Political Economy of Public Policy

Public Policy: Lecture 1

This class provides a broad theoretical introduction on how politics constrains policy-making. It is divided into four broad categories: why political economy matters; why thinking about feasible policies matter; what kind of political institutions best lead to accountability; and how to get from bad institutions to good ones.

Politics and the Public Interest:

The making of public policy is about serving the general good. What policies are in the social interest? A clearly political question: what is good in the context of the people. What's good for the collective: politics is about groups of people determining what they want to do.

Constraints limit the number of policy options that can be feasibly implemented. How do we structure our institutions (the rules, interaction of bureaucracies, and structure of the government) to make the world a better place? To paraphrase Rousseau, the goal of public policy is the attainment of laws and regulations that serve the general will which leads to the general good. The goal of government, therefore, is to promote the general interests of society: which means the aggregate interests of individuals.

The public interest cannot be determined theoretically: context matters because at different times different people think different things about what is important. An underlying assumption of rational choice is that people know what is best for them. People have preferences over options which must be rational in a limited sense. Preferences must be transitory and are dependent on context. Transitivity is important because it is the minimum requirement of rationality: one cannot prefer beef to chicken and chicken to fish but prefer fish to beef.

The problem of imperceptible differences can arise: if you are indifferent to x and y and y and z, then you must be indifferent to x and z, yet eventually a chain of indifference yields some preference . . .

An outcome is in my individual preference if it reflects my interest. Society/social interest is really the collective interest from a group of individual ones.

An example of majority rule: if X gets more votes than Y, then X is preferred to Y. Lets suppose there are three tax rates: low, medium, and high and three voters: poor, middle class, and rich.

Poor's preferences: high, medium, low
Middle Class: medium, high, low
Rich: low, medium, high.

Medium is preferred to high and high to low, and medium to low, therefore, medium wins.

Majority rule can fail to produce coherent preferences:
1. x, y, z
2. y, z, x
3. z, x, y.

X > Y, Z >X, and Y > Z which renders society intransitive as it lacks rational preferences. In this case majority rule fails to identify the collective interest. While a majority may prefer one policy to another, another majority will be found that prefers another policy to the one enacted.

In this example, however, nothing is specified about the rules of the political process: the outcome in the real world will be determined by a game.

Borda Count:

The Borda Count is a crude utilitarian method of assigning points to each alternative based on individual preferences, producing a result that sums up the scores.

X3, Y2, Z1
Y3, Z2, X1
Z3, X2, Y1

In this method, society is indifferent to the outcome as all points added up yield the same result.

While intuitively appealing, the Borda Count fails to recognize that social preferences are not immune to the adding of irrelevant alternatives: for example:

If two people think X>Y>Z
one person: Y>Z>X
one person: Y>X>Z

where first choice gets 3, second, 1, third 0, y gets 8, x gets 7, and z gets 1

If you add W, then
two people: x>w>y>z
one person: y>z>x>w
one person: w>y>x>z

X gets 6, W gets 5, Y gets 4, and z gets 1. In other words, the group now prefers X to all others, even though they preferred y before. This is aking to saying you prefer chicken to beef, but when fish is added to the mix, you prefer beef to chicken or fish. This is not a good way to figure out preferences. The problem, however, was not the decision-making, but the aggregation method.

In an amendment procedure which the professor moved too quickly through for me to copy all down, a majority might agree X>Y, but the weighting of votes allowed Y to win.

Arrow's Impossibility Theorem:

Arrow assumes that a society with three people, three alternatives, and the capacity to order alternatives in any way they want: there is only one way aggregation rule that will return a transivtive outcome with a unamity of preferences and is sensistive to alternetives: the rule of dictatorship.