Economic Policy and Special Interest Politics

Abstract

A great deal of research has been done on the boundary between economics and political science in the last five to ten years. This research in 'political economics' spans many subfields, such as macroeconomics, trade, public finance, regulation, rational choice politics, and game theory. A common denominator has been to study structural models of the political process: agents behave rationally within well-specified economic and political institutions, where the policymaking process is formulated as an extensive form game. Methodologically, much progress has been made relative to traditional approaches, which were often based on inconsistent or irrational political and economic behaviour, relying on non-derived influence functions, political support functions, or vote functions. Yet, the modem work has largely developed separately in each subfield, without much contact with other subfields. And each of the resulting literatures tends to focus on a distinct, but partial, aspect of the political process. In this lecture, I shall argue that even though the progress to date has been substantial, we can gain a better understanding of policymaking in democracies by combining the insights from different strands of thinking. On some economic policy issues the conflicting views, both among citizens and politicians, basically reduce to a single left-to-right dimension. Examples may include the politics of inflation vs. unemployment, capital taxation, or the size of government. We can think about policy issues, within this domain of 'general interest politics', as being resolved via traditional Downsian electoral competition, at least to a first approximation. But the economic policy process also allows narrow interest groups ample opportunities to concentrate benefits to their own group at the expense of the population as a whole. The resulting policy conflict is generically multi-dimensional; resolving it by voting alone would thus result in Condorcet cycles. We therefore need to go beyond the simplest electoral models to understand policy determination within this domain of 'special interest politics'. This lecture deals with special interest politics. To make my point about fruitful analytical arbitrage, I will stick to the same underlying policy example throughout: this will be a simple model of a society where the government uses

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