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Post-Keynesian Economics and Politics: Toward an Expectationist Theory of Democracy?

Published online by Cambridge University Press:  13 June 2011

Norman J. Vig
Norman J. Vig
Affiliation:
Carleton College
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Abstract

Recent economic theory places growing emphasis on the importance of psychological expectations in economic behavior and policy implementation. This article reviews four recent books on political economy which analyze failures in Keynesian macroeconomic management in light of social and political pressures in advanced democratic nations (especially Britain and the United States). Public choice theories focusing on the myopic behavior of voters and structuralist interpretations stressing class or corporatist conflict are discussed; but the author concludes that political as well as economic response to uncertain conditions is best understood in terms of how future expectations shape current preferences. James Alt's pioneering research on British public opinion suggests that expectational adaptation may hold the key to democratic stability as well as economic adjustment.

Type
Review Articles
Information
World Politics , Volume 34 , Issue 1 , October 1981 , pp. 62 - 89
Copyright
Copyright © Trustees of Princeton University 1981

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References

1 Lindbeck, Assar, “Stabilization Policy in Open Economies with Endogenous Politicians,” American Economic Review, Vol. 66 (May 1976), 1–19.Google Scholar

2 Buchanan, James M. and Tollison, Robert D., eds., Theory of Public Choice (Ann Arbor: University of Michigan Press, 1972), 11ff.Google Scholar

3 It is noteworthy, however, that with the partial exception of the “Post Keynesian” and Marxist contributions, none of the economists writing in “The Crisis in Economic Theory” (special edition of The Public Interest, 1980) address questions of political economy.

4 For a popular explication of rational expectations theory and an attack on Keynesian models, see Willes, Mark H., “‘Rational Expectations’ as a Counterrevolution,” The Public Interest (fn. 3), 81–96.Google Scholar On the distinction between “adaptive” and “rational” expectations and use of the former in augmenting Keynesian analysis, see Humphrey, Thomas M., “Some Current Controversies in the Theory of Inflation,” in Teigen, Ronald L., ed., Readings in Money, National Income and Stabilization Policy, 4th ed.; (Homewood, I11.: Richard D. Irwin, 1978), 134–45.Google Scholar

5 The most respected treatment is still perhaps Leijonhufvud, Axel, On Keynesian Economics and the Economics of Keynes (London: Oxford University Press, 1968)Google Scholar, but there is a large recent literature including Sir Hicks, John, The Crisis in Keynesian Economics (New York: Basic Books, 1974)Google Scholar; Keynes, Milo, ed., Essays on John Maynard Keynes (Cambridge: Cambridge University Press, 1975)Google Scholar; Minsky, Hyman P., John Maynard Keynes (New York: Columbia University Press, 1975)CrossRefGoogle Scholar; Hutchison, Terence W., Keynes versus the “Keynesians’? (London: Institute of Economic Affairs, 1977)Google Scholar; Johnson, Harry G., The Shadow of Keynes (Chicago: University of Chicago Press, 1978)Google Scholar; and Hurt, William H., The Keynesian Episode: A Reassessment (Indianapolis: Liberty Press, 1979).Google Scholar

6 This is not to say that governments have consistently practiced Keynesian policies. See Cowart, Andrew T., “Economic Policies of European Governments—I: Monetary Policy,” and “Economic Policies of European Governments—II: Fiscal Policy,” British Journal of Political Science, VIII (July and October 1978), 285–312, 425–40CrossRefGoogle Scholar; and Andrain, Charles F., Politics and Economic Policy in Western Democracies (North Scituate, Mass.: Duxbury Press, 1980).Google Scholar In Britain, the Conservative governments of 1951–1964 followed Keynesian management doctrines more closely than the subsequent Labour or Conservative governments; see Ait, chap. 2.

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8 Brittan's argument is discussed further in part II below.

9 See especially Tufte, Edward R., Political Control of the Economy (Princeton: Princeton University Press, 1978)Google Scholar, and Frey, Brunoy S., Modern Political Economy (New York: Halstead Press, 1978).Google Scholar For a useful review and critique of the literature, cf. Inoguchi, Takashi, “Political Business Cycles: Toward a Reconceptualization,” paper presented at the Annual Meeting of the American Political Science Association, Washington, D.C., August 28–31, 1980.Google Scholar

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11 Buchanan and Wagner state (p. 57) that “public spending—at all governmental levels, federal, state, and local—in the United States amounted to 32.8 percent of national income in 1960; this proportion had increased to 43.4 percent by 1975.” This comparison presumably employs a narrow definition of “national income,” but the size of the public sector is normally measured in terms of the ratio of total government spending to GNP or GDP. According to OECD figures, U.S. public expenditure (at all levels) amounted to 29.5 percent of GDP in 1962 and 34.0 percent in 1975, percentages considerably lower than those of any other major Western democracy (OECD, Public Expenditure Trends [Paris: 1978], Chart 1, p. 16).Google Scholar Buchanan and Wagner also do not mention that when state and local government surpluses in this period are included, there is very little if any net revenue deficit (OECD, Table 10, p. 40), or that the national debt has fallen as a proportion of GNP.

12 Mueller, Dennis C., Public Choice (Cambridge: Cambridge University Press, 1979)Google Scholar, I. See also Tullock, Gordon, “Public Choice in Practice,” in Russell, Clifford S., ed., Collective Decision Making: Applications from Public Choice Theory (Baltimore: Johns Hopkins University Press, 1979), 31ff.Google Scholar

13 Downs, , An Economic Theory of Democracy (New York: Harper & Row, 1957).Google Scholar

14 Whether “pure” public goods are oversupplied or undersupplied in this situation is a matter of dispute among public choice theorists; cf. Downs, , “Why the Government Budget Is Too Small in a Democracy,” World Politics, XII (July 1960), 541–63CrossRefGoogle Scholar; Mueller (fn. 12), chap. 8.

15 See the discussion of Alt's book in section III below.

16 In a host of behavioral studies over the past decade, researchers have attempted to document relationships between voting and both macroeconomic conditions and micro-economic motivations. For some of the recent work, see Arcelus, Francisco and Meltzer, Allan H., “The Effect of Aggregate Economic Variables in Congressional Elections,” American Political Science Review, Vol. 69 (December 1975), 1232–39CrossRefGoogle Scholar; Howard S. Bloom and H. Douglas Price, “Comment: Voter Response to Short-Run Economic Conditions; the Asymmetric Effect of Prosperity and Recession,” ibid., 1240–54; Saul Goodman and Gerald H. Kramer, “Comment on Arcelus and Meltzer: The Effect of Aggregate Economic Conditions on Congressional Elections,” ibid., 1255–65; Kenski, Henry C., “The Impact of Economic Conditions on Presidential Popularity,” Journal of Politics, XXXIX (August 1977), 764–73CrossRefGoogle Scholar; Fiorina, Morris C., “Economic Retrospective Voting in American National Elections: A Micro-Analysis,” American Journal of Political Science, XXII (May 1978), 426–43CrossRefGoogle Scholar; Kinder, Donald R. and Kiewiet, D. Roderick, “Economic Discontent and Political Behavior: The Role of Personal Grievances and Collective Economic Judgments in Congressional Voting,” American Journal of Political Science, XXIII (August 1979), 495–527CrossRefGoogle Scholar; Kiewiet, , “Policy-Oriented Voting in Response to Economic Issues,” American Political Science Review, LXXV (June 1981), 448–59.CrossRefGoogle Scholar

17 For an excellent discussion of non-policy variables, see Andrian (fn. 6).

18 For a discussion of recent Marxist theories, see Crouch, Colin, “The State, Capital and Liberal Democracy,” in Crouch, , ed., State and Economy in Contemporary Capitalism (New York: St. Martin's Press, 1979).Google Scholar See also Frank, Andre Gunder, Crisis: In the World Economy (New York: Holmes & Meier, 1980)Google Scholar, chaps. 2–3, and Castells, Manuel, The Economic Crisis and American Society (Princeton: Princeton University Press, 1980).CrossRefGoogle Scholar

19 Lester Thurow reaches a similar conclusion regarding the distributional effects of inflation in the U.S. See Thurow, , The Zero-Sum Society (New York: Basic Books 1980), 50–51.Google Scholar

20 Runciman, Walter G., Relative Deprivation and Social Justice (London: Routledge & Kegan Paul, 1966).Google Scholar Ted Gurr has also developed the concept in explaining the sources of political violence, in Why Men Rebel (Princeton: Princeton University Press, 1970).

21 See the discussion of “positional goods”; in Hirsch, Fred, Social Limits to Growth (Cambridge: Harvard University Press, 1976).CrossRefGoogle Scholar

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30 It is not total, of course, because of mavericks such as John Kenneth Galbraith, Robert Heilbroner, and Lester Thurow, plus various members of the “Post Keynesian” school that has recently developed. Cf. esp. Eichner, Alfred S., ed., A Guide to Post-Keynesian Economics (White Plains, N.Y.: M. E. Sharpe, 1979)CrossRefGoogle Scholar, and Thurow (fn. 19).

31 Public choice theory has been applied to a variety of political institutions and processes including bureaucracies, interest groups, and legislatures by others. See Olson, Mancur, The Logic of Collective Action (Cambridge: Harvard University Press, 1965)Google Scholar; Niskanen, William Jr, Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971)Google Scholar; Borcherding, Thomas E., ed., Budgets and Bureaucrats (Durham, N.C.: Duke University Press, 1977)Google Scholar; Rae, Douglas W. and Eismeier, Theodore J., eds., Public Policy and Public Choice (Beverly Hills, Calif.: Sage, 1979)Google Scholar; and Russell (fn. 12). But the emphasis has for the most part been on organizational incentives, logrolling, coalition formation, and budgetary allocation.

32 See, e.g., Loehr, William and Sandier, Todd, eds., Public Goods and Public Policy (Beverly Hills, Calif.: Sage, 1978).Google Scholar The ultimate problem for Hirsch may come down to Arrow's paradox by which it is impossible to aggregate the preferences of individuals into coherent majorities because of intransitivities—in this case including ideological preferences that enter the social welfare function.

33 Compare, for example, the classic aggregate voting studies such as Kramer, Gerald H., “Short-Term Fluctuations in U.S. Voting Behavior,” American Political Science Review, Vol. 65 (March 1971)CrossRefGoogle Scholar, and others cited in fn. 16 above.

34 Butler, David and Stokes, Donald E., Political Change in Britain: The Evolution of Electoral Choice 2d ed. (New York: St. Martin's Press, 1976).Google Scholar

35 Willes (fn. 4). Alt discusses several models of expectation formation in chapter 4.

36 Tufte, Frey (fn. 9).

37 Sec also Alt and Chrystal, K. Alec, “Electoral Cycles, Budget Controls and Public Expenditure,” Journal of Public Policy, 1 (February 1981), 37–59.Google Scholar

38 Macrae, Duncan, “A Political Model of the Business Cycle,” Journal of Political Economy, Vol. 85 (April 1977), 239–64.CrossRefGoogle Scholar

39 The data here are for 1969–1970. Alt suggests that there may have been changes somewhat later in the 1970s.

40 Rose, Richard and Peters, Guy, Can Government Go Bankrupt? (New York: Basic Books, 1978).CrossRefGoogle Scholar

41 Alt distinguishes between simple “extrapolation” models and more complex “adaptive” ones, and finds more support for the latter (chap. 4); but others combine the two in the concept of adaptive expectations.

42 See Willes (fn. 4). Cf. Davidson, Paul, “Post Keynesian Economics: Solving the Crisis in Economic Theory,” also in The Public Interest (fn. 3), esp. 159–62.Google Scholar

43 Cf. Adam Przeworski and Michael Wallerstein, “The Structure of Class Conflict in Advanced Capitalist Societies,” paper presented at the Annual Meeting of the American Political Science Association, Washington, D.C., Aug. 28–31, 1980. The authors develop a game-theoretic model of structural conditions permitting “class compromise” between workers and capitalists. Although subjective motivations such as “moral restraint” are not considered, the “compromise” depends very much on workers’ expectations that profits “delegated” to business will be of benefit to them in the future.

44 For examples written from different perspectives see, e.g., Heilbroner, Robert, An Inquiry into the Human Prospect (New York: Norton, 1974)Google Scholar; Crozier, Michel and others, The Crisis of Democracy (New York: New York University Press, 1975)Google Scholar; and Wolfe, Alan, The Limits of Legitimacy: Political Contradictions of Contemporary Capitalism (New York: Free Press, 1977).Google Scholar Cf. Dahrendorf, Ralf, “Effectiveness and Legitimacy: On the ‘Governability’ of Democracies,” Political Quarterly, Vol. 51 (October-December 1980), 393–410.CrossRefGoogle Scholar

45 On this fundamental point, see Rose and Peters (fn. 40), 244ff, and Rose, Richard, “Ordinary People in Extraordinary Economic Circumstances,” in Rose, , ed., Challenge to Governance: Studies in Overloaded Polities (Beverly Hills, Calif.: Sage, 1980).Google Scholar