We have covered seven leading political figures from different historical periods and countries who have used economic theory to design economic policy and carry out often radical reforms, affecting the lives of contemporary and future federations. What do these political figures have in common, and what does differentiate them? We have chosen them because they provide some very prominent examples of how economic theory guides policy choices, yet the tools they used and policy they implemented were very different. How can we rationalise these differences and assess their legacy?
Economic theory offers us a general framework to study individual behaviour that can help us understand not only how consumers, workers, and firms make choices, but also how policymakers choose policies, and why sometimes they may fail to deliver good outcomes. As pointed by Keynes, the theory of economics does not furnish a body of settled conclusions immediately applicable to policies. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw direct, correct conclusions. So how does the economic method help us understand the behaviour of policymakers? First, economic theory helps us understand why collective decision making is challenging and why we need policymaker.
Second, it helps to shed lights on the nature of the relationship between politicians and citizens to understand policies, how policies are chosen, and why sometimes optimal policies are not chosen. In our everyday life, most of the time we undertake individual decisions– what we eat for breakfast, which career to choose, whether to take a mortgage, open a business, go on holiday, et cetera. At the same time, day to day we interact with other individuals within our household, neighbourhood, city, and country. As a result, alongside individual decisions, we are also called to make collective choices that affect an entire group, be it our household, our neighbourhood, city, or country. How much should the city spend on schools?
Shall a new airport be built? Should health care be publicly provided? Should government provide affordable housing? Should polluting emissions be cut? These are all examples of collective decision making, for which we typically rely on policymakers to make choices on our behalf. But why do we need government to make these decisions? We could just decide whether to build a new school in our neighbourhood, have more streetlights, or fix potholes without government intervention. So why do we need governments? There are important differences between the goods we buy for our own consumption and those that are provided by governments. First, once we buy our own goods or services– shoes, books, cars, clothes, food, haircuts, et cetera– we enjoy their exclusive use.
Several publicly provided goods– road, park, streetlights, police protection, instead once provided are basically available for everybody to enjoy them. As a result, individuals may have an incentive to free ride, to try to enjoy the use of publicly provided goods without contributing to their payment. Second, while private goods typically bring a benefit only to the person that uses them, many publicly provided goods and services, such as education or health care, have positive spillovers on individuals that are not tied at the beneficiaries. Spillovers can be negative, too, as it is the case for polluting activities.
Since individuals do not take into account these positive or negative spillovers, if the decision on how much to spend on these goods was left to them, such goods will typically be under provided or over provided. In short, free riding externalities associated with the provision of some goods and services imply that if we were to just rely on the market for market forces, too little or too much of these goods would be provided. When the market fails to provide goods efficiently, there is scope for government intervention to correct these inefficiencies. However, government are not gods with super powers who can always fix market failures. Governments are organisations made up by individuals with their own preferences, objectives, and limitations.
As pointed out by the founding fathers of the US Constitution in the Federalist Paper 51, if men were angels, no government would be necessary. If angels were to govern men, neither external nor internal control on government would be necessary. In framing a government which must be administered by men over man, the great difficulty lies in this. You must first enable the government to control the governed, and in the next place, oblige it to control itself. The greatest challenge of collective decision making is that on most matters, individuals have different preferences and interests. And even if we may agree that some government intervention in the economy is desirable, we would still find it difficult to agree on what government should do.
To make sure that our preferences are represented in the collective decision making process, we elect representatives holding views are as close as possible to our own. Clearly, as our views differ, some individuals would have a better chance to see their preferences represented. Political parties with extreme views are usually less likely to be in power than political parties with more moderate positions. At the same time, even when we appoint a politician running on a political platform that is very close to our preferences, there is still a risk that once in office, the person we have appointed might not act in our best interest. Political actors may pursue their policy, preferences, power, personal faith, virtues, and so on.
Once they are in office, they will act accordingly. In some instances, their objectives may coincide with those of the voters that elected them. In this case, they will act in the best interest of their principal, the voter. However, in a principal/agent relationship, interests are not always well aligned. As a result, the voter needs to have some way to monitor and validate what the politician is doing. Elections are the primary instrument by which voters can reward or punish politicians for their past behaviour. These instruments, however, are not perfect. Governments no not always succeed in delivering the best policies for the majority of their citizens. Not surprisingly, as markets can fail governments can fail, too.
In some instances, government failures are simply due to the fact that the elected representatives do not have enough information to design the most effective policies. In other cases, influence by powerful, organised groups may bias policy decision against interest of the majority of citizens. Elections still remain the fundamental tool by which citizens can keep their elected representatives accountable. At the same time, elections may sometime induce politician to give in to short-term electoral pressures disregarding long drawn consequences of their policy choices. The working of the electoral mechanism also critically hinges on the ability of voters to scrutinise the work of elected representatives. How new voters get information about their elected representatives and the policies they have pursued?
Media play an increasingly important role. A free press is indeed key to the functioning of democracies. At the same time, media are organisations with their own interests and objectives that are not necessarily aligned with those of the public. In short, while economic theory provides fundamental tools to understand how market works, when they can fail, and how we can address these failures, still it is not sufficient alone to deliver optimal policies. Actual policies are chosen by elected representatives with their own preferences and interests. Selecting the best people for public office and keeping them to account is essential.