Minor Failures: The Identity of Policymakers

What we call ‘minor failures’ are the government failures that have been emphasised by the ‘positive’ approach to eco­nomic policy. This perspective stresses very important fac­tors, such as the corruption of politicians and their capture by powerful interest groups.

The ‘classical’ theory of economic policy is accused of ignor­ing the identity of policymakers, their political and personal objectives and thus the numerous agency problems arising in public governance.^[24] The egoistic or populist tendencies of politicians were first introduced by the school of public choice, starting from the idea of the political process as being deter­mined by a collection of self-interested decisions (Buchanan and Tullock 1962). This applies not only to politicians but also to other agents. As far as politicians are concerned, their attempts to maximise the length of their tenure (Downs 1957) or to win re-election (Nordhaus 1975), their partisan inclina­tions (Hibbs 1977; Wittman 1977) and their representation of interest groups (Olson 1965) rather than all citizens imply reaching an employment target higher than the natural one, running budget deficits, accumulating public debt and so on. This is possible if there arise principal-agent problems as an effect of ‘rational ignorance' (Downs 1957) or asymmetric information (also Dixit 1996).2 To be sure, similar problems affect not only macroeconomic policies but also the provision of public goods and are particularly important if the principal is composed of a large group of individuals (Olson 1965). Niskanen (1971) underlines the personal interests of bureau­crats in enlarging their share of the budget they have to admin­ister in order to be paid higher salaries. This leads them to over-provide public goods. In addition, the kind of electoral system, e.g. proportional representation, and electoral uncer­tainty can exacerbate the tendency to enlarge expenditures and deficits.

However relevant, the factors underlined by the political economy approach are not vital failures of the classical dis­cipline of economic policy. They need to be taken into account in practical policy together with a number of other institutional and historical features characterising the issue in question and should be part of the discipline when policy action is to be devised in practice. These objections can be dealt with partly in analytical terms similar to some of those referred to as ‘market failures' (asymmetric information). Both markets and governments, as human institutions, are imper­fect. Having recognised this, economic policy as a discipline

² This is the reason why control over bureaucrats can never be complete, even when political power is concentrated in the hands of a sovereign (Tullock 1965).

could be a way to devise how they can complement each other and be designed in a more rational way (I trace some of their consequences on policy actions later). On practical grounds, as a consequence of these theories, the need arises to devise rules to constrain governmental action (see Section 2.6).

Instead, logical and empirical objections were moved to the second precondition, as mentioned by Arrow (1951), and new ones were added as an effect of the innovations introduced in the two decades after the mid-1960s. Some objections of this kind contributed to developing parts of economic policy and generated new fields of inquiry. Some other objections, such as the Lucas critique, tied to REs, have been fatal to the survival of economic policy as an autono­mous discipline until recently and have contributed to its decline while supporting the theoretical orientation of the Chicago school, referred to earlier. The absence of theoretical advances in crucial areas of the core of economic policy, such as the theory of economic policy, after its practical demise as an effect of the Lucas critique has been a determinant for the persistence of critical positions against the discipline.

2.4