Paradox of Electoral Economics

This paper will focus on essay prompt four which is an explanation for the paradox of electoral economics for the period 1945 to 2000. First, the paradox holds that the legitimacy of all governments is connected to their capacity to produce consistent positive economic performance. This paradox suggests that governments unable to manage such performance will quickly lose favor with the voters. All governments have a strong incentive to stimulate high levels of economic output. This indicates that democratically elected governments are much more vulnerable to changes in the business cycle than authoritarian regimes. However, governments may often factor in non-economic principles into their formal decision-making.

There are a number of reasons why states will intervene in markets and engage in distributive and redistributive policies. For instance, states may often want to insure a proper dispersion of wealth among all citizens. Indeed, states will engage in regulation to provide protections to its citizens from the activities of a private sector that may generate widespread inequality.

Governments will also use regulation to protect its citizens from externalities. Externalities are negative consequences or outcomes of the political or market system (Keohane). Thus, regulation plays a crucial role in restricting the activities of the private sector and providing recompense to society when the outcomes of a business enterprise produce externalities. Thus, government regulation provides maximum and minimum restraints on private-sector enterprises. An example of a maximum restraint would be pollution levels, including those targeted on reducing carbon emissions. A maximum restraint would be set at levels up to which businesses are allowed to emit a certain amount of pollution, but no more without incurring penalties. A minimum restraint would be health and safety regulations. These regulations would provide a minimum level on allowances for certain chemicals that are thought to be damaging to human health if ingested in large quantities.

A problem arises because state intervention in the economy incurs both costs and benefits (Eichengreen). For instance, in the case of pollution, the costs would be borne by the polluting industry, whereas the benefits are borne by everyone. Wilson's typology of regulatory costs and benefits is used by some political scientists to discuss the likelihood that certain policies will be supported by the electorate (Kelman 256-257). It's also used as guidance to determine what type of inputs produce certain policy outputs.

The typology holds that the distribution of costs and benefits has a great influence on electoral economics. Thus, when costs are concentrated, and benefits are dispersed the policy usually attracts only one well-organized organization. Thus, there will be very little input from the general public in government regulatory policy. When the distribution of costs and benefits are concentrated there tend to be two well organized organizations. Although here again, widespread electoral or public input may be lacking because of the perceived lack of a stake in an outcome. When costs and benefits are dispersed the ideal in public policy formation exists. In such a case, organized opposition will usually be held to a minimum. There will also be a high degree of public satisfaction and thus electoral interest in the issue. This type of issue would be a true net positive for electoral economics. Finally, when costs are dispersed and benefits are concentrated, a single organization will develop to retain the benefit. Once again, it may be that the public has little interest in the outcome. This allows for special interest groups to develop disproportionate influence on an issue.

In Europe during the period 1945-2000, economies developed in one of two forms. The first economies are the capitalist or market-based states, often with generous welfare state policies. These states were found mainly in Western Europe during this particular period. The second are the state driven, centrally planned economies of the former Soviet bloc group of states in Eastern Europe. The key difference between the two is that, capitalist states allowed for the existence of private ownership and enterprise. However, this allowance is joined with an understanding that capitalist economies will produce inequality. As high rates of inequality are damaging to any healthy democracy, these states created sometimes elaborate welfare state regimes, such as those in Scandinavia.

The capitalist states are mainly interested in growing wealth and this was pursued through such mechanisms as free trade agreements, a common currency area with the euro, and free movement of labor across borders. The latter was particularly crucial to economic growth because it allowed citizens from countries in southern Europe, where labor rates were cheaper and unemployment higher, to emigrate. Thus, the more dynamic northern European economies, such as Germany with its demand for cheap labor, would benefit greatly from the free movement of labor.

In addition, free trade would permit the lowering of tariff barriers to goods from the industrially prodigious European states. The use of common currency would make financial transactions much easier and more convenient among all the member states. The formation of the European Economic Community, and its evolution into the now extant European Union (EU) in the late 1990s, is crucial. This greater integration of capitalist states allowed for the creation of one of the world's largest and most affluent competitive markets. It has also allowed for a more widespread distribution of economic benefits across a large number of capitalist democratic states.

In contrast, the centrally planned economies of Eastern Europe, dominated by the Soviet-backed and now defunct Council for Mutual Economic Assistance (COMECON), were a study in failure. This may be due partly to the authoritarian nature of Communist regimes. Such regimes lack responsiveness to citizen needs during most of the period under consideration. Centrally-planned economies are simply less efficient than capitalist economies. The market principle of supply and demand is not being used to set priorities for the production of goods and services. Thus, while the industrial output of Soviet bloc states could be prodigious in its own right. It was, at the same time, also incredibly wasteful. What happens in such systems is that goods not in great demand are overproduced. The lack of competition means that the quality of the goods produced was also inferior when compared with similar goods produced in Western Europe. Finally, unlike in a capitalist economy, bureaucracies make crucial economic decisions in centrally-planned regimes. They typically did so without reference to the principle of demand and supply.

The Soviet Union appears to have fallen because this inefficiency took a considerable toll on economic growth. Indeed, there is evidence that one of the world's super-powers was experiencing economic stagnation and no longer able to compete with the West economically during the Cold War (Daniels 294-295). This collapse of the Soviet bloc, and its centrally planned economies, appears to provide solid evidence that such state-based systems simply don't work. The rapidity with which these political regimes collapsed, under Gorbachev's perestroika policy, suggests that the residents of the bloc didn't genuinely support their leadership.

Moreover, markets function in an institutional environment conditioned by history, custom and culture. The influence of religion is particularly pertinent as is the rule of law. The existence of law, and a means to successfully and consistently enforce it, are crucial to the consolidation of trust in market-based regimes (Buchanan and Keohane 1). Trust allows for the facilitation of monetary transactions that carry a certain degree of risk to parties. However, this risk is mitigated by the availability of recompense if a crucial trust is violated. Thus, state regulation provides an essential role in the proper functioning of a market-based economy by protecting all parties, even where differentials in wealth, power and access may exist.

The existence of law, and its enforcement, are crucial state monopolies. The role of the state in preserving the integrity of each is crucial to its own legitimacy. Thus, law and regulation are expressions of state authority and power. It also extends to such issues as contract law, property rights, and limits on the market. In capitalist economies, governments or states, can increase or reduce their role in the processes of market and political allocation. These shifts may occur as the result in changes in philosophy concerning the role of regulation, and the degree of state involvement, in the economy. This flexibility is a key characteristic of capitalist democracies. Conversely, in state-based regimes, this influence remains rather consistent and overbearing. A sense of nuance in economic policy decision-making is not allowed in such systems.

The earlier point regarding demand and supply can stand further discussion. The free market system allows for the efficient production and distribution of goods and services. As such, price signals play a crucial role in allocating scarce resources. Indeed, in such systems opportunity costs are an important factor in making decisions where scarce resources exist. The cost of opportunities forgone refers to the loss of benefits not chosen from a menu of better alternatives.

Another measure of efficiency is productivity. Productivity can be expressed as the ratio of output to input and is a measure of the mean efficiency of production. Production efficiency refers to the capacity of production to create viable income. Therefore, increasing productivity can also raise living standards. This occurs because increases in income, after adjusted for inflation, provides for an improvement in the capability of workers to afford a range of luxury goods and services. Moreover, improved productivity is crucial to the competiveness of any business or industry.

Capitalist systems also allow for the existence of micro-incentives. Incentives are the crucial underpinnings of economic production and competitiveness. The existence of the right mix of incentives can be a crucial spur to economic performance. There is a consensus among business leaders regarding the efficacy of individual rewards. In their view, a business organization is like a machine whose individual components can be manipulated to work better by means of certain kinds of inputs (Hope and Fraser). The idea that motivation of individual workers can be shifted by using types of extrinsic motivation such as financial incentives is at least a century old and dates back to early 20th century management theory.

However, there is some literature which finds problems with methods that rely on extrinsic motivation. This problem arises when the incentive is removed or is no longer perceived as worthwhile. A study of employee award programs (Gubler, Larkin and Pierce), found that employees only performed up to standard for the duration of the award program. The authors reported a decline of 1.4 percent in worker productivity as well by resentful workers who didn't need a reward to achieve promptness. Thus, there is evidence such extrinsic incentives can produce volatile and unreliable outcomes.

Extrinsic motivation can be contrasted with intrinsic motivation. With intrinsic motivation individual workers are motivated by means of factors internal to the individual. Intrinsic motivation means workers achieve a great deal of personal satisfaction from the job or task to be completed. Such individuals will perform a task at a high level of efficiency, regardless of the presence of incentives (Hope and Fraser). Thus, the right of mix of intrinsic and extrinsic incentives will also work best for public policy makers as well.

Efficiency and equity are each crucial issues. Efficiency involves allocation to the highest value uses as in the stock market. However, there are paradoxes. The most notable is the diamond-water paradox. This paradox exists because while water is more valuable than diamonds, the latter enjoys a significantly higher value on the market. There is also the consumer surplus. The consumer surplus occurs when the consumer is willing to pay a higher price for a good or service than what is its prevailing market value. However, when the consumer finds the product for sale at a price below the price that could have been paid he gains a benefit. This benefit is the difference between what was willing to pay, and the actual price paid. This allows the consumer to have surplus income that can be used to make other purchases.

Equity involves fairness to all individuals or stakeholders in a community. Equity can also involve a quest for policies that can produce an equality of opportunity. Such equality proposes to remove barriers to opportunity that may be founded on such artificial foundations as race, ethnicity, gender, sexual orientation, religion, age or disability. This policy is oppositional to a policy of disbursing benefits based on an individual's relationship to a person in authority or membership in a particular clique.

Such equality doesn't guarantee outcomes and can still lead to considerable inequality of results. To mitigate this, public policy may seek solutions that incorporate some equality of outcomes. An equality of outcomes exists when all individuals have the same or similar material circumstances. These kinds of outcomes are usually pursued by wealth redistribution policies, which use the taxing authority to shift income from wealthier to poorer members of society.

Works Cited

Buchanan, A. and Keohane, R.O. "The Legitimacy of Global Governance Institutions." Conference on the Normative and Empirical Evaluation of Global Governance, Princeton University, February 16-18, 2006. Print.

Daniels, Robert V. Russia: The Roots of Confrontation. Cambridge, MA: Harvard University Press, 1985. Print.

Gubler, Timothy, Ian Larkin, & Lamar Pierce. "The Dirty Laundry of Employee Award Programs: Evidence from the Field." Harvard Business School NOM Unit Working Paper, 13-069 (2013).

Hope, Jeremy and Fraser, Robin. "New Ways of Setting Rewards: The Beyond Budgeting Model." California Management Review, 45.4 (2003): 104. Web. http://www.business.aau.dk/~benth/foraar2010/foraar4/HOPE_THE_BEYOND_BUDGETING_MODEL.PDF.

Kelman, Steven. "Occupational Safety and Health Administration." The Politics of Regulation. Ed. James Q. Wilson. New York: Basic Books, 1980. Print.

Keohane, Robert O. After Hegemony: Cooperation and Discord in the Global Economy. Princeton, NJ: Princeton University Press, 2005. Print.