General economic policy



01.  Approaches

02.  Methods

03.  Target analysis

04.  Means analysis

05.  Institution analysis

06.  Political economy

07.  Welfare economy

08.  Order analysis

09.  Order conception

10.  Order dynamics



Chapter 6: Political economy





1st Introduction

2nd About the history of the political economics

3rd Essential features of political economics

4th Micro- versus macro consideration

5th Distinction against scientific socialism

6th Distinction against a science imperialism

7th Distinction against the economic policy teaching

8th Market economy versus democracy

9th Individual goods versus collective goods



1st Introduction


In this chapter shall be depicted the essential features of political economy. The so-called political economy is a branch of economic science that emerged very late, namely at the end of World War II, and which also differs crucially from the other parts of economic science, namely in the fact that this part of the economic sciences deals just not with the events within the economic system.


In this first section we will confine ourselves to explain wherein then the peculiarities of this discipline are, what general aims are pursued, but also which intentions this branch of science does just not have, but which are just in public associated with it frequently.


These misconceptions start already with the name of this discipline. In general, one refers to economy as the object of investigation of economic sciences, that is the economic system, the reciprocal relations between households and enterprises, the interaction between suppliers and demanders of goods or services at markets.


As we have already indicated, although the general economic theory (political economy) considers the economic system as a study object, the 'political economy' does just not do this. Subject of the investigations of the political economy are all possible societal systems with the exception of the economic societal system.


Therefore, it is actually wrong to speak of political economy, here. Rather, it is the way how the traditional economic theory approaches their problems and analyses what constitutes the essence of a political 'economy '. It is also almost exclusively the economists who have developed this branch of science, and now have applied these methods also to non-economic societal systems.


It would therefore be better, if we would not speak of 'economy', but of 'economics' and in its German translation of 'Ökonomik'. The term economics or Ökonomik refers namely just not to the study object, but to the branch of science that deals with the study object economy. With the term economy or rightly economics is therefore addressed the subject, the examining scientist and just not the object of study.


Furthermore, it is also not entirely correct, when we speak of political economy or economics. Of course, it is true: the political economics has found its beginning by that Joseph Alois Schumpeter in 1942 made in his work on ‘Kapitalismus, Sozialismus und Demokratie’ the attempt to transfer economic methods on the political system of a representative democracy. Already long time ago, that this approach of political economics is confined to the political system. In the meantime, almost all modern societies have been studied from this perspective.



2nd About the history of the political economics


Therefore, let us ask ourselves initially about the history of the origins of political economics and the historical development of this discipline. As mentioned before, the publication of Joseph Schumpeter’s ‘Kapitalismus, Sozialismus und Demokratie’ marked the birth of political economy.


Schumpeter compared in this study the behavior of the politicians with that of the entrepreneurs. He emphasized that economic science has ever found to its current size and importance only, as it stopped to look at the behavior of the entrepreneurs solely as an action to promote the general welfare of the population; as it had rather realized that the entrepreneurs, at their entrepreneurial decisions, have in mind first and foremost their own well-being: their profits.


Also in the discussion on the behavior of politicians, it would be important to separate the meaning or aim of a political order from the motives which move the politicians. Just as modern economic science insinuates that the entrepreneurs were inspired by a calculus of profit maximization in all its activities, one has to assume for the policy decisions that for the politicians it is first and foremost about gaining power and when they have achieved such, to keep it and to multiply it. In a representative democracy is this behavior expressed by a vote maximizing calculus.


However, we must point out that this knowledge does not mean that the ultimate aim of a representative democracy perishes, according to which it is about to realize the will of the population - embodied in the will of the majority of voters. It can be shown, namely, that it has to be distinguished always between the motives that move the politicians to their actions and the overall policy aims of a societal system, and that above all the often expressed opinion that the predominant self-interest calculus of the entrepreneurs or the politicians would be already evidence enough that the aims of the common good would be neglected, is incorrect.


The main concern of economic liberalism was to prove that just a system of order that is based on the own good of acting individuals, ultimately accommodates the general welfare of the population much more than an order in which to the executives the requirement is addressed to think only of the common good and to put last self-interest with each individual decision.


The trains of thought of Schumpeter were picked up in the 50s of the last century by Philipp Herder-Dorneich initially under the pseudonym F. O. Harding, at which mainly the by Pareto and Edgeworth introduced instrument of collective indifference curves was applied to the electoral process in a representative democracy, in order to explain this way the voting behavior. Later, Philipp Herder-Dorneich generally turned to issues of social cybernetics that is a kind of theory of societal systems.


In the US, it was especially James McGill Buchanan, who took up and deepened the trains of thought of Schumpeter. His main works concerning this matter include the in 1954 published work on 'Individual Choice in Voting and the Market', further: the also in 1954 published work on 'Social Choice in Voting and Free Markets', especially the work published together with Gordon Tullock 'The calculus of consent' and the work of 1975 on ‘Die Grenzen der Freiheit zwischen Anarchie und Leviathan’. Viktor J. Vanberg then has continued the work of Buchanan and was concerned among other things in 1983 with the ‘Individualistischen Ansatz zu einer Theorie der Entstehung und Entwicklung von Institutionen’ and in 1994 with the 'rules & choices in economics' and pointed out the necessary distinction between the "order of rules" and the "order of action".


Gordon Tullock has extended his work furthermore to the area of the state bureaucracy in 1965: 'The Politics of Bureaucracy'. Tullock became known mainly by demonstrating that the in democracies widespread majority rule turns out to be fair at best coincidentally.


Antony Downs counts also to the founders of the political economics in the USA. His two main works include the 1957 published work: 'An Economic Theory of Democracy' and the in 1967 published work on: 'Inside Bureaucracy'. Downs dealt among other things with the question of what can move the voters to participate in the elections, although the influence of the individual voter on the policy is extremely low due to the large number of voters.


Although the behavior of the state bureaucracy has also been investigated by Tullock and Downs, it was primarily William A. Niskanen who highlighted the relations of the bureaucracy to elected politicians in the 70s and showed that the bureaucrats succeed to raise the state budget over the amount corresponding to the desire of the voters.


To the representatives of the political economy in the United States counts furthermore Dennis C. Mueller. In his works: 'Voting paradox' (1987), and: 'Constitutional democracy' (1996) he has pointed out that allocation problems are difficult to solve in the context of everyday politics, but that these problems are easier approachable in the framework of the constitution. Namely, if because of the long-term effects the individual does not know at the pending issue whether the measure benefits himself at all, he decides to quasi-altruistic.


William D. Nordhaus, who also belongs to the group of American representatives of political economics, advocated in his work 'The political business cycle' the view that the behavior of politicians in a representative democracy contributes to an aggravation of cyclical swings. Immediately after the election would the politicians namely pursue a contractionary policy. Despite temporary loss of income this policy was possible because voters forget quickly. Immediately before the election, the politicians operate, however, an employment policy. This brings temporary and relatively fast income gains and guarantees the re-election of politicians. This policy leads overall to a permanent change of contractionary and expansionary measures, thus aggravates the economy cycle, in contrast to the conviction of the Keynesians who emanated from the concept that they could reduce the economic fluctuations and hence unemployment by means of such a policy.


In the German-speaking area have mainly Bruno S. Frey and Peter Bernholz spread the ideas of a political economics. To be mentioned particulary are the works of Bruno Frey: ‘Theorie demokratischer Wirtschaftspolitik’ (1981) and 'Public choice', results of the last 10 years (1991). Thereafter, business cycles are influenced by political behavior. Also noteworthy is the proposal to create in addition to the existing regional division of the public entities also functionally defined institutions.


Peter Bernholz published in 1972 together with F. Breyer his basics of Political Economy and emphasized especially in his work on 'The importance of associations for economic policy' (1973) the role of interest groups in a representative democracy. In 1974 he expanded our knowledge about the policy-making process in his work on: 'Logrolling, Arrow paradox and decision rules - a generalization'.


We mentioned above already, that the political economics has by no means confined itself to the political system of democracy, but rather that these viewpoints were transferred to other societal systems. In this context, especially the work of Richard Posner has to be pointed out. With him we find the transfer of economic methods to the dispensation of justice and the legal system. These considerations can be found mainly in the work published in 1973 on: 'Economic Analysis of Law' and 'Economic Justice and the Economist' and in the fundamental work published in 1981 'The Economics of Justice'.


Even if one cannot count Friedrich August v. Hayek to the inner circle of political economics, he has, though, developed especially in his later works a theory about the complexity of the modern global society systems that can be thoroughly considered as a continuation and generalization of these viewpoints.


Also with Robert A. Dahl and Ch. E. Lindbloom, American economists and sociologists, there is found a generalization of these approaches and an overall view of the global societal systems, especially in the work jointly published in 1953 on: 'Politics, Economics and Welfare. Planning and Politico-Economic Systems resolves into basic social processes'. The democratic system of politics is compared systematically to the functioning of a market economy. It is shown that in a democratic election process exists a tie votes, however, in a market economy system exists a more or less large income differentiation.


If one can also regard Mancur Lloyd Olson generally as an economic theorist who deals primarily with economic organizations, he has, though, contributed essentially with his 1965 published work on 'The logic of collective action' to the comprehension of the role of interest groups in a representative democracy. The starting point is the definition of public goods according to the exclusion principle: A good is considered as public good when the one who is not willing to participate in the costs of the production of this good cannot be excluded from the acquisition and consumption of this good.


Related to this is the knowledge that the political decision-making process is also significantly influenced by the activities of the interest groups as well as the state bureaucracy. Especially, the activity of interest groups is pointed out. These would also in a democracy win influence as on the one hand, they can offer to the politicians information that they need to assess the undertaken actions; on the other hand, the interest groups may therefore gain political influence because they can express recommendations towards their members before elections.


Unclear remains initially the question why the consumers in turn do not exert political pressure on the politicians, although they could still pronounce vote recommendations to much more voters because of their group size. The association theory answers this question therewith that the various interest groups can be organized differently; the organizational capability of entrepreneurs associations is high, the one of the consumer associations, however, is low.


For this thesis are blamed especially the various transaction costs that must be raised to form interest groups and to formulate a unified will. These transaction costs increase excessively with the size of the group, so that the small group of industry associations must exert much lower transaction costs and can therefore be organised better than the group of consumers.


This point is even further supported thereby that income generation interests, that are at in the forefront of the industry associations, can be organized more easily than the income usage interests that are in the foreground at the consumer decisions. With regard to the income generation, each one has the same interests, but not in regard to the income usage. In addition, citizens are in general more willing to organize themselves to protect against income losses as to achieve higher incomes.


Here again takes effect that industry associations mainly pronounce against free trade because they fear loss of income in case of giving-up of protectionism, while consumer interest in free trade is based on the fact that free trade can increase income.


Finally, there may also be mentioned at this point the works of Gary S. Becker. Superficially, differ these works considerably from the works previously mentioned. While we have previously pointed mainly to studies that deal with the functioning of global societal systems, the works of Becker, though, aim on the behavior of individuals and households.  Among his major works count: 1960 'An Economic Analysis of Fertility', 1962 'Investment in Human Capital: A theoretical analysis', 1964: 'Human Capital', 1973-74: 'A Theory of Marriage' (2 volumes) and 1988: 'A Reformulation of the Economic Theory of Fertility' together with R. J. Barro.


Becker brings in these works an application of economic behavior models on birthrate, marriage and fertility. The indifference curve system is expanded by the inclusion of economic data sizes. So it is spoken of the production of usage units, which require the use of consumer goods and leisure time. Therefore, changes in the indifference curves result not only from changes in the demand structure, but also from the technology used in the household. Decisive for these works to be attributed to the political economics is the fact that Becker transmits perspectives about the economic behavior of individuals also on non-economic activities of households like birth, marriage and divorce.


Naturally, a complete picture of all the important publications of political economics cannot be given at this point. It represents a selection and is, of course, like any selection - from perhaps a different perspective - arbitrary.



3rd Essential features of political economics


After this teaching historical introduction, we now like to explain wherein then the common of all these contributions consists, what really distinguishes the political economic theories from other disciplines of knowledge.


We have already pointed out that at the political economic issues it is always about to apply perspectives, which were originally developed for the analysis of economic institutions and economic practices, to areas that commonly are precisely not included with the economic area; like when, for example, Schumpeter says that the politicians haggle for votes just like entrepreneurs are eager to increase their income, or like when Becker analyses a marriage as well as within the framework of the economic household theory the demand for consumer goods is examined.


The reason why such a transfer of viewpoints on non-economic problem areas takes place, is not the fact that the representatives of this discipline emanate from the belief that all human actions are guided by material interests. Motives and objectives are examined that are just not regarded as economic interests.


The representatives of the political economics assume rather that especially since the modern age have arisen societal systems for all major areas of life, which have common or at least similar properties and structures and can precisely therefore be studied also with the same kind of thinking instruments. It is then rather based on a coincidence that these regularities were analysed first of all in the field of economy in the course of the history of doctrines.


So what are these - all societal systems affecting - structures? It was especially Hans Freyer, who differenciated in his in 1955 published writing ‘Theorie des gegenwärtigen Zeitalters’ between the medieval primary societies and the modern secondary societies. The primary companies had grown and existed, mostly as the family, of small, manageable units, while the secondary companies, for which the industrial society of the 20th century is characteristic, must be considered as a consciously by man produced secondary system that is marked by large, unmanageable structures, its own administrative organization and use of technology.


Freyer also determines that state and society are becoming less separated and that to science an ever increasing importance is awarded.


In such a society no longer applies the principle that the person to whom an official position has been awarded, has also been given the required mind to this from God. Rather, an expertise is needed to address the modern problems. Just as a pilot, who can fly a small plane (a single prop aircraft) is therefore not already able to control a jet plane, also from the application of common sense does not result the ability to take executive functions at the forefront of modern societies.


For these reasons, have the acting leaders in the secondary societal systems to be selected according to the expertise. In the language of Max Weber is ethic of conviction now no longer sufficient, rather it requires an ethic of responsibility that one is able to perceive only when one has competence. A top politician may be still so full of good intentions, if he lacks the expertise; he cannot help to solve the difficult problems either.


An essential consequence of this development is, however, that when the executives of modern societal systems are selected according to expertise, then always a certain percentage of elected politicians seem morally questionable. There is no reason now to believe that the percentage of moral failings in the group of executives will be less than in any other population group.


From the perspective of the welfare of the population, it is more appropriate that, for example, the problem of mass unemployment is solved by a professionally competent politician with success, who though, could perhaps be carried away to some moral failings in private areas, than that an in every way morally infallible leader controls the fate of the nation and is also full of good intentions, but who nevertheless succeeds to get rid of unemployment due to lack of expertise.


Also Friedrich von Hayek has contributed with his theory of complex phenomena to the understanding of the mode of operation of modern societies. The modern structures are complex and could just therefore not be planned completely. But whereas the conclusions of the theory of Hans Freyer emphasize the opportunities that have arisen in the context of these secondary societal systems, the considerations of Friedrich August von Hayek point out rather to the boundaries of the feasible of these societal systems.


The necessary amount of knowledge for key decisions is so large that an individual could never have this knowledge. It would equal an arrogation of knowledge if politicians are striving, perhaps in meritorious intention, but by far exceeding the limits of the possible, to try to solve societal problems by planning centrally. The market, which brings the knowledge of many together, is much more suited to solve the outstanding societal problems. This aggregation in the market then contributes to the fact that as by an invisible hand the existing problems are solved, although none of the persons operating in the market is trying to seek the general welfare in a direct manner.



4th Micro- versus macro consideration


In the context of the teaching historical overview we had seen that despite large similarities there are even also substantial differences in the approach of the political economics. Just as in economic theory, we can distinguish here between a micro- and a macro analysis.


In economic theory, the micro economic theory is concerned with the behavior of individual households or the individual enterprises. Traditionally, the theory of the single market is attributed to the micro theory, although already here, the single market examines a large number of individual market participants and, for example, the demand curve results from the demand behavior of many households, namely in the way of an aggregation. One speaks of mesotheory in a narrow sense, but generally attributes this part of the economic theory of micro economics to the broad sense of the word.


On the other hand, the economic theory of macro economics analyses the interaction of the individual markets between the individual goods markets as well as between the markets for production factors (labor, capital). Here, the cycle interrelationship is at the forefront of the analysis. So it is, for example, pointed out that the demand for a single good depends not only on the ratio of the prices of goods, but is also determined by the level of incomes, which in turn depend on how many goods are demanded respectively.


The micro perspective within the political economics gets particularly a chance at the investigations of Gary Becker. Again, the author confines himself to the analysis of the behavior of individual households respectively - since the non-economic behavior is in the focus of the perspective - on the behavior of families respectively spouses.


It is appropriate to class the analysis of consumer behavior at Gary Becker also to the theory of political economics, although this is of course a matter of economic behavior in the strict sense.


In the traditional household theory the demand for goods by households respectively by the consumers is attributed among others to the demand structure of the individuals, which is a given date for the household, on the other hand represents a data size for the economic theory, which - at least in the context of economics - is not necessary to be examined any further. Gary Becker, however, has set himself the aim to investigate further also the structure of demand, which is expressed in the system of indifference curves. In other words, Gary Becker dealt with sizes which have not been attributed to the economic problem sizes, but were at most object of study of other social sciences such as psychology. The investigations of Becker are a prime example of a theory that is indeed attributed to the political economics, but does not approach a political subject in the strict sense.


However, the majority of the political economic theories are characterized by a macro consideration. This applies, for example, to the by Joseph Schumpeter developed theory of a representative democracy. Of course, also this works build on micro-political behaviors. But these analyses are only necessary because only with their help the central question of these theories, namely the question of the functioning of the overall political system can be answered. What incentives emanate from the political, thus non-economic system that even if the individual actors mainly pursue their own interests, yet the end result, the overall policy welfare gets a chance?



5th Distinction against scientific socialism


After having clarified what then constitutes the statements of political economics, we want to show the intentions that this branch of science does just not pursue, even though such aims are insinuated to the political economics in the general public.


The fact that the representatives of this knowledge discipline speak of a political economy is often misunderstood to that effect that at this approach it is alleged that everything that happens would be understood as materially conditioned, that the root cause of all action, in other words, lies in the material interest ultimately.


Such an interpretation of history we find in fact in the scientific socialism of Karl Marx. This was famously a student of Georg Wilhelm Friedrich Hegel. According to Hegel's philosophy of history, the history develops in the form of theses which would bring forth an antithesis, whereat from the conflict between thesis and antithesis finally results a synthesis which also encompasses both previous theories. So at Hegel it is the ideas that promote the history.


Karl Marx has indeed adopted this scheme of thesis, antithesis and synthesis, however, he was of the opinion that Hegel's teachings virtually stood bottom up and therefore had to be put on the feet first. It was not the idea, but the material conditions which would ultimately trigger the historical development. The ideas played in connection with the historical development only insofar a certain role, as they constituted the ideological superstructure of each powerful group, which the rulers would propound to justify their activities.


This conception, that material interests are the ultimate cause of all action, does just not correspond to the conception of the representatives of political economics. So within the scope of this knowledge discipline it is not asserted that people let themselves lead exclusively of material interests in the non-economic areas such as politics and culture. Again: It is the approach which is adopted by economic theory and which is transferable to other sectors of society, and not a specific thesis of the ultimate motive of all social action.



6th Distinction against science imperialism


Now, we come to another misinterpretation of political economics. Occasionally is namely the attempt of this direction, to apply the in economics developed perspectives in other fields of science, regarded as a kind of claim on imperialism. One had - perhaps successfully - developed useful methods within the scope of the economics and now wants, through the acquisition of these approaches on non-economic phenomena, to displace the hitherto applied methods in these areas.


However, such an interpretation misjudges the intention of the political economics. It is precisely not about awarding the supremacy to a single approach. Quite the contrary, the representative of political economics emanates from the belief that the subject of any science can never be explored fully and conclusive with a single method.


Instead, one assumes that it always requires more than one method to obtain a complete picture of reality. Here one can compare a scientific method with rose-colored glasses. They may be able to recognize the things that we observe more clearly and precisely. However, they are certainly not able to discern colors. On the contrary, the pink coloration of glasses brings along that we recognize everything as inked rose-colored with regard to the color, no matter what color the object of observation actually has.


For the observation of the things around us we dispose of our senses. We see with the eyes, hear with the ears, smell with the nose, taste with the tongue and touch with our hands. Physiology has shown us that these senses are imperfect, that we can detect always only a specific segment of reality and that, for example, animals often see or smell something completely different and much more than humans.


Based on these limitations of our natural senses, science has developed a number of instruments which allow us to perceive much more than with natural senses. So using a microscope, we can see structures that could never be recognized with our eye alone. But just this detail view may be responsible in turn that we miss the forest for the trees, as to say the overall structure of our study object.


We can conclude of these insights that only at a methodological pluralism we obtain a complete picture of the reality and not if we confine ourselves to a single method.


This does not mean, however, that all methods can yield an equally large contribution to the knowledge. Just because the research aims are quite different, one can, precisely because of applying specific methods and directing the focus to the features which are considered essential due to the selected questions, cover more with these specific methods than with any other perception. Solely remains that no thinking tool can cover all possible features of a study object.


So we will be able to assume that every science has developed its own methods, which can recognize the essential features of a study object better than other methods. In this sense, the non-economic societal sciences will apply predominantly the methods developed for this knowledge disciplines. And these methods are then also not displaced when one is trying to gain some new, hitherto closed insights by means of the specific economic theory methods.


This limitation of a method is naturally also true for economic theory. Just as we assume that the methods employed in economic theory can be applied with success in the other societal sciences, we also have to acknowledge that the economic theory in turn needs to be supplemented by other non-economic theoretical methods. So in addition to the economic theory in the narrower sense, an economic history, an economic geography, a sociology of economy and an economic psychology have developed.


To be continued!