Explorations toward an economic theory of political systems

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Virginia Polytechnic Institute and State University


The analysis developed attempts to present a preliminary exploration for the development of an economic theory of political systems. Using the tools of economic theory, it tries to discover the expected differences among political systems, as well as to identify some of the necessary conditions for the emergence of a particular kind of political system. The study is restricted to the particular cases of representative democracy and dictatorship.

It is assumed that any society consists of three rational behaving groups of individuals: citizens, politicians and bureaucrats. Each is assumed to have a separate preference function, as well as different constraints for utility maximization. The question then is: how do political institutions constrain individual choices, and how does the set of political constraints vary with political systems. To answer these questions some relevant constraints are identified and their variations with political systems analyzed.

The identified constraints are: (a) the political constitutions, (b) the size of the dominant coalition, (c) the probability of overthrow from power and the degrees of freedom available to the head of government for implementing policies that his supporting coalition does not desire, (d) the flows of information, (e) the market behavior of the citizens, (f) the costs of migration for the individuals, and (g) the behavior of the bureaucracy.

The theory developed in this study presents a coherent picture of the overall fiscal performance of political systems. It finds out that all the relevant forces considered reinforce the inference that, other things being equal, democracies should be expected to exhibit larger public sector shares in national income than dictatorships. Second, it reaches the conclusion that dictatorial regimes will tend to be more inefficient, from a productivity point of view, than democracies.

These two hypotheses are considered in the Appendix, but no attempt is made to test them formally on the basis of the empirical evidence presented therein. Rather, a preliminary survey is provided of some of the data and the consistency of the results is checked against the theory. The formal empirical testing of the theory is left to subsequent research.