Assumptions of the Economic Model

• A.K.A. Rational choice, public choice, political economy

• Individuals are the unit of analysis• Individuals are self-interested• Utility maximizing• Intelligent and creative• Respond to changing information (not just

creatures of habit)

The Efficiency Benchmark: The Competitive Market

• Self-motivated behaviors of economic actors in an idealized economy create an invisible hand• Invisible hand: Leads to EFFICIENT patterns of

production and consumption (an equilibrium)• Several assumptions of an idealized competitive

economy: – RC assumptions of human behavior– large # of producers and consumers– Exit and Entry barriers are small– Free flow of information

The Efficiency Benchmark: The Competitive Economy

• General Equilibrium Model, an idealized competitive economy: – “finds the prices of factor inputs and goods that

clear all markets in the sense that the quantity demanded exactly equals the quantity supplied”

– Rational consumers respond to supply (prices)– Rational producers respond to demands (prices)

The Invisible Hand & the Demand and Supply of Goods

• Marginal Utility – If the price is below the marginal utility of the

consumer the consumer will continue to purchase units of good

– If the price is above the marginal utility of producing a good, the producer will continue producing the good

Efficiency and the Idealized Competitive Market

• Caveats: Models and Reality– limitations to the general equilibrium model: • A perpetually incomplete model (simple/parsimonious)• Its necessary assumptions are “often violated in the

‘real world’” • Gupta – Market failure

– Lack of competition, information asymmetries, externalities

• Stone – the market is not a good model of society

Efficiency and the Idealized Competitive Analysis

• Conclusion– In spite of limitations of the necessary

assumptions, analysis through the use of the general equilibrium model can be very useful for “helping policy analysts get started in understanding the complexity of the world in which they work” (Weimar & Vining, p. 69)

– Idealized competitive economy is useful conceptual framework for thinking about efficiency.

Stone’s model of politics

• “A theory of policy politics must start with a model of political society, that is, a model of the simplest version of society that retains the essential elements of politics.”

• In searching for the elements of politics, it is helpful to use the market model as a foil because of its predominance in contemporary policy discussions. The contrast between the models of political and market society will illuminate the ways the market model grossly distorts political life.

• Because politics and policy can only happen in communities, community must be the starting point of the polis. Public policy is about communities trying to achieve something as a community. Unlike the market, which starts with individuals and assumes no goals, preferences, or intentions other than those held by individuals, a model of the polis must assume both collective will and collective effort.

• Membership in a community defines social and economic rights as well as political rights.

Stone and the Public Interest

• Essentially within a market the empty box of public interest is filled as an afterthought with the side effects of other activities. In the polis, by contrast, people fill the box intentionally, with forethought, planning, and conscious effort.

Stone and Problems

• In market theory, common problems are thought to be the exception rather than the rule. In the polis, by contrast, common problems are everything. Most significant policy problems are common problems.

Stone, Influence, Cooperation, Loyalty

• Behavior can be influence by others (individual vs. group)

• Cooperation is often looked down upon in model of the market (collusion)

• Political alliances bind people over time. In the market, people are “buyers” and “sellers”.

Stone, Passion and Power

• Passion is a unique resource, it feeds upon itself, can spread

• Power is the primary defining characteristic of a political society and is derived from all the other elements. It is a phenomenon of communities. Its purpose is always to subordinate individual self-interest to other interests-sometimes to other individual or group interests, sometimes to the public interest.

• Any model of society must specify its source of energy, the force that drive change. In the market model, change is driven by exchange, which is in turn motivated by self-interest.

• In the polis, change occurs through the interaction of mutually defining ideas and alliances. Ideas and passions about politics shape political alliances, and strategic considerations of building and maintaining alliances in turn shape the ideas people espouse and seek to implement.

Gupta – Government Failure• Inability to define social welfare (problems)• Limits of Democracy (paradox of voting)• Inability to estimate marginal costs/benefits• Political, legal, cultural constraints• Institutional constraints• Knowledge constraints• Analytic constraints• Timing of policies