The Endogenization of Government Behaviour in Macroeconomic Models (Studies in Contemporary Economics)

In chapter 2 we concluded that the present public choice and marxist approaches to the study of political processes, as far as relevant for the analysis of economic policy making, are unsatisfactory, for reasons of incoherency, insufficient empirical support, and lack of specificity~ It was suggested that a different approach to the subject might be fruitful. To that purpose, we now turn our attention to the so-called interest function approach to the study of politico-economic phenomena, that has been developed by Van Winden (1983). See also Van Winden (1987), Van Velthoven and Van Winden (1986). Without paying too much attention to the specific conduct of and intricate relationships between voters, politicians, bureaucrats and interest groups, the interest function approach intends to combine valuable elements of the marxist and public choice analyses. According to Van Winden (1983, p. 12) "this means that in studying the interaction between state and private sector, attention should be paid to: - social classes, and the impact of class/power relationships on political and economic processes; - the way that social power structures (involving the real control over state activities) are maintained or altered; - the relative autonomy of political processes (involving the state) and its consequences for, as well as its dependence on economic processes; - individual motivations; - the possibility of mathematical formalization. " Section 3. 2. will give a general introduction to the concepts and the line of argument of the interest function approach. The purpose of this book is to discuss the issues involved in and to make a contribution to the endogenization of public sector behaviour in macroeconomic models. To that end, the traditional theory of economic policy is critically reviewed as well as the existing literature on the impact of politics on (macro)economic policy. It is argued that Van Windens' interest function approach offers a more useful and valuable entry to the analysis of public sector decision making. It gives a coherent, yet condensed picture of the impact of the various social classes on economic policy. Using this approach an explanatory model of public sector decision making is developed, which yields behavioural equations for public expenditure, public employment and taxation that appear to be suited for insertion in a macroeconomic model. Application of the model to data for the Netherlands shows that the model can be provided with empirical support and that the power structure of society can be proxied by the relative numerical strengths of the economically active social classes. Taking the latter finding for granted, a fully closed model of politico-economic interaction is obtained. The model is further generalized to account explicitly for the social security system and its income transfers, and to allow for multi-period decision making on bond financed budget deficits/surpluses Front Matter....Pages I-XI What this Book is All About....Pages 1-6 The Traditional Theory of Economic Policy....Pages 7-34 The Impact of Politics, A Survey of the Literature....Pages 35-100 The Interest Function Approach....Pages 101-128 The Endogenization of State Expenditure and Taxation in A Simple Keynesian Model....Pages 129-154 An Application to the Netherlands....Pages 155-184 A Dynamic Version of the Model with an Endogenous Social Power Structure....Pages 185-202 Towards A Politico-Economic Theory of Social Security....Pages 203-248 Towards A Behavioural-Theoretic Analysis of Budget Deficits....Pages 249-292 Epilogue....Pages 293-301 Back Matter....Pages 303-367