Economic Theory
Economics 570
Summer
II 2001
Chapter
5. Public Choice and the Political Process
I.Goals
of this section
*Define
and illustrate “public choice” in the political process
II.Major
Points and Lecture Suggestions
A.Make
sure students are aware of the simplifying assumptions made in most models
ofpolitical equilibrium. The issue
under consideration is single-dimensional. In most casesthe
variable is the quantity of a pure public good to supply per year. Voters
are assumed to know the tax per
unit of the public good before deciding how to vote.
B.Students
are very receptive to the definition of a political equilibrium as an agreement
anthe level of periodic supply
of a pure public good, given the collective choice rule andthe
distribution of tax shares among voters.
C.Emphasize
that a person’s most-preferred political outcome is the one for which thatperson’s
tax share equals her marginal benefit from the public good: ti
= MBi. In class point out that this is analogous to P = MBi
for a private good. However, each consumer
can adjust consumption to achieve the latter condition in a market.
Political supply of pure public good under majority rule can result in
some voters not achieving the formercondition.
Point out that any voter’s most-preferred political outcome depends both
on that person’s tax share and preferences.
D.The basic point you want to get across in class is that a political equilibrium depends oncertain important economic variables given the collective choice rule and voterpreferences. These include the distribution of marginal tax shares, the average andmarginal cost of the public good, and the distribution of benefits of the public good.
Note
that the marginal tax rate is assumed to equal the average tax rate for
all votersthroughout the chapter.
In addition, for simplicity MC = AC for the public good.
E.Special
Section on changing quality of life
The
Elevator to Modernity
In
the year--1995--the U.S. Commerce Department reported that the gross value
produced in the United States by the average employed worker was about
$56,970. A century ago--1895--historical statistics tell us that the gross
value produced, divided by the number of workers, is some $14,150 measured
at 1995 prices (and $408 when measured at 1895 prices).
The
average American worker produces some four times as much as a century ago
according to this set of numbers, which roughly answer the question:
"What
would 1895's production be worth if we had it to sell today?"
But
we are most interested in a different question: roughly, how much better
is today's economy than that of a century ago in making what humans need
and want?
And
simply valuing last century's goods at today's prices leaves out the important
fact that we, today, produce a much wider range and quality of goods than
a century ago. Anyone taken back in time to 1895 would feel cramped and
harassed by the absence of so many of the goods and services we take for
granted: no airplanes, limited telephones, no communications media or compact-disk
players, limited prepared foods, no automobiles and no asphalt or concrete
roads, no electrically-powered consumer durables.
Note:
incorporates one-half percent per year increase in standard of living masked
in Historical Statistics by failure of price indices to adequately take
account of new goods, and new types of goods, the low estimate suggested
by Alan Greenspan.
Source:
Historical Statistics , draft versions of Economic Report of the President
1995.
How
much does the expanded range of choice made possible by the inventions--new
goods and new categories of goods--of the past century matter? If you try
to duplicate in the past the capabilities we have today in the past, you
fail. The capability of your compact-disk player--that of listening to,
say, Don Giovanni in the evening in your home at whim--could not have been
provided two centuries ago at any price.
Let
me use Alan Greenspan's guess that the invention of new goods, new kinds
of goods, and new features for old goods boosts our true standard of living
by one-half to one and one-half percent per year: combining the fourfold
multiplication in measured output per worker with the one-fifth decline
in hours and the increase in the scope and range of goods and products,
America as a society today is at least eight and perhaps as much as twenty-three
times as wealthy as America a century ago. The average American today has
a "real standard of living" higher than 999 out of every thousand Americans
alive in 1895.
Perhaps
the nineteenth century saw a doubling of real standards of living in the
industrial core. Perhaps there was some progress not just in technology
but in standards of living in the previous eighteen centuries of the Christian
era--although I would not place high odds that the median Frenchman in
the age of Louis XIV had a higher standard of living than the median Athenian
at the birth of Christ.
Nevertheless,
the difference between economic growth in any previous century and economic
growth in the twentieth century is a large enough quantitative to invoke
not just one, but several qualitative transformations. It is like the difference
between climbing a ramp, and riding up the World Trade Center in an elevator.
Why
has the twentieth century been so different from all previous centuries?
Market economies have the standard advantages of giving manufacturers and
traders every incentive to use resources most efficiently, and which have
the additional advantage of providing that "sunset" for relatively inefficient
organizations. Enterprises that are relatively inefficient cannot pay their
bills, and vanish.
This
automatic weeding-out of inefficient organizations that fail the test of
the market is so lacking where state enterprises draw on the general taxation
or money-printing power of the state.
But
markets alone do not generate the tenfold multiplication of human productive
potential that the twentieth century has seen.
Previous
mercantile capitalisms, like Classical Athens, Sung dynasty China, Mediterranean
Islam circa 1000, northern Italy in the late middle ages, or Augustan Britain
have been relatively bright spots in human history. But they are only pale
shadows of what we have seen this century.
If
I had to lay odds on the necessary additional factors, I would bet on two:
first, democracy; second, technological density.
Before
our century, a productive mercantile economy was a goose that laid golden
eggs--but there was always the temptation to squeeze the goose a little
tighter to pay for a slightly greater degree of courtly splendor or a slightly
higher military effort on whatever was the current active conquest frontier.
History
is littered with the corpses of golden geese. The loss of control by a
mercantile aristocracy to a military one, or to a despot, meant that the
best days of the local mercantile economy were past.
Successful
democracy changes the calculus. Courtly splendor and an overmighty military
become of less interest and less urgency than keeping real wages, employment,
and profits rising--for political parties that are either unlucky to catch
an unfavorable wave of the business cycle or unskillful enough to disrupt
economic growth vanish rapidly. Economic growth and market institutions
certainly coexist with political despotism for a while,
But
we need "technological density" as well: research and development has to
become an industry in itself, rather than an avocation of a few learned
gentlemen reading papers before a Royal Society, to maintain the pace of
invention and innovation that we now take for granted. Only the confluence
of all three, market institutions, political democracy, and high technological
density, could generate the economic revolutions of
This
is the proper central theme of twentieth century history: the pace of economic
transformation--its causes, its implications for productivity, for the
structure of employment, for the use of education, for the value of capital,
for society and social order, for cultural events, for politics.
This
is where a truly Marxist analysis could have been extremely powerful. For
if there was ever an age in which changes in the material conditions by
which humans produce and reproduce the necessities and conveniences of
their life dominate every other sphere of human activity, it is the twentieth
century.
The
upward jump of productivity and wealth is not confined to the core of the
world economy. In 1987, 97 percent of households in Greece, not usually
considered one of the world's industrial leaders, owned a television set.
In Mexico there was one automobile for every sixteen people, one television
for every eight, one telephone for every ten.
Countries
that Certainly Have Higher Average Standards of Living Today than the United
States in 1900
Note:
country averages have little meaning when applied to income distributions
as unequal as those in Brazil, South Africa, or the Arabian peninsula.
A higher estimate of the value for living standards of access to new technologies
would expand the range of countries considerably.
Source:
Historical Statistics , World Development Report 1994, author's calculations.
On
our low estimate of the pace of growth in the twentieth century, some 44
countries today--from South Africa and Estonia to Botswana and Brazil,
from Slovenia and South Korea to Japan and Switzerland--are as rich as
or richer than the United States was a century ago. And the United States
a century ago was a society with a level of wealth previously unseen in
world history. On our high estimate of growth, not 44 but 76 countries
are wealthier today than the U.S. was at the turn of the century.
The
world's distribution of wealth, today, is probably more unequal than at
any time in the past: the explosion of wealth in the industrial core carried
them far above the four-plus billion below. But when future historians
look back at the third world in the second half of the twentieth century,
they will say that this was a period in which three billion humans climbed
onto the escalator to modernity.