3.2 Basic Concepts of Public Choice Theory Flashcards
What is “New Political Economy” or “Public Choice Theory”?
New Political Economy: New Political Economy (European version): Analysis of the interrelationship between the economy and politics - more diverse than Public Choice Theory and greater tolerance as regards approaches from other disciplines . New Institutional Economics is mainly based on the theory of property rights and the theory of transaction costs. Public Choice Theory: Public Choice Theory (US-American version): Application of the methodological tools of economics to political institutions and decision making processes. It is the mentality and methods of modern economic sciences extended to apprehension of political processes. The key area is the connection between politics and the economy. Relationships models are developed and empirically (econometrically) tested. It developed into a general framework to analyse institutions and includes: (1) rules and procedures, (2) social norms and governmental legislation and (3) organisations.
Please describe the area of application and the basic properties of New Political Economy (public Choice Theory). What is meant by “methodological individualism”?
The government is a part of this system and cannot pursue politics without consideration for other decision makers. Political decision making is often in conflict with organized interest groups or sensitive components of the society. The starting point are economical behaviours, that assumes that individuals and thus institutions react to changes of benefits and costs in a predictable and systematic way. Thus, goods that become more expensive are supplied more but demanded less. Basic assumptions of New Political Economy are: a.) Methodological individualism: The individual is the relevant unit of analysis, even if collectives are studied. -> It means that the theory will look at the behavior of the individual and not collective. Each individual is important and relevant. b.) (Economically) rational behaviour: Individuals respond to changes in cost and benefits in a systematic way. -> Meaning that the individual will respond to changes according to their benefits – intended to be rational in their choices. c.) Self-interest: Although rationality would also be compatible with altruistic behaviour, self-interested behaviour is in the most cases assumed. -> Meaning that the individual will act according to their own benefits and interests – presume that people are selfish. d.) Constraints due to scarcity: For explaining changes in behaviour only changes in the scope of action by changing constraints but not changes in preferences are taken into consideration. -> Meaning that the changes will occur because of scarcity, because resources are limited and not because of preference changes.
Why do important interrelationships between politics and the economy exist? Which theories reflect these types of relationships?
There is an important interdependence between politics and economic, because one influence each other. Bruno Frey developed models to analyse this interaction. Government action is determined mainly by economic conditions, as voters hold the government responsible for an unfavourable state of economy. During the election term public opinion polls serve the government as indicators of the likely future election outcome. This relationship between economic variables and government popularity is captured by the popularity function. If, owing to a low popularity index, re-election is in danger, the government uses policy instruments to improve economic conditions. It will consider both the time available until the next election takes place and the time period until economic policy actions have an effect. If public opinion polls point to a comfortable re-election, the government can afford economic actions that correspond to its ideological position even if they do not necessarily bring votes. This theory was used to develop the system theory, where there is an appliance of a close model (the political system into the system), then issues are add and the solutions came out. This is used to apply in reality and the new problems and outcomes are reintroduced in the system.
What is “system theory” and what are the basic characteristics of this theory?
Systems theory is an interdisciplinary theory about the nature of complex systems in nature, society, and science, and is a framework by which one can investigate and/or describe any group of objects that work together to produce some result. Characteristics of systems theory: Open system: a system keeps evolving and its properties keep emerging through its interaction with environment Holistic view: systems theory focuses on the arrangement of and relations between the parts that connect them into a whole. The mutual interaction of the parts makes the whole bigger than the parts themselves. Goal-directedness: systems are goal oriented and engage in feedback with the environment in order to meet the goals. Also, every part of the system is interdependent with each other working together toward the goals. Self-organizing: productive dynamic systems are self organizing. It implies the adaptive ability of the systems to the changes in the environment. Using a metaphor of social interaction, Pask (1975, 1984) described the self-organizing process as “a conversation between two or more participants, whose purpose is to arrive at “an agreement over an understanding.”
Please describe the political-economic model of interaction used in the New Political Economy. What is meant by the “political-economic business cycle”?
The total interdependence between the economy and polity described is illustrated in Figure below. It is a very simple model, but good to illustrates the reality. The lower loop going from economy to government indicates the popularity function. The upper loop leading from government via the government administration to the economy shows the policy function. In this simple model government popularity is determined by the economic variables of unemployment, inflation and growth of income. The use of economic policy instruments consisting of (exhaustive) public expenditures for goods and services and transfers depends on ideology and re-election expectation, as well as on the state of the budget. -> If economic conditions are good, a larger share of the people will tend to support the party in the government. If the government thinks that they may not be elected, they change the programmes according to the preferences of the voters. But if a majority agree, they can follow with their ideology. Real income growth: is an easy way to satisfy preferences. Unemployment: Companies provides jobs (government does not have a direct influence on that, but must be aware and support the economy, than jobs can be offer) Inflation: reduces the real income and if it’s too high emits unstable conditions *GRAFIK HIER EINFÜGEN, BITTE*
New Political Economy consists of a bundle of theories. Which are the main theories in this bundle? Which basic social institutions do the theories correspond with?
New Political Economy as a Bundle of Theories (1/2) (1) Economic Theory of Constitutions - New contract theory (Buchanan and Tullock) (2) Economic Theory of Democracy - Approaches for explaining party competition and electoral behaviour (Downs; Herder-Dorneich) (3) Economic Theory of Collective Action – Capacities of groups to organise and to get acceptance of or enforce their objectives (Olson; Hardin) (4) Economic Theory of Bureaucracy – Budget maximisation hypotheses (Niskanen; Roppel) (5) Economic Theory of Regulation - Economic theory of interest groups competition (Peltzman; Becker) (6) Theory of Political-economic Business Cycles (Frey; Kirchgässner) – not used anymore (7) Game Theory - Bargaining Theory (Holler, Rappaport) – Very important, is applied in many areas of study. It fity to institutional analysis as well and describes an actual situation, with real actors. It is a simplification of reality but very applied for analysis of actors, their interaction and situation.
