The Economic Theory of Representative Government

In the last fifteen years or so economists, returning to a tradition which they had to all appearances completely abandoned, have produced a growing volume of research on the problem of collective choice. If we bear in mind that the classification of analytic and scientific work is always somewhat capricious, it is possible without doing too much violence to these writings to classify them under four major headings, to wit, the theory of public goods, the theory of democracy, the theory of decision- rules, and the theory of transaction costs.¹ It may not be intuitively obvious that all this research work has a bearing on the question of collective decisions: this may explain why each particular field of research has until now largely, but not wholly, lived a life of its own, unimpeded in its growth by the issues discussed in the other areas.

Our knowledge of the public sector is so scant that we do not even have an accepted definition of the output of governments. In this chapter I suggest a definition that is consistent with and indeed inspired by the theory of public decision-making developed in subsequent chapters. Consequently, I depart from current accounting definitions but suggest a way of moving from the theoretically correct definition to the accounting ones since empirical work can only be based on the latter.

The discussion in the following chapters should make clear that the behavior of those Who participate in the processes that ultimately determine the allocation of resources in the public sector—citizens, politicians, and bureaucrats—is to a large extent conditioned and influenced by the context in which these processes take place, a context that I call the institutional framework. It is therefore imperative to examine, though briefly, some of the dominant characteristics of that framework. I focus on three of them. The first, but not necessarily the most important, is the set of decision-rules that is in force at any time in a democratic society, rules known as simple majority, qualified majority, plurality, proportionality, unanimity; the second pertains to the length of the election period, defined as the number of months or of years between an election day and the next one; and the third relates to the degree of full-line supply that exists or the variety of policies on which a citizen automatically makes a choice by the simple act of voting for one representative or for one party, a phenomenon that, given the size of the public sector, is a function of whether a given society is organized as a unitary basis or as a federation and also of the extent of the existence of direct democracy.¹

It is usual in economic theory to assume that consumers engage in only one type of economic activity: the purchase or sale of goods and services. The other activities in which they engage—window-shopping, swapping of recipes and advice, experimenting with new products, acquiring information on goods and services and on their prices and suppliers—are not considered to be significant aspects of behavior for the specific purpose of studying the market mechanism through which some scarce resources are allocated. The origin of the postualted action is simple: a consumer with given preferences and a given income faces a set of goods and services each of which can be traded at a given price; for each of these goods, the consumer can, taking his tastes, his income, and the prices of goods as fixed, determine the quantities he desires. If he has less than these quantities, he buys; if he has more, he sells.

This chapter examines the various activities in which utility-maximizing citizens can engage in an effort to reduce, or even to eliminate, the coercion (or the expected coercion) that is placed on them by the government’s supply of policies with public and non-private goods characteristics.¹ The object of the chapter could also be defined as that of analyzing how individual citizens, motivated by their own interest, can seek to achieve partial or complete elimination of the coercion (or of the expected coercion) imposed on them by the governing party and in the process signal or reveal their (positive or negative) preferences for public policies. Throughout I assume that citizens deal with politicians and political parties that maximize a utility function defined, among other things, for probability of reelection variable so that it makes sense to assume that citizens can influence the pattern of government policies.

Chapter 4 discussed why citizens engage in political action and chapter 5 examined the various political activities or instruments which these same citizens can undertake or use in an effort to alter the amounts of public policies supplied by the government and thus bring them to levels that are more in accordance with their own preferences. This chapter focuses on the costs of engaging in the activities described in the last chapter and analyzes how political participation changes with changes in these costs. In effect, this chapter, building on the material of the last two, is intended to provide an institutional theory of the demand for public policies.

In chapter 4, it seemed reasonable or at least consistent with tradition to assume without justification that citizens maximize utility functions in which, in addition to private goods, government policies (of a public and private goods variety) enter as variables; the hypothesis that governing and opposition (i.e., non-governing) political parties (and politicians) maximize a utility function defined for a probability of reelection (or election) variable—and for other variables as well, as I will indicate below and examine in more detail in chapter 10—however needs explanation and defense. The present chapter, therefore, discusses the hypothesis in some detail, though the full implications of its meaning will only be known at the end of chapter 11 when it has been used to produce results.

The last chapter noted that a political party that maximizes a utility function defined for a probability of reelection and other variables could only do so subject to certain technical constraints or production conditions.¹ This chapter examines these constraints and analyzes how they define the range of feasible alternatives open to the governing party and how they influence its behavior and indirectly the supply of public output.

Decisions about the supply of public policies are made by politicians, but these decisions are influenced and sometimes largely shaped by bureaucrats. It is therefore not possible to analyze the forces that impinge on the provision of public output without including bureaus and bureaucrats in the framework of analysis.

We are now in a position to bring together the building blocks developed in the previous chapters. On the demand side, these include the preferences of citizens for public policies as these are related to the incomes of citizens and to the tax-prices that have to be paid for these policies as well as to the costs of using the various instruments of political participation that can lead to the desired supply of public expenditure and taxation policies. On the supply side, there is the degree of competition to which the opposition submits the governing party and the degree of interest which this competition stimulates in citizens as reflected in what they remember of the disparities between the weights attached to their tastes by politicians and the weights they themselves use; there is also the bargaining strengths of politicians and bureaucrats which determine the instruments used by politicians in their efforts to reduce the degree of coercion placed on some citizens and the policies that will be implemented.

Having analyzed the forces that operate to determine the equilibrium supply of and demand for public policies in the last chapter, I will now examine how the public sector adjusts to external disturbances. It will be recalled that in previous discussions and especially in chapter 2 a large number of public policies were examined and were shown to be analyzable within one broad frame of reference. As a consequence, it will be sufficient if, in this chapter, I arbitrarily select two cases to examine the various possible disturbances to which the system may be subjected and to illustrate how the model works.

By now the reader of this book must be fully aware that I have simply applied conventional economic theory to representative government. Indeed, in the organization of the book itself I have carefully separated the forces that operate on the demand side of the public sector from those operating on the supply side and have taken special care to formulate the demand and supply problems in terms which depart as little as possible from conventional economic theory. I have then, as is traditional in that theory, examined the equilibrium of demand and supply as well as the nature of the process that yields comparative statical predictions.