Politics and Economics have been historically closely linked and not until recently appeared as inseparable disciplines that expanded their research frontiers conjunctly and at similar paces. Furthermore, the mere existence of Political Economy as an academic discipline was even before establishing economics as a science. Political Economy originally derives from moral philosophy. Its primary origins have been traced back to Ancient Greece and the Medieval Scholastics, like those from the School of Salamanca.
They are credited for having written some of the first treatises in Economics, probably even before Adam Smit, who has been regarded as the modern father of the discipline for so long. Personalities, such as Adam Smith, David Hume, or François Quesnay, which are denominated as “economists” in many modern History of Economic Thought textbooks, were officially considered philosophers or “political economists” at most.
Even with the consolidation of mathematical economics after Samuelson’s 1947 Foundations of Economics, the debate about definitely breaking up with politics from economics has not been so alive as at present times. The emergence over the recent decades of new and more “technical” disciplines as econometrics or modern branches of macroeconomics generated a trend of opinion in academia about the need to transform economics into a more positivist science. This means rejecting any kind of normative approximation to the science or interpretation of it. In other words, taking economics away from politics to promote economic rationality in theorizing and policymaking.
The emergence of neoclassical economics started a new intellectual war between them and a wide variety of heterodox schools as Austrians, neodevelopmentalists, neoinstitutionalists, structuralists, Marxists or neokeynesians, just to mention a few of them. This debate has brought forward the question of the appropriateness or not of purging politics from the process of economic policymaking.
I have approached the study of this question from various perspectives of diverse authors, trying to conclude the relevance (or not) of politics in the process of economic policymaking.
In the first place, I’ll analyze the Public Choice School. This school is one of the most skeptical concerning the effects of political intervention in the economy, and which applies rationalistic economic analyses to the study of politics and its inner functioning.
Butler explains how the Public Choice School demonstrates how, while in a private economic decision, the economic agent bears almost all the costs (except for externalities), in public choices, the beneficiaries usually are not the cost-bearers of each decision. This makes it possible for a minority to be exploited by a majority of voters, just by the functioning of politics and mechanic democratic systems.
Studying these phenomena through economic theory lenses, the Public Choice School purports itself as going against orthodox economic thinking. Public Choice does not reject the idea that some collective decisions and government intervention are required and peremptory for certain tasks. Yet, it highlights how in political and economic decision making, the functioning of the state does not coincide with the ideal notion of the state as an omniscient social guardian, as defended by welfare economists and structuralists. One idea explained and developed by Public Choice theorists in relation to some clichés about the homo economicus view of economic theorizing is that of self-interest not being the same as selfishness, portraying economic agents as rational maximizers.
Public Choice introduced a new interpretation of externalities and led to new economic theorizing and analysis branches, responsible for studying “government failure.” According to Butler, before the appearance of Public Choice, it was commonly thought that the private sector would only produce any negative externality. Consequently, it was a strict requirement to consider it a “market failure,” being the government’s role in intervening, correct it, and internalize costs.
What the Public Choice School realized was that apart from market failures, government failures existed. They arose from governments not fully knowing the preferences of all their voters who legitimized their political rule. Public Choice pretends to demonstrate through a realistic analysis of how government action functions, and which are its most pernicious effects, developing a profit-cost analytical framework of government’s actions to judge their adequacy later on.
There is a fascinating concept brought forward by Public Choice, which I find very pertinent and necessary to be analyzed at this stage, logrolling,in its two versions: explicit and implicit. Butler explains how explicit logrolling is a widespread practice in democracy, especially in representative systems, when certain politicians exchange support in Parliament for certain favors or projects for a determined region, class, or similar.
An example would be if a regionalist party offered the governing party their support for a certain proposal if, in exchange, the central government conceded them an infrastructure plan for the region. Another case is implicit logrolling where various political groups “pack” their proposals into a single plan, to be voted on as a whole instead of each one separately in Parliament. This could mean that a party is “forced” to support in Parliament a certain proposal it is against just to get some policy or plan approved.
This trading of votes and support present in the vast majority of parliamentary systems is what Public Choice described as logrolling, a practice accused by Butler of destroying any chances of rational policymaking. Due to all of this, Public Choice scholars argue that bureaucracy and the political class should be closely controlled. Their actions should be regulated with correct controls and effective checks and balances to prevent particular political and ideological interests from influencing rational economic policy.
Following this trend, Anne Krueger analyzes the main problems caused by government failures in developing countries. She also studies how government intervention prevents economic development in many countries, in opposition to what mainstream development economists tend to argue, as is the case of structuralists, who Krueger firmly criticizes. Based on structuralist theories, early development economists argued that institutional features in developing countries caused a near-zero price elasticity in response to incentives from different institutional frameworks. This was used as a prior justification for direct government intervention.
Krueger in her paper Government Failures in Development argues that government failures can be divided into two ample subcategories: failures of commission and failures of omission. The first group includes excessive, unnecessary and inefficient government interventions, usually related with high-cost programs, public enterprises or any sort of economic activities which typically have not been managed in a centralized manner by the government, but which are taken over by it in developing countries.
Some examples of this can be unnecessary and wasteful infrastructure programs, high indirect costs bearing excessive bureaucratic controls, or sky-high deficits that led to high inflation rates in the 1970s, leading to a harsh erosion of disposable income and purchasing power.
Furthermore, failures of omission are detrimental indirect effects of government omission of responsibility over problems caused by its own prior intervention, carrying along with it high costs related to large-scale corruption scandals, which were and are very frequent in developing countries, due mainly to extractive institutions.
Krueger makes a crucial point about the general perception people have about government as an omniscient social guardian and its supposed monopoly over the correction of market failure and internalization of social costs. Krueger even criticizes the neoclassical view of government failure as being any outcome diverging from the Pareto-optimal situation at a certain moment.
In some cases, government interventions intending to solve the initial deviation from Pareto optimality could even lead to greater deviations from the most efficient use of resources. This may lead to an inferior outcome to the one probably observed under a free-market scheme. Following this reasoning, Krueger argues against excessive government intervention in developing countries, showing how living standards did not fall before the 1950s in those countries, when laissez-faire doctrines were more or less intensively applied in those countries regions of the world.
Furthermore, the author demonstrates how government intervention in those nations led to larger saving rates and more public investment, but this didn’t result in higher growth rates, due mainly to excessive regulation and restrictions. Countries that grew and developed between the 1950s and 1970s did it despite their respective governments and not thanks to them. Professor Krueger ends up arguing that governments should direct all their resources to those activities in which they have a clear competitive advantage due to high-cost barriers of entry or similar restrictions. Then, they should let the market reign on the remaining economic activities, leading to greater overall economic efficiency.
On the other hand, some authors as Ha-Joon Chang have harshly criticized positions as those of Public Choice or neoclassical economics in general, with special emphasis on rebutting free-market economic doctrines. Chang, in his paper Breaking the Mould – An Institutionalist Political Economy Alternative to the Neo-Liberal Theory of the Market and the State, centers his argument in how what he refers to as the “dominant neo-liberal discourse” has presented the state as a highly politicized agent which should be tightly restricted or eliminated in the name of economic efficiency and freedom.
Chang also proposes an alternative view, called Institutionalist Political Economy, that will help overcome these shortcomings and clarify these discussions, which many times, according to the author, lack a correct analysis of institutions and politics in economic policymaking.
Chang does not believe the anti-interventionist ideology from neo-liberal economics to be the main problem, but its envisage of the state, the market, and overall, of political institutions as a whole, consequently reaching erroneous conclusions about their interrelationships. What Chang defines as “neo-liberalism” is a supposed ideological and theoretical alliance between neoclassical economics -being these the providers of economic analysis tools and a commonly accepted theoretical framework-, and the Austrian School of economics, commonly related to libertarian and anarcho-capitalist ideas, which, in Chang’s opinion provided the moral and philosophical bases for neo-liberal economics.
Chang finds the definition and interpretation these economists make of “government failure” to be erroneous, as Golden Age Economics (GAE) did not have a Benthamite vision of social justice or a conception of the state as being Plato’s Philosopher King. However, the author recognizes that GAE economists did not have a clear theory of the state, and therefore were very vulnerable to internal criticism.
On top of this, Chang harshly criticizes these economists’ view of market failures or their “minimal state” defense. He defends that market failure can occur in a multiplicity of areas and not only on the ones enumerated by some neoclassical economists as those of Public Choice: law and order, defense, or large-scale infrastructure, as Butler and Krueger defended.
Chang argues that neo-liberal economics presents severe political inconsistencies in its arguments. One interesting example he shows is that of relative liberties and supposed state coercion. He says that while many neo-liberal economists argue for reducing or eliminating minimum wages, they support state intervention for stringent immigration control.
Chang sees this as a political contradiction and inconsistency, as they claim for freedom in some areas (as the labor market) but then ask for state coercion and tight controls in other (as border controls). Even if we do not fully agree with Chang’s argument, this is definitely food for thought on ideological contradictions.
Chang states that neoclassical economists confine the whole economy just to the market, so market failure for them would represent the failure of the economy, while institutionalists economists recognize a variety of political and economic institutions through which society can organize and arrange itself, reducing the effect of market failure and correcting it.
He highlights how neoclassical economists as those of Public Choice see politics as opening the door for sectional interests to distort the rationality of the market system, so their proposed solution is to depoliticize economics, which for Chang is in itself a political decision, as well as the market being a political construct. Here, Chang makes a central point of his argument about the impossibility of depoliticizing economics. Later on, Chang proposes certain theoretical and ideological solutions for these debates and establishes a correct descriptive interrelation of institutions, such as the market and the state.
He argues for Institutionalist Political Economy (IPE), which believes that behavior may be changed not only through changing institutions but also through variation in ideologies and institutional reform that directly influence individual motivations themselves. Furthermore, IPE recognizes that too much politicization can be harmful to the market and that there is no definite correct view on the optimal participation of politics in economics.
In conclusion, through this article, we observed the current debate at the edge of Political Economy about the influence of politics on economic theorizing and policymaking. When deciding on certain economic policy goals, preventing value judgments is extremely difficult, or even impossible, if we consider economics and economic institutions as a political construct, as some authors do.
I do not share this vision, and I believe in the existence of normative economic laws and the prevalence of economics as a science, which has demonstrated extreme rigor and an always developing technique and methodology, correcting previous errors and eliminating superfluous and excessive simplifications. This does not mean that politics should be purged from economics, but what we should by all means confront is an excessively politicized and ideological economic science.
Butler, E. (2012), “Public Choice: A Primer”, Institute of Economic Affairs.
Chang, H-J.(2002), “Breaking the Mould – An Institutionalist Political Economy Alternative to the Neo-Liberal Theory of the Market and the State”, Cambridge Journal of Economics
Chang, H-J. (2014), “Economics: The User’s Guide”, Pelican Books.
Krueger, A. (1990), “Government Failures in Economic Development”, Journal of Economic Perspective, no. 3
Roncaglia, A. (2017), “A Brief History of Economic Thought”, Cambridge University Press.
Samuelson, P. (1947), “Foundations of Economic Analysis”, Harvard University Press.