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    | An Economic Theory of | Democracy ANTHONY DOWNS A la Comunidad Académica de la Universidad de San Andrés Prof. Frederick C. Turner HARPER & ROW PUBLISHERS NEW YORK R64 564 To My Mother and Father ‘AN BcoNosc namsoRY OF prMocRAcr. Copyright @ 1957, by Harper & Row, Publishes, Incrporaed. Printed in the United States of America. All rights in this book are seterved. No part of the book may be used or reproduced in ony ‘manner whatsoever without sitten permission except in the cate of brief quote tions embodied in critical articles and reviews. For information address Harper © Row, Publisher, Incorporated, 49 Baa! 33rd Street, New York, N.Y. 10016 [mpaany OF CONGRESS cATALO CAND NUBMBER: 57=10571 An 15 A Comment on Economic Theories of Government Behavior Introduction Trouctt few economists have tried to explain government behavior as a part of general equilibrium theory, many hhave made normative statements that imply a certain conception of government. In this chapter, we examine that conception to see (1) if it is consistent with the basic axioms of economic theory and (2) what implications those axioms have for explicit theories of gov- emment like our own, Objectives In this chapter we attempt to prove the following propositions 1. The conception of government implicit in much of traditional economic theory is inconsistent with the axioms that explain how the private sector operates. 2. Any attempt to deal with all forms of government by means of a single economic theory is bound to be either self-contradictory or too general to be meaningful. ra) 280 [AN ECONOMIC THEORY OF DEMOCRACY 3. In order to explain government's role in the economy on either ‘a normative or a positive level, economists must take into account society's political constitution; therefore economics and polities must be merged into a unified theory of social action. I. THE INCONSISTENCY OF TRADITIONAL ECONOMIC THEORIES OF GOVERNMENT AL THE VIEW TMPLICIT IN TRADITIONAL THEORY Attempts to treat government as an endogenous variable in gen- eral equilibrium theory are extremely scarce, because most theorists have followed the classical tradition of considering government as a disturbing influence upon the self-egulating private economy. ‘Therefore they regarded it as an exogenous datum rather than an intrinsic part of the division of labor. But the crucial role of govern- ‘ment in all fields of economic action has forced economists to make statements about its behavior in spite of the darth of general theories conceming it. Particularly in the fields of public finance and welfare economics, normative prescriptions abound. If we examine a few of ‘them, we discover they nearly all imply a similar conception of the proper role of government in the economy? ‘These prescriptions are usually made in one of three forms. The first is a disguised value judgnent in the form of an “if” clause positing a goal, and a presumably factual statement describing how to teach it. Thus Professor A. P. Lemer says in The Economies of Control: IE it is desired to maximize the :otal satisfaction in a society, the rational procedure is to divide come on an equalitarian basis. Lemer qualifies this description of “the rational procedure” Iater in his analysis, but he retains the idea that some income should be "See Gerhard Colm, Bsus in Pebic Finance and Fiscal Policy (New York: Oxford University Pres, 1955), pp. 6-8. "This concurence does not ear all economists egree upon policy recom- mendations for government action. Rather they agree upon a very broad state. ment of the object of such action: govemments should maximize focal welfare, How this objective is best accomplsfed is « matter of extreme controveny. "Abba P. Lemet, The Economics of Control (New York: ‘The Macmillan ‘Company, 1944), p. 32. ECONOMIC THEORIES OF GOVERNMENT BEHAVIOR 281 redistributed from rich to poor. Since government is the agency which does the redistributing, we may conclude that Lerner believes, government's proper function is “to maximize the total satisfaction society.” ‘The second type of prescription made about government is an ex plicit designation of a specific policy goal as “proper” to it. For ex ample, Adolph Wagner regarded redistribution of income as a duty of the state, though he masked this personal opinion as a “demand recognized by “the modem of economies.” He states that: ‘The state, by adopting appropriate policies, should remedy evils which are not due to its previous action in financial or other matters. From this demand it follows that . . . taxation, in addition to serving the purely financial purpose of providing sufficient revenue, should be em ployed for the purpose of bringing about a different distribution of wealth from that which would result from the working of free competition upon the basis of the present social order:* Another such open value judgment is made by Lemer as follows: [It is] a duty of the government—perhaps even the primary duty of the government—to ensure the maintenance of full employment. Neither of these two kinds of prescription really qualifies as a normative theory of government, since the first is not explicit enough and the second not general enough. But it is difficult to find overt statements of the criteria by which actions proper to government can be differentiated from those proper to private agents. One of the ‘broadest was made by Hugh Dalton in The Principles of Public Finance: Most of the operations of public finance resolve themselves into a sexies of transfers of purchasing power . . . from certain individuals to public authorities, and back again from thes: authorities, by way of public expen- ditures, to other individuals. . . . Asa result of these operations of public Snance, changes take place in the amount and in the nature of the wealth which is produced, and in the distribution of that wealth among indi viduals and classes. Are these changes in their aggregate effects socially advantageous? If so the operations are justified; if not, not. ‘The best Adolph Wagner, Finanzwisenschajt, Vol. 1, Part 27, as quoted in Elmer D. Fagan and GC. Ward Macy, eds, Public Finance: Selected Readings (New York Longmans, Green and Co, 1936), p. 170 *Lemer, op. cit, p. 303, 282 AN ECONOMIC THEORY OF DEMOCRACY system of public finance is that which secures the maximum social ad vantage from the operations which it conducts. A similar statement occurs in Harvey W. Peck’s Taxation and Wel- fare: If public operation of an enterprise will produce a greater net social utility, the services rendered by this enterprise should belong in the category of public goods.? Peck also cites the formulation advanced by Erik Lindahl According to Lindahl. . . the production of public goods should be cartied on to the point where atility is just ofset by costs, as is the tendency in the private economy, or where the marginal satisfaction is the same from both public and private goods 8 ‘These few quotations complete our sample, which, though small, is, in our opinion, fairly typical of non-Marxist economists. Behind all of the prescriptions quoted lurks a single conception of government: govemment is that agency in the division of labor which has as its proper function the maximization of social welfare? However, because this conception is almost never formulated quite s0 explicitly, some of its implications have remained unrecognized In particular, government is rarely treated as an integral part of the division of labor. The classical tendency to regard it as outside the system being analyzed persists even when the analyst recognizes that government has a specific function in the economy. 3. THE WEAKNESS OF THIS VIEW ‘As we pointed out in Chapter 2, every agent in the division of labor is assumed to have a privete motive as well as a social function, ‘This duality springs from the selFinterest axiom, which states that, in general, men undertake economic activity primarily to further their own private aims and only secondarily to provide benefits for “High Dalton, The Principles of Public Finance (London; George Routledge and Sons, Lid. 1932), pp. 910. * Harvey W. Peck, Tektion ond Welfre (New York: ‘The Macmillan Com: pony, 1925), pp. 30-36, as quate in Harold M, Groves (ed), Viewpoints In Prble Finance (New Yo Hleny Hot and Company, 1949), 551 ‘Erik Lindabl, Die Gerechtigheit der Besterung, a cited in Groves, ioe, et * Social weifae is here used as a synonym for socal utility, satisfaction in a society, social advantage, and all other terms referring to the same general idea. ECONOMIC THEORIES OF GOVERNMENT BEKAVIOR 283 society (i.e, for other men). From the point of view of society as a whole, the object of each man's ection is the discharge of his social function. But from his own point of view, he acts to attain his pri- vate ends, which are often unrelated per se to that function. ‘There fore when we theorize about his behavior, we should not limit our selves to describing his social function; we should also show how he is motivated to carry it out. Every economist recognizes this state of affairs when he is talking about private economic agents. He docs not advise monopolistic corporations to increase social welfare by cutting prices—and thereby reducing their profits. Rather he assumes that the men operating ‘them can be reasonably expected to maximize their own profits be- ccause they are human. Similarly, he does not advise a labor union to quit restricting entry because doing so causes inefficient allocation of resources. He might believe that entry should be easier for the good of society, but if he sees that union members benefit from closed entry, he regards them as acting rationally in their own in- terest To remedy such situations, he does not suggest that the men in volved stop being selfish, Tnstead he attempts to devise some social ordering which benefits society through the very leverage of that selfishness. In this sense, the model of perfect competition drawn up by welfare economists is a triumph of selfishness, It demonstrates how, under certain conditions, society actually gains when men at- { tempt to maximize profits and utility. ‘Economists apply this reasoning to private economic agents not be- cause they are private, but because they are agents. In short, they are ‘human, and the realities of human nature must be accounted for in any economic analysis. Ipso facto, the same type of reasoning must be applied to every institution run by men, i.e, to every agency in the division of labor. ' However, economic theories of government behaviot—in so far as they exist—universaly fail to assign any motives to the men in gov- emment. In every one of the quotations we cited, and in almost every other similar passage, the theorist discussing government's role in society merely describes its proper function. He says nothing 284 AN ECONOMIC “HEORY OF DEMOCRACY about the incentives which might cause that function to be carried out by the men who run the government. Yet those incentives are vital, because their operation determines in what way the function of government is discharged, just as the degree of competition among firms determines what goods are produced. As Joseph Schumpeter stated in a passage we quoted previously: It does not follow that the social meaning of 2 type of activity will necessarily provide the motive power, hence the explanation of the latter. IF it does not, a theory that contents itself with an analysis of the social end or need to be served cannot he accepted as an adequate account of the activities that serve it.2° True, the economists who commit this error are rarely guilty of describing reality inaccurately, because most of their statements are normative, not descriptive. Probably not one of them would contend that governments in the real world actually maximize social welfare Nevertheless, they make policy prescriptions which assume govern ‘ments should maximize welfare. But there is little point in advising governments to do so, or forming recommendations of action based ‘on the supposition that they might, unless there is some reason to believe that they will. Otherwise the economists’ advice may very ‘well be a5 useless as telling a profit maximizing monopolist to sell his, product at marginal cost so as to benefit society (©. WHY ECONOMISTS HAVE IGNORED THIS PROBLEM Most theories in normative economics tacitly assume that govern- ment will in fact maximize welfare once it knows how to do so. In ‘our opinion, there are three reasons why economists have ignored the problem of government motivation. The first and most obvious is that this problem lies more in the realm of politics than of eco- nomics. As economic theorists shifted emphasis from political econ- ‘omy to purely scientific analysis, they directed less and less attention to the political aspects of economic problems. Instead they tended to leave all quasi-political questicns to political scientists and political Joseph A, Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Brothers, 1950), p. 282. Schumpeter is one of the few economists Who have mot ignored this problem, ECONOMIC THEORIES OF GOVERNMENT BEHAVIOR 285 theorists. Only recently have attempts been made to apply economic concepts to these questions." ‘Avoidance of political speculation has not prevented many econ- ‘omists from being influenced by the overly abstract conception of government formulated by Jean Jacques Rousseau.” In effect, he argued that the government should be merely a device for carrying ‘out the will of the people; therefore'in theory it has no existence of its own apart from that will. Acceptance of this view—even on purely theoretical, normative level—climinates the need for govern: ment motivation, at least on that level, It amounts to assuming that governments are not institutions mn by men, but are depersonalized, frictionless machines which operate according to mathematical rules; eg, they carry out the “will of the majority.” Being machines, they have no private motives. eing frictionless, their particular processes of operation do not affect their outputs. ‘Therefore govern- This study i of course, such an attempt. An example of other similar a temple isthe application of choice thtry as developed in economics to politial bureucracs. See Herbert Simon, Adminitrative Behavior (New York: ‘The Maemilin Company, 1947) ise fen equ Rows, The Suc Contact, afr Library of Clas Baton (New Yo Tater Pubs On, 1940). The phrase used by Rowson fb "the general wil” He himec€ wat aot guly ot spying this conception of government to every politi system. Infact, he invented if 25 en ideal against tehich to contrast existing goternmenis, Responsilty for eroneously broadening {the application of his ideas resta with those cconomie theorsts who followed the reasoning described inthe tet, thotgh mest of them did so unconscously. "Another posible interpretation of Rowsca's theory ir that the goverment consists scelyof hired men who carry oxt the policies ordered by “the wil of the people,” This argument explains the private motive of the men in goverment {uit simply: they obey the commands of the people with peeson in order to Keep their yobs, Beeaute the slightest dobedience means immediate dismal. As our whole study shows, this view incompatible with uncertainty and the ‘division of labor. It sesemes (1) the people a a whole have some Weil to be Caried ont on every sue, however trval, and (2) that they can communicate these myciad wills to thei hitelings (Fhe government) without disrupting the per formance of theit own specialized tasks nthe division of labor. In other wore, there is perfect information in the word, no Arrow problems are ever encoun: tered, and the minority alvays submits gracefully to the majorly. The unrealistic nature of such reasoning forceolly demonirated by Schumpeter, op. cf ‘Admitey, the sssamption tht every large corporation maximizes rohts ets ‘upon exactly the same type of reasoning, since tis assumption does not explain hhow the motives ofthe Corporation's managers lead them to cary out he desies of ils stoctholders. But the magnitage cf the distortion iavelved f much greater ‘on a national scale than within corpomtion—so much greater that we vill not

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