and unemployed—
vote to elect a government that wishes to introduce an unemployment
benefit that workers will receive when out of work, financed by a tax on
profits.
• Short-run impact: This raises the reservation option of employed
workers, shifting up the wage-setting curve, so that employers now have
to pay more to induce workers to work hard and well. This is shown by
point C.
The policy has its intended effect: the unemployed receive a higher income,
and employed workers’ wages have risen too, seemingly an unexpected
feature of the policy. However, this unintended effect, raising wages, takes
the economy away from its initial Nash Equilibrium. We will see how the
long-run effects can differ from the short-run effects.
Using the analysis in Figure 22.18a, follow through the logic of the
model as the actors respond to the policy.
What is the long-run impact of the policy? In the labour market diagram,
we see that there is:
• A new Nash equilibrium: The unemployment benefit has shifted the
wage-setting curve upwards. In the short-term, the labour market shifts
to point C. But the tax which finances the more generous benefits has
shifted the price-setting curve downwards, so in order to ensure the
required profit margin for firms, the real wage must be lower.
• Firms reduce employment, or shut down: Some firms paying the new higher
wage will be making insufficient profits to motivate further investment
and so they will cut back employment; other firms will fail or move pro-
duction to other countries.
• Long-run impact: These changes will push the economy towards point N′,
where (as intended) the unemployed will now receive higher income
when out of work, but fewer workers are employed and the employed
workers receive a lower wage.
The policy objective—raise the living standards of the unemployed without
increasing unemployment—was economically infeasible.
Yet we have seen in Unit 16, Figure 16.16 (page 731) that countries with
more generous unemployment benefits do not necessarily have higher
unemployment rates. This suggests that these countries were able to
22.12 ECONOMIC INFEASIBILITY
1059
In our ‘Economist in action’ video,
John Van Reenen uses the game of
cricket to explain how the eco-
nomy’s average productivity is
affected by the survival of low pro-
ductivity firms. https://tinyco.re/
5433022
achieve a Nash equilibrium outcome different from either N or N′. Figure
22.18b shows how this may have happened—there is a third Nash equilib-
rium at N″ where a new higher price-setting curve intersects the post
reform wage-setting curve.
The Swedish approach had its origins in the ‘solidarity wage policy’,
devised in 1951 by Gösta Rehn and Rudolph Meidner, two economists who
worked at the research institute of the Trade Union Confederation in
Sweden.
They reasoned that workers and employers have a common interest in
rapid productivity growth, and that workers could enjoy higher wages
without the profits of firms being reduced if more of the economy’s output
was produced by high-productivity firms rather than in firms with low
productivity.
The solidarity wage policy in Sweden was actually three linked policies:
• Equal wages for equal work: This means that the wage for each job was set
at the national level by negotiations between the employers’ association
and the union. This had the effect of compressing wage differences
among workers doing similar jobs. The lowest-productivity firms had
survived by paying lower wages to equivalent workers than other firms
paid. Under the new policy, they could not pay the negotiated wage and
still remain profitable, and so had to exit the industry. Higher-pro-
ductivity firms survived and took over the market share of the failed
firms.
Po
st
-t
ax
re
al
w
ag
e
Employment
Price-setting curve
Labour supply
Wage-setting curve
(unemployment benefit)
Wage-setting curve
Price-setting curve
(tax rate funds UB)
N′
N
C
Figure 22.18a Introducing an unemployment benefit: Short- and long-run effects.
1. The status quo
The Nash equilibrium is at point N. The
new government introduces an
unemployment benefit that workers
will receive when out of work, financed
by a tax on profits.
2. The unintended consequence
This raises the reservation option of
employed workers, so that employers
now have to pay more to induce
workers to work hard and well. This is
shown by point C.
3. The result
The tax on profits shifts the price-
setting curve downwards. The new
Nash equilibrium is at N′, with higher
unemployment and a lower real wage.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1060
• Unemployment benefits: These were generous but time-limited. See Unit
16 for more detail on how this policy works.
• Active labour market policy: Retraining and mobility allowances to
displaced workers, for example, aimed to improve matching them with
vacancies. It protected workers rather than jobs. Again, you can find
more detail on this type of policy in Unit 16.
The tax-financed increase in unemployment benefits alone would likely
have pushed the price-setting curve downwards, as in the example above.
But the solidarity wage policy also forced low-productivity firms out of the
market. The remaining firms had higher productivity and could therefore
maintain their profit margins at lower prices, pushing the price-setting
curve upwards. Retraining and mobility allowances ensured that these
high-productivity firms had access to a well-trained workforce, allowing
them to cut costs and prices even further. Figure 22.18b shows how this
combination of policies resulted in a new equilibrium with higher real
wages at N″, and without the rise in unemployment at N′.
This is an example of how a democratic political environment with large
nationally oriented trade unions and a responsive government could
sustain low levels of inequality (shown in Figure 22.17), while raising
average living standards.
Economic feasibility: An example from Chile
The previous analysis using the labour market model is a simplification. But
it helps us understand real economic forces operating in the world. Chile is
one example.
In 1970, the socialist Salvador Allende was elected president of Chile in
a surprise victory, on a platform promising greater public services and
nationalization of many of the privately held firms in the country.
The reaction of the wealthy is seen in the stock market prices, shown in
Figure 22.19. A stock (or share) is a share in the ownership of a company,
Po
st
-t
ax
re
al
w
ag
e
Employment
Price-setting curve
Price-setting curve
(solidarity wage policy,
tax rate funds UB)
Labour supply
Wage-setting curve
(unemployment benefit)
Wage-setting curve
Price-setting curve
(tax rate funds UB)
N′
N
N″
C
Figure 22.18b Combining the introduction of an unemployment benefit with a
solidarity wage policy.
22.12 ECONOMIC INFEASIBILITY
1061
and its price (as you know from Unit 11) measures how much it is worth to
own part of that company and as a result receive a share of its profits, and
benefit in the future from selling it to another person.
Share prices rise when, taking everything into account, owners or
potential buyers of shares think that the company will be more profitable in
the future. When a socialist president was elected in Chile, wealthy people
were worried about higher taxes, policies favouring their employees that
would mean paying them higher wages, and the possibility that the govern-
ment or even workers might expropriate (take over the ownership of) the
firm’s assets.
These worries created a limit to the policies that would prove eco-
nomically feasible for the Allende government. If the wealthy thought that
the firms they owned would be less profitable in the future, they would
have no incentive to invest in increasing the assets of the firm. Rather than
invest in these firms, the wealthy might then invest in another country
(known as capital flight), in housing, or in other Chilean assets more likely
to be valuable in the future.
As you can see from Figure 22.19, stock prices plummeted straight after
Allende’s election day. We will pick up the Chile story a bit later, seeing that
political interests as well as economic infeasibility can limit what a
democratically elected government can do.
Day before Allende elected
70
80
90
100
110
120
130
140
150
160
−15 −10 −5 0 5 10 15 20 25
Trading days on Santiago stock market after election
N
om
in
al
sh
ar
e
pr
ic
es
in
Sa
nt
ia
go
(1
96
9
av
g
=
10
0)
Figure 22.19 Stock market prices in Chile: The election of a socialist president, 1970.
Proprietary data from the Santiago stock
market. Time zero is the first trading day
on the Santiago stock market following
the election. Daniele Girardi and Samuel
Bowles. 2018. ‘Institution shocks and
economic outcomes: Allende’s election,
Pinochet’s coup, and the Santiago stock
market’. Journal of Development Eco-
nomics 134: pp. 16-27.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1062
asymmetric information Informa-
tion that is relevant to the parties
in an economic interaction, but is
known by some but not by others.
See also: adverse selection, moral
hazard.
EXERCISE 22.12 ECONOMIES SUCCEED WHEN NATIONAL POLICIES
ALIGN WITH INDIVIDUAL IMPULSES
In 1759, Adam Smith wrote in The Theory of Moral Sentiments:
The man … enamored of his own ideal plan of government, … seems
to imagine that he can arrange the different members of a great
society with as much ease as the hand arranges the different pieces
upon a chess-board. … but in the great chess-board of human
society, every single piece has a principle of motion of its own,
altogether different from that which the legislature might choose to
impress upon it. If those two principles coincide and act in the same
direction, the game of human society will go on easily and
harmoniously, and is very likely to be happy and successful. If they
are opposite or different, the game will go on miserably, and the
society must be at all times in the highest degree of discord.
1. In your own words, explain Smith’s idea of the economic feasibility of
government policies.
2. Using what you have learned about the constraints faced by the Central
Bank as a policymaker, give an example that illustrates Smith’s point.
QUESTION 22.4 CHOOSE THE CORRECT ANSWER(S)
Look again at Figure 22.18a (page 1060). Which of the following state-
ments are true?
The upward shift in the wage-setting curve would have caused real
wages to increase if taxes on firms had not also been increased.
Policies that shift the wage-setting curve without also changing the
price-setting curve cannot increase real wages in equilibrium.
The long-run impact of financing an increase in unemployment
benefit by a tax on profits is the opposite of the short-run impact.
Increasing unemployment benefits made all workers worse off.
22.13 ADMINISTRATIVE INFEASIBILITY
Limited information
Remember that many market failures arise because of asymmetric informa-
tion—the lender does not know how the borrower will use the funds, the
employer does not know how hard the employee will work, the insurance
company does not know if the person purchasing life insurance is terminally
ill, and so on. The limited information available to the principal in these three
cases (the lender, the employer, the insurer) made it impossible for them to
write a complete contract with the agent (the borrower, the employee, the
insured). A complete contract would have ‘internalized’ the external effects
that are the source of the market failure, ensuring that the agent bore all of
the costs and enjoyed all of the benefits of his or her actions.
The same is true of environmental market failures. If the citizen
suffering from a respiratory illness could bring a lawsuit against the
polluting firm that caused it, and secure compensation for the costs of his
illness, then this might ‘internalize’ the external costs of the polluter’s
22.13 ADMINISTRATIVE INFEASIBILITY
1063
fiscal capacity The ability of a gov-
ernment to impose and collect
substantial taxes from a population
at low administrative and other
costs. One measure of this is the
amount collected divided by the
cost of administering the tax
system.
actions, leading to more effective abatement efforts. But in most cases, this
cannot be done because the citizen does not have the necessary information
about who is polluting, and also would not be able to pay the legal and
other expenses of pursuing the case.
But this information is not available to the government either, limiting
its ability to design policies that address environmental market failures. As
we saw in Unit 20, governments often do not know how much citizens
value environmental quality, or how effective environmental policies will
be in ensuring a sustainable environment. As we also saw, it’s hard for the
government to find out this information.
Limited information is not the only factor limiting the administrative
feasibility of policies.
Limited capacities
Taxes, as we have seen, can change the way that private actors behave. For
example, imposing a tax that raises the price of fuel reduces car journeys
and the associated environmental damages. But, to levy taxes effectively and
collect the revenue, governments need revenue officers who are competent,
not corrupt, with sufficient resources to find and punish tax evaders, and
with enough legitimacy that most people pay their taxes. Where this is not
the case, sellers would continue selling fuel at a lower price, driving their
law-abiding competitors out of business.
Administrative capacity is required for many different kinds of taxes,
from trade tariffs enforced at the border, to payroll taxes levied on wages,
and to corporate income taxes charged on legally incorporated economic
entities. The use of accounting books in large firms makes it easier to audit
firms and accurately assess their tax bill. But this also depends on the tech-
nology and institutions available. International flows of difficult-to-track
financial obligations makes illegal tax evasion, and legal tax avoidance (for
example by moving profits to international tax havens), a problem for gov-
ernments who want to collect tax. This lowers their fiscal capacity.
Lack of administrative capacity affects all aspects of government, not
just taxes. An educational reform, for example, requiring teachers to
abandon rote learning methods and engage in more active student-centered
learning may simply be impossible to implement given the skills of the
current teaching force.
Administrative infeasibility: An application from Nigeria
A lack of information about the progress of infrastructure projects funded
by the government, and a poorly functioning and corrupt administration,
resulted in poor outcomes in Nigeria.
In 2006–07, the public sector was given funding and made responsible
for implementing 4,700 small-scale infrastructure projects like installing
water wells, constructing dams, and building health centres. Just 31% of the
projects were completed and 38% were not even started. For example, the
funding was paid for 1,348 water wells, but 846 were never completed,
leaving hundreds of thousands of people without improved access to water.
Economists Imran Rasul and Daniel Rogger wanted to find out why
some organizations succeeded in completing projects on schedule and
budget and others did not. They were able to do their research because the
Nigerian government had collected information from independent teams
of engineers about the quantity and quality of completed projects. Accurate
Timothy Besley and Torsten
Persson. 2014. ‘Why do developing
countries tax so little?’. The
Journal of Economic Perspectives
28 (4): pp. 99–120.
Imran Rasul and Daniel Rogger.
2016. ‘Management of bureaucrats
and public service delivery:
Evidence from the Nigerian civil
service.’ The Economic Journal.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1064
principal–agent relationship This
relationship exists when one party
(the principal) would like another
party (the agent) to act in some
way, or have some attribute that is
in the interest of the principal, and
that cannot be enforced or
guaranteed in a binding contract.
See also: incomplete contract. Also
known as: principal–agent problem.
information of this kind from independent observers on the quantity and
quality of public services is very rare for a low-income country.
Rasul and Rogger found that ‘getting things done’ by public sector
organizations is affected by how the organizations are managed. They were
surprised to discover that using performance incentives, with which
managers were rewarded for good performance as measured by the
organization (not by independent assessors), was correlated with lower
completion rates. In organizations where officials had greater autonomy in
making decisions—not in response to performance incentives—outcomes
were better.
While financial incentives can play a positive role in motivating govern-
ment officials, the Nigerian case shows that, if it is difficult to collect and
verify information, trying to attach simple performance incentives to
complex tasks may backfire. If there is poor information, then it may be
better to give organizations greater autonomy. In this case, officials given
autonomy observed social norms of responsibility, and completion rates
were higher.
22.14 SPECIAL INTERESTS
In a democracy, it is often said that ideally the government is the servant of
the people. In economic terms, government officials are the agents and the
citizens are the principals.
But this immediately raises two questions:
• Why would the agent (the elected official) do what the principals (the citizens)
desire? As in any principal–agent relationship the agent has his or her
own objectives, and they differ from the principal’s objectives. Our
model of the government as a monopolist illustrated how the govern-
ment need not serve the interests of the people in an undemocratic
society. We saw that the problem does not disappear in a democracy.
• Who are ‘the people’? In economic terms, who is (or are) the principal(s)?
Until now the principal has been the lender or the employer, which we
could simplify by representing as a single individual. But there are many
citizen-principals and they have differing priorities for what the govern-
ment should do, whether the question is abatement of pollution, school
improvement, policies to boost innovation, tax-funded transfers to the
poor, and so on.
Democratic accountability of elected officials
Think about the first problem—motivating the elected official to do what
the citizens prefer—as a principal–agent problem, like the employer trying
to motivate a worker to contribute to the profits of the firm. What are the
possible solutions when the manager tries to motivate workers? The
manager could:
• Pay the agent an economic rent: She will fear losing it if she does an
unsatisfactory job.
• Monitor the work activity of the employee: To detect signs of inadequate
work.
• Replace the worker by another worker: If the work is found to be
unsatisfactory.
22.14 SPECIAL INTERESTS
1065
short-termism This subjective term
refers to the case when the person
making a judgement places too
much weight on costs, benefits, and
other things occurring in the near
future than would be appropriate.
In a democracy, elected officials are held accountable to the electorate by a
similar set of strategies:
• Give the official a sufficient salary, prestige, and other amenities of office: The
official would then like to keep the job.
• Monitor the activities of the government: To determine the quality of the
government’s performance using legal principles of transparency and
judicial review, along with a free press and free speech.
• Hold periodic elections: A government that has not performed well in the
citizens’ eyes is replaced by a different set of political leaders.
This is how democracies solve the principal–agent problem of making
elected officials accountable to the public. But it comes with a downside:
the fact that officials, like employees, are subject to periodic review gives
them an incentive to undertake projects whose objectives will become
visible before the next election. This is called short-termism.
Governments, for example, sometimes introduce expansionary fiscal
policies (cutting taxes or expanding spending) in the run-up to elections, so
that disposable incomes will be rising and unemployment falling when
people vote. Attempts to push employment above the long-run sustainable
level (recall the labour market model) will eventually lead to unsustainable
inflationary pressures. But these unwanted consequences would occur only
after the election.
Because future elections are an incentive for short-term thinking by
political leaders, a partial solution is to remove some policymaking from
the hands of elected officials. This is the argument for an independent (not
elected) judicial system, and for the political autonomy of the central bank.
For example, the governors of the US Federal Reserve system are
appointed by the president for 14-year terms which are staggered, so that it
is unlikely that a president will appoint many of them while in office. Figure
15.18 (page 685) shows when central banks across countries in the world
adopted inflation-targeting. This was a signal of a greater degree of
autonomy of central bank decision making. Also in the US, presidential
appointments to the Supreme Court are for life.
Policymaking in a democracy is also sometimes biased in favour of
smaller groups. Here is the reason. Consider a policy, such as a reduction in
tariffs on imports of clothing, which will make less-expensive clothing
available to the population but reduce the employment and income of
workers in the domestic clothing industry. Suppose that it will confer a
total of €1 million of costs on the 500 clothing workers and at the same
time will confer €2 million of benefits on 2 million consumers of clothing.
Now consider the challenges facing those seeking to organize campaigns
against and for the policy:
• Each worker in the domestic indstry would lose €2,000 a year if the
legislation were passed, so most would support the ‘anti-import’ cause,
and be against the tariff reduction.
• Each consumer would benefit by €1 if the legislation were passed, so
few people would be willing even to send an email to their legislator.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1066
In our ‘Economist in action’ video,
Esther Duflo explains what
happened when it was mandated
that randomly selected villages
elect a woman to head their local
council. https://tinyco.re/1095549
‘All animals are equal. But some are more equal than others.’
This quote is from George Orwell’s 1945 book Animal Farm, which was a
satirical critique of Joseph Stalin’s dictatorship of the Soviet Union. But it
also applies to how democracies work in practice. All citizens are legally
equal in their rights, but some have much more power to influence govern-
ment policy than others.
This concerns the second question at the beginning of this section: when
persuading elected officials to favour one policy over another, citizens are
far from equal. Wealthy citizens in particular may have a disproportionate
voice in a democracy because:
• Wealthy citizens invest: Their decisions about investment (the case of
Chile, for example) may determine the fate of a government.
• Wealthy citizens donate to politicians: Their contributions to electoral
campaigns (in countries where this is allowed), or even direct personal
payments, may influence either who is elected or what the elected
officials do once in office.
• Wealthy citizens control communications: Some own and direct newspapers
and TV stations.
• Wealthy citizens employ lobbyists: They, or the firms they own, employ
professionals—often former politicians—to influence elected officials.
The result is that economic inequality feeds political inequality, which in
turn feeds economic inequality.
For example, the relationship between economic inequality and political
inequality affects gender outcomes. In many countries, women participate
much less in political life and leadership than men. In India, the reservation
of positions for women to head village councils has been shown to increase
public spending on the public services that women prefer, like wells, so that
they do not have to carry water so far. It also reduces receipts of bribes by
those in power and was found to transform stereotypes. Men in villages
that were randomly reserved for women leaders subconsciously perceived
women more positively as leaders, as compared with viewing them solely in
domestic roles.
Kenneth Scheve and Daniel
Stasavage. 2010. ‘The conscription
of wealth: mass warfare and the
demand for progressive taxation’.
International Organization 64 (04):
pp. 529–561.
Kenneth Scheve and Daniel
Stasavage. 2012. ‘Democracy, war,
and wealth: lessons from two
centuries of inheritance taxation’.
American Political Science Review
106 (01): pp. 81–102.
Kenneth Scheve and Daniel
Stasavage. 2016. Taxing the rich: A
history of fiscal fairness in the
United States and Europe.
Princeton University Press.
Jacob S. Hacker and Paul Pierson.
2010. ‘Winner-take-all politics:
Public policy, political
organization, and the precipitous
rise of top incomes in the United
States’. Politics & Society 38 (2):
pp. 152–204.
For evidence on how political
contributions (as well as special
interests) influenced US housing
market policy prior to the crisis,
read: Atif Mian, Amir Sufi, and
Francesco Trebbi. 2013. ‘The Polit-
ical Economy of the Subprime
Mortgage Credit Expansion’.
Quarterly Journal of Political
Science 8: pp. 373–408.
HOW ECONOMISTS (AND POLITICAL SCIENTISTS) LEARN FROM
FACTS
Does money talk?
In the US, people often say ‘money talks’. Many are concerned that it
talks particularly loudly when it comes to politics.
To some, it is obvious that when a candidate for political office
receives a large contribution for his electoral campaign from a business,
or a trade union with an economic interest at stake, the candidate will be
more likely to take the side of the contributor when it comes to using
political power to influence policy.
We know the election campaigns for the US congress in 2012 spent
on average $8.5 million per congressional seat, as a paper on procuring
access to congressional representatives relates. But did the winners
provide favours for the donors that would not have occurred without
the donors’ contributions?
22.14 SPECIAL INTERESTS
1067
Joshua L. Kalla and David E.
Broockman. (2015). ‘Campaign
contributions facilitate access to
congressional officials: A
randomized field experiment’.
American Journal of Political
Science 60 (3): pp. 1–14.
Adam Bonica, Nolan McCarty, Keith
T. Poole, and Howard Rosenthal.
2013. ‘Why hasn’t democracy
slowed rising inequality?’ The
Journal of Economic Perspectives
27 (3): pp. 103–123.
Martin Gilens and Benjamin I. Page.
2014. ‘Testing theories of American
politics: Elites, interest groups, and
average citizens’. Perspectives on
politics 12 (03): pp. 564–581.
The vast majority of Americans who cannot afford to contribute
to campaigns in meaningful amounts are at a disadvantage when
attempting to express their concerns to policy makers.
Special interests: The story of Chile continued
What happened after the election of Allende in Chile in 1970 tells a story
not only of economic limits to feasible policies, but also of political limits.
Amid faltering economic performance, due in part to potential investors
holding back on investment in Chile, opposition to Allende mounted, some
of it supported in secret by the US government. In 1973, the Chilean armed
forces attacked the presidential palace, defeating troops loyal to Allende.
They took over the government, ending democracy and replacing Allende
with the unelected General Augusto Pinochet.
The wealthy anticipated that Pinochet would introduce pro-business
policies, so stock prices rose again (Figure 22.20a). The Pinochet
dictatorship would remain until a constitutional referendum in 1988
demanded a return to democracy, which the armed forces respected.
Once again, a sharp change in behaviour of the wealthy is recorded in
the stock market prices on the day following the referendum.
We might ask if the members of congress who received contributions
from those with investments in the oil industry tended to favour the
interests of those firms afterwards. Or did those receiving funds from
trade union members support an agenda that favoured the union’s
interests? The answer in both cases would be that they did.
But this does not demonstrate that donor contributions purchased
influence over the legislator. Remember causation can work both ways:
those with oil wealth are likely to donate to candidates who already
favour that industry’s interests. Trade union members will donate
money to those who already support the interests of trade unions.
Simply showing a correlation between the source of the funding and the
policies supported by the legislator does not show that the contributions
caused the legislator to act differently.
Political scientists Joshua Kalla and David Brockman designed a
clever experiment to see if the donation caused the congress member to
behave in the donor’s interest. They reasoned that citizens could
influence legislators by meeting with them and expressing their views.
Members of Congress are busy people, so gaining access to them for a
meeting is something that groups compete for.
They wanted to find out if those who gave money to a congress
member were more likely to be granted a meeting. With the cooperation
of a (real) interest group Credo Action, they contacted 191 members of
congress to ask for a meeting. All of the constituents making this request
had contributed some funds to the member’s campaign. The control
group, randomly chosen, and half of the total sample, said only that they
were residents of the member’s district. The treatment group also
identified themselves as donors. All callers in both groups read from a
script, so the requests for a meeting were otherwise identical.
Among those not identified as donors, 2.4% gained a meeting with
either the congress member or the chief of staff. For those identified as
donors, 12.5% got a meeting.
The authors concluded:
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1068
The day before the
military takeover
450
650
850
1,050
1,250
1,450
1,650
−15 −10 −5 0 5 10 15 20 25
Trading days on Santiago stock market after military takeover
N
om
in
al
sh
ar
e
pr
ic
es
in
Sa
nt
ia
go
(1
97
2
av
g
=
10
0)
Figure 22.20a Stock market prices in Chile: The military overthrow of the socialist
government, 1973.
Time zero is the first trading day on the
Santiago stock market following the
military takeover.
The day before referendum
ended military rule
120
125
130
135
140
145
150
−15 −10 −5 0 5 10 15 20 25
Trading days on Santiago stock market after referendum
N
om
in
al
sh
ar
e
pr
ic
es
in
Sa
nt
ia
go
(1
98
7
av
g
=
10
0)
Figure 22.20b Stock market prices in Chile: The 1988 referendum, ending military
rule.
Time zero is the first trading day on the
Santiago stock market following the
referendum.
22.14 SPECIAL INTERESTS
1069
China
South Africa
Brazil
Uruguay
Russia
Kazakhstan
Spain France
UK
Japan
Canada
Australia
Bahrain
Germany
Sweden
Netherlands
Oman US
Switzerland
UAE
Norway
Singapore
Line of best fit
0
5
10
15
20
25
0 20,000 40,000 60,000 80,000
GDP per capita in 2018 (PPP, constant 2011 international dollars)
CO
2
em
is
si
on
s
pe
rc
ap
ita
in
20
18
(m
et
ri
c
to
nn
es
)
As we saw in Figure 20.25a (page
956), countries with similar per
capita income do not necessarily
have similar levels of CO2
emissions per capita.
Allende’s economic program was infeasible for two reasons:
• It was economically infeasible: He could not force private firms to invest in
Chile, and without their investment the economy would stagnate or
even shrink.
• It was politically infeasible: Though democratically elected he did not
control the Chilean armed forces which, with the support of businesses
and the US Central Intelligence Agency, turned against him.
22.15 POLICY MATTERS AND ECONOMICS WORKS
In this unit, you have learned that Adam Smith’s reasoning about the men
on the chessboard can now be expressed in economic terms by saying that,
for a policy to improve an outcome, it must change the current Nash equi-
librium to a different and preferable one (economic feasibility). And it also
must be favoured by a governing elite with the authority and capacity to
implement it (political and administrative feasibility).
The limits posed by special interests, as well as economic and
administrative feasibility, explain why governments often do not
successfully address the problems of market failure and unfairness that we
have encountered throughout this course. Looking at the different eco-
nomies of the world, however, you see substantial differences in the extent
to which these problems are effectively addressed. As a result, the limits
posed by economic, political, and administrative feasibility differ
substantially among countries.
To see this, return to the problem of climate change and Figure
20.25a (page 956). Sweden, Australia and the US have roughly the same per
capita income. If they all faced similar constraints of economic, policy, and
political feasibility in adopting policies to limit greenhouse gas impacts on
climate, then we would expect to see their similarity in income matched by
similarity in CO2 emissions per capita.
But this is not at all what we see in the figure. The US and Australia emit
about three times as much per capita as Sweden. It seems likely that what is
economically feasible may not differ very much in these three countries, as
all share the same knowledge about technologies, and their citizens are
likely to respond in similar ways to incentives to adopt cleaner energy
sources. The government information and capacities in the three countries
are also similar: all have well-informed and capable governments.
Although carbon dioxide emissions are affected by industrial structure
and trade specialization, they are also affected by what is desired by the
elites, who have political influence. Policies to address climate change are
more likely to have political support in Sweden than in Australia and the
US. One reason for this difference is the importance in US and Australian
politics of lobbies representing the natural resource industries, including
the gas, oil, and coal producers.
A similar contrast appears when we look at inequality, shown in Figure
19.30. Germany and the US have both experienced about the same rate of
growth in GDP per capita over the past four decades, but they differ
markedly in inequality of living standards, as can be seen by the much
higher Gini coefficient for disposable income in the US. The comparison
for the measure of intergenerational inequality is similar. Denmark,
Sweden, and Finland are more equal by this measure than even Germany.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1070
High performers
Low performers
Luxembourg
Norway
Finland
Austria
Belgium
Germany
UK
Sweden
Netherlands
France
USCanada
Australia
Italy
Denmark
Switzerland
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.25 0.30 0.35 0.40
Long-term average inequality in disposable income (Gini coefficient)
An
nu
al
av
er
ag
e
G
D
P
pe
rc
ap
ita
gr
ow
th
,
19
70
–2
01
8
(%
)
As we saw in Figure 19.30a (page
898), high income countries with a
similar growth in GDP per capita do
not necessarily have similar levels
of inequality.
James Heckman explores the
question of how schooling and
preschool experience affects
inequality. https://tinyco.re/
8952344
Many things could account for these differences. They are, at least in
part, due to the greater political influence in Germany than in the US, of
those who value sustaining a higher living standard for the least well-off.
What can we learn from these comparisons?
One lesson, if we wish to address problems like climate change and
unfair inequalities in living standards, is that for most countries it is
possible to do a lot more than is currently being done. The fundamental
forces contributing to inequality in the high-income countries—new tech-
nologies and growing imports (from China, for example) that make the
skills of low-paid workers redundant—do not differ much among the high-
income countries in Figure 19.30. The differences appear to be a matter of
choices among the similar set of policies that are economically and
administratively feasible, some countries opting for policies that sustain
high levels of inequality, and others pursuing the goal of greater equality.
We also have a lot to learn from the top performers in these and similar
figures, by studying the policies and institutions that appear to account for
their success in addressing market failures and unfairness.
Not all policies and institutions that are effective in one country can be
transferred to another. The comparison between the innovation systems in
Silicon Valley and in Germany in Section 21.2 (page 972) shows how different
combinations of innovating firms, government policies, financial institutions,
and social norms in these two regions produce effective solutions to the
market failures associated with knowledge production. Neither would be
easily adopted in the other country, or in a country like Brazil or Portugal.
Some countries have school systems that teach much more effectively
than others. Because educational policies differ greatly among countries, we
can get some idea of the importance of good policy by looking at differ-
ences among nations in performance on a mathematics test administered to
15-year-old students around the world.
Let’s compare two countries that are ethnically diverse and have about
the same per capita income: the US and Singapore. The average maths score
in Singapore was 20% higher than in the US. Even more striking, the
student whose score placed him or her in the middle of the US students (the
student with the median score) would have been in the bottom quarter of
Singapore’s students. A similar comparison would place the median
American student in the bottom quarter of Japanese students, and just
above the bottom quarter of Finland’s students.
You can access the data from this
test at the OECD’s Programme for
International Student Assessment
(https://tinyco.re/1018246).
22.15 POLICY MATTERS AND ECONOMICS WORKS
1071
Economic research has explored the question of how schooling and
preschool experience affects inequality. A leader in this research is James
Heckman, who was the subject of one of our ‘Economist in action’ videos.
You may also want to read his book Giving kids a fair chance.
His book begins by noting that:
The accident of birth is a principal source of inequality in America
today. American society is dividing into skilled and unskilled … birth
is becoming fate.
Heckman’s ‘strategy that works’ is based on the following logic. ‘Both
cognitive and socio-emotional skills develop in early childhood and their
development depends on family environment.’ Growing up poor deprives
children of opportunities to develop these skills, and ‘family environments
in the US have deteriorated’.
In response, Heckman advocates ‘early interventions’ such as enriched
preschool environments and home visits by professionals to assist parents,
which his research shows can ‘produce positive and lasting effects on
children in disadvantaged families.’
Policies of the kind advocated by Heckman are being implemented in
countries including Colombia, Jamaica, Chile, and in the state of Orissa in
India. Teams of economists and experts in child development are rigorously
evaluating them for their longer-term effects and to assess the feasibility of
scaling them up from small pilot interventions (https://tinyco.re/2744426).
So we know that the kids of poor parents often grow up to be poor. We
now also know that this has little to do with genetics, and more to do with
the socio-emotional behaviour associated with growing up poor. We now
know of, and govenments can implement, effective policy remedies to
break this cycle of poverty.
22.16 CONCLUSION
Harold Lasswell, a prominent mid-twentieth-century American political
scientist, is best known for his book Politics: Who gets what, when and how.
The title captures a basic point of this unit, though we will go beyond
Lasswell’s title. Politics is all about:
• who gets what
• who gets to be what
• who gets to do what
The reason is that political processes determine the rules of the game—the
basic institutions that govern how we interact in the economy and other
arenas of our society.
But politics is not simply about dividing up a pie, with the powerful
getting the larger slice and the struggle for power sometimes resulting in a
smaller pie. Well-designed government policies are also able to increase the
size of the pie, improving living standards for the vast majority of people.
Examples that you have already seen include the economic policies of the
government of China, which since the 1980s resulted in the most rapid
eradication of large-scale poverty ever witnessed in human history.
Another example was the clean water and sanitation policies that were
behind the global reduction in child mortality.
James Heckman. 2013. ‘Giving Kids
a Fair Chance: A Strategy That
Works’. Cambridge, MA: MIT Press.
Daron Acemoglu and James A.
Robinson. 2013. ‘Economics versus
politics: Pitfalls of policy advice’.
The Journal of Economic
Perspectives 27 (2): pp. 173–192.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1072
Economics is an essential tool to understanding how government poli-
cies can both increase the size of the pie and ensure its fair division. The
Economy has given you a way of understanding the manner in which we
interact with each other, and with our natural environments in producing
our livelihoods. Our economy is all about people and what we do as buyers
and sellers, borrowers and lenders, employees and employers, voters and
government officials. We learn a lot about this economy by seeing actors as
doing the best that they can under a given set of circumstances, while also
seeking to change their circumstances, often through political movements
and governments.
Economics can help to adequately address the problems of inefficiency
and unfairness in our economies, by designing policies that are both eco-
nomically and administratively feasible. Economics can also play a role in
making good policies politically possible: economic reasoning can have a
powerful effect on public understanding of what can be done in the eco-
nomy, and even on what ought to be done.
The capitalist revolution with which we began in Unit 1 and the
democratic revolutions—extending the vote to all adults—with which we
have concluded here have together produced the distinctive economic and
political system under which most readers of The Economy now live.
Capitalism and democracy continue to change, and to change the world.
Economics will help you understand how capitalism and democracy
together are changing your circumstances, and how you—with others—in
turn might participate in this process of change.
Concepts introduced in Unit 22
Before you move on, review these definitions:
• Government, governing elite
• Economic accountability, political accountability, democratic
accountability
• Political rents
• Political institutions
• Median voter model
• Short-termism
• Economic feasibility, administrative feasibility
22.17 REFERENCES
Consult CORE’s Fact checker for a detailed list of sources.
Acemoglu, Daron, and James A. Robinson. 2013. ‘Economics versus politics:
Pitfalls of policy advice’ (https://tinyco.re/5915146). The Journal of
Economic Perspectives 27 (2): pp. 173–192.
Arrow, Kenneth. J. 1978. ‘A cautious case for socialism’ (https://tinyco.re/
4741014). Dissent 25 (4): pp. 472–480.
Arrow, Kenneth J., and F. H. Hahn. 1991. ‘General Competitive Analysis’,
eds. C. J. Bliss and M. D. Intriligator. Advanced Textbooks in Economics
Vol. 12. San Francisco: Holden-Day.
Bakija, Jon, Lane Kenworthy, Peter Lindert, and Jeff Madrick. 2016. How Big
Should Our Government Be? Berkeley: University of California Press.
Besley, Timothy, and Anne Case. 1995. ‘Does electoral accountability affect
economic policy choices? Evidence from gubernatorial term limits’
22.17 REFERENCES
1073
(https://tinyco.re/2599264). The Quarterly Journal of Economics
110 (3): pp. 769–798.
Besley, Timothy, and Torsten Persson. 2014. ‘Why do developing countries
tax so little?’ (https://tinyco.re/3513621). The Journal of Economic
Perspectives 28 (4): pp. 99–120.
Bonica, Adam, Nolan McCarty, Keith T. Poole, and Howard Rosenthal.
2013. Why hasn’t democracy slowed rising inequality?
(https://tinyco.re/5838764). The Journal of Economic Perspectives
27 (3): pp. 103–123.
Deaton, Angus. 2013. The Great Escape: Health, Wealth, and the Origins of
Inequality. Princeton, NJ: Princeton University Press.
Durlauf, Steven. 2017. ‘Kenneth Arrow and the golden age of economic
theory’ (https://tinyco.re/9029504). VoxEU.org. Updated 8 April 2017.
Freedom House. 2016. ‘Freedom in the World 2016. Anxious Dictators,
Wavering Democracies: Global Freedom under Pressure’
(https://tinyco.re/9817968). Washington, DC.
Fujiwara, Thomas. 2015. ‘Voting technology, political responsiveness and
infant health: Evidence from Brazil’ (https://tinyco.re/3783631).
Econometrica 83 (2): pp. 423–464.
Gilens, Martin, Benjamin I. Page. 2014. ‘Testing theories of American
politics: Elites, interest groups, and average citizens’
(https://tinyco.re/5699630). Perspectives on politics 12 (03):
pp. 564–581.
Girardi, Daniele and Samuel Bowles. 2018. ‘Institution shocks and eco-
nomic outcomes: Allende’s election, Pinochet’s coup, and the
Santiago stock market’. Journal of Development Economics 134: pp.
16-27.
Hamilton, Alexander, James Madison, and John Jay. 1961. The Federalist.
Middletown, Ct. Wesleyan University Press.
Hayek, Friedrich A. 1994. The Road to Serfdom. Chicago, Il: University of
Chicago Press.
Heckman, James. 2013. Giving Kids a Fair Chance: A Strategy That Works.
Cambridge, MA: MIT Press.
Hirschman, Albert O. 1970. Exit, voice, and loyalty: Responses to decline in
firms, organizations, and states. Cambridge, Mass: Harvard University
Press.
Hotelling, Harold. 1929. ‘Stability in Competition’. The Economic Journal 39:
pp. 41–57.
Kalla, Joshua L., and David E. Broockman. 2015. ‘Campaign contributions
facilitate access to congressional officials: A randomized field
experiment’ (https://tinyco.re/6564191). American Journal of Political
Science 60 (3): pp. 1–14.
Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2011. ‘The
worldwide governance indicators: methodology and analytical issues’.
Hague Journal on the Rule of Law 3 (2): pp. 220–246.
Lasswell, Harold D. 1936. Politics; who gets what, when and how. New York:
Whittlesey House.
Leibbrandt, Murray, Ingrid Woolard, Arden Finn, Jonathan Argent. 2010.
‘Trends in South African Income Distribution and Poverty since the
Fall of Apartheid’ (https://tinyco.re/8617393). OECD Social,
Employment and Migration Working Papers, No. 101. Paris: OECD
Publishing.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY
1074
Lindert, Peter. 2004. Growing Public: Social Spending and Economic Growth
since the 18th Century. Cambridge: Cambridge University Press.
Martinez-Bravo, Monica, Gerard Padró i Miquel, Nancy Qian, and Yang
Yao. 2014. ‘Political reform in China: the effect of local elections’
(https://tinyco.re/6544486). NBER working paper, 18101.
Mian, Atif, Amir Sufi, and Francesco Trebbi. 2013. ‘The Political Economy
of the Subprime Mortgage Credit Expansion’ (https://tinyco.re/
4522161). Quarterly Journal of Political Science 8: pp. 373–408.
Miller, Grant. 2008. ‘Women’s suffrage, political responsiveness, and child
survival in American history’ (https://tinyco.re/5731666). The
Quarterly Journal of Economics 123 (3): pp. 1287–1327.
Nuffield Foundation, The. 2010. ‘Mirrlees Review of tax system
recommends radical changes’ (https://tinyco.re/6726989).
Updated 10 November 2010.
O’Brien, Patrick K., and Philip A. Hunt. 1993. ‘The rise of a fiscal state in
England, 1485–1815’. Historical Research 66 (160): pp.129–76.
OECD. 2015. Programme for International Student Assessment
(https://tinyco.re/1018246).
Plummer, Alfred. 1971. Bronterre: A Political Biography of Bronterre O’Brien,
1804–1864. Toronto: University of Toronto Press.
Przeworski, Adam, Fernando Limongi. 1993. ‘Political regimes and eco-
nomic growth’ (https://tinyco.re/6669217). The Journal of Economic
Perspectives 7 (3): pp. 51–69.
Rasul, Imran, Daniel Rogger. 2016. ‘Management of bureaucrats and public
service delivery: Evidence from the Nigerian civil service’
(https://tinyco.re/9848716). The Economic Journal.
Scheve, Kenneth, and David Stasavage. 2010. ‘The conscription of wealth:
mass warfare and the demand for progressive taxation’. International
Organization 64 (04): pp. 529–561.
Scheve, Kenneth, and David Stasavage. 2012. ‘Democracy, war, and wealth:
lessons from two centuries of inheritance taxation’ (https://tinyco.re/
9000452). American Political Science Review 106 (01): pp. 81–102.
Scheve, Kenneth, and David Stasavage. 2016. Taxing the rich: A history of
fiscal fairness in the United States and Europe. Princeton University
Press.
Sethi, Rajiv. 2010. ‘The Astonishing Voice of Albert Hirschman’
(https://tinyco.re/2899363). Rajiv Sethi Blog. Updated 7 April 2010.
Sethi, Rajiv. 2011. ‘The Self-Subversion of Albert Hirschman’
(https://tinyco.re/2163474). Rajiv Sethi Blog. Updated 7 April 2011.
Sethi, Rajiv. 2013. ‘Albert Hirschman and the Happiness of Pursuit’
(https://tinyco.re/5203731). Rajiv Sethi Blog. Updated 24 March 2013.
Shleifer, Andrei. 1998. ‘State versus private ownership’ (https://tinyco.re/
4317440). Journal of Economic Perspectives 12 (4): pp. 133–150.
Smith, Adam. 1759. The Theory of Moral Sentiments (https://tinyco.re/
6582039). London: Printed for A. Millar, and A. Kincaid and J. Bell.
Swedberg, Richard. 1991. Joseph A. Schumpeter, The Economics and Sociology
of Capitalism. Princeton, NJ: Princeton University Press.
The Economist. 1999. ‘The grabbing hand’ (https://tinyco.re/8993136).
Updated 11 February 1999.
22.17 REFERENCES
1075
Tirole, Jean. 2017. ‘Jean Tirole – Prize Lecture: Market Failures and Public
Policy’ (https://tinyco.re/2393310). Nobel Media AB 2014, 11 May.
Wood, Elisabeth Jean. 2000. Forging Democracy from Below: Insurgent
Transitions in South Africa and El Salvador. Cambridge: Cambridge
University Press.
UNIT 22 ECONOMICS, POLITICS, AND PUBLIC POLICY