Political economy models offer diverse lenses on policy
My previous column (bit.ly/3O1XGqi) had presented empirical evidence on the political business cycle to show how economic life vibrates to the rhythms and rituals of politics. That policymaking is influenced by the forces of realpolitik is clear. To truly understand this, we require a model of the political economy where policy takes shape.
Luckily for us, several such models have been developed by economists. Broadly, models of the political economy can be classified into four main categories: normative models, public choice theory, the Chicago political economy approach and the transactions cost view. Normative models view policymaking as a technical or an engineering problem where a policymaker seeks to maximize some sort of a social welfare function with an optimal policy.
This approach is similar to most rational-agent models in economics. The only innovation in this approach is the introduction of constraints to maximizing social welfare, such as the ability to raise taxes or make transfer payments. However, it ignores the actual policymaking process and the institutional and political forces that act upon it.
It assumes that policymakers will ascertain and implement the policy that best maximizes benefits within constraints. Public choice theory offers a much richer understanding of the political economy. Influenced by the views of Knut Wicksell and pioneered by Nobel laureate James M.
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