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Unformatted text preview: Chapter 28 Governments and Politics Throughout this book, we have treated individuals – whether they be consumers or workers or firms – as “doing the best they can given their circumstances”. 1 What is “best” was typically interpreted as a subjective judgment of the individual, although we have assumed that firms view maximizing their profits as “best”. And on a few occasions when we found particular real world policies to be inefficient (and sometimes inequitable), we hinted that we might want to look at politicians in the same way; that is, we might want to forego idealistic notions of democratic politicians simply implementing “the will of the people” and rather take a more realistic view of the incentives that guide political behavior. In this chapter, that is precisely what we will do. The motivation for this arises from a famous result by Ken Arrow – an analytic proof of the proposition that, in a sense, there is generally no such thing as “the will of the people.” I realize that may sound a bit odd, but it is absolutely true. What Arrow showed (and what we will demonstrate formally in part B of this chapter) is that democratic processes of aggregating voter preferences generally do not result in a rational “social preference order” (that could be called “the will of the people”) where social alternatives can be clearly ranked from best to worst. Rather, democratic processes tend to result in social preference rankings that make it possible for politicians – especially those that can set the agenda on which voting takes place – to manipulate the process to their own advantage. For this reason, economists and political scientists have studied different types of political insti- tutions extensively over the past few decades – because it is the incentives contained in particular political institutions that shape the outcome of government policy in democratic societies. Some such institutions make it more difficult for politicians to manipulate the process; others make it easier. But no matter how well designed the institution, democracy is a messy business. To put it in the language used throughout this text, there is no first welfare theorem for politicians – po- litical competition in democratic institutions does not generally result in efficient outcomes. This is important to realize for economists who give policy advice – just like markets and civil society institutions face problems, so do governments. Which part of society (if any) should get involved in solving problems then depends in part on which faces the fewest problems in implementing what we would like to ideally see happen. 1 This chapter requires a basic understanding of consumer theory as developed in Chapters 2 and 4 through 6....
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.
- Fall '09