States and Markets: A Primer in Political Economy

by Adam Przeworski

The purpose of this text is to introduce concepts for studying relationships between states and markets. The economy and the state are thus analyzed as networks of relationships between principals and agents, each occupying a particular position in the institutional structure. The book then analyzes systematically the effect of the organization of the state on the functioning of the economy. It isolates the conditions that trigger government's positive or negative responses to the economy.

Genres: Economics, Politics

236 pages, Hardcover

First published August 25, 2003

About the author

Adam Przeworski is the Carroll and Milton Professor of Politics and (by courtesy) Economics at New York University. Previously he taught at the University of Chicago, where he was the Martin A. Ryerson Distinguished Service Professor, and held visiting appointments in India, Chile, France, Germany, Spain, and Switzerland. A member of the American Academy of Arts and Sciences since 1991, he is the recipient of the 1985 Socialist Review Book Award, the 1998 Gregory M. Luebbert Article Award, the 2001 Woodrow Wilson Prize, the 2010 Lawrence Longley Award, the 2010 Johan Skytte Prize, the 2018 Sakip Sabanci Award, and the 2018 Juan Linz Prize.. He recently published Why Bother with Elections? (London: Polity Press 2018).

Reviews

[Lee · Rating 5 out of 5]

przewowski one of my favorite thinkers, and this is his opinionated introduction to the methods used by modern political economists. notes and quotes below:

- markets are exchanges between individuals with some initial endowments; they can only take place only under the auspices of the enforcing authority
- market equilibrium reached when trades cease, no one can be made better off without someone being made worse off (pareto optimal)
- pareto optimality is always relative to initial endowments, which sidesteps some of the deeper justice questions; pareto optimality reach only if transaction costs are zero and everyone has perfect information, but under those conditions centralized planning gets same result
- now turn analysis toward enforcing authority (eg, a cop) and ask why does he not just grab everyone's initial endowment for himself? this question widens analysis to include full political-economic equilibrium
- we focus on democratic state with markets, and ask how its enforcement authorities (eg, regulators) will behave
- going back to market, there are a variety of potential market failures: increasing returns to scale lead to monopoly and deadweight loss to society in static analysis; in dynamic analysis entrepreneurial rents only accrue if there is some monopoly; nonrival consumption of goods leads to undersupply by market; positive/negative externalities lead to under/over supply as well
- market failures much discussed in 1950s, and by 1970s corresponding failures of governance as well
- no market encompasses all possible goods, so all markets are said to be incomplete; while they are incomplete prices are not sufficient statistics summarizing forsaken opportunities in a global sense, only locally given the fact of missing markets (eg, in externalities or futures)
- imperfect information means that some individuals learn from seeing others trade, generating keynes-type beauty contest phenomena: multiple rather than unique equilibria result
- asymmetric information an issue, else many trades don't make sense: eg, why consult a doctor? but with asymmetric information comes principal-agent problems
- different contract types between landlord and peasant illustrate how principal-agent problems under imperfect symmetric information (nature moves and both observe) allocate both consumption and risk differently; wage/tenancy/sharecropping make landlord/peasant/both bear risk; optimal choice of contract depends on risk posture of principal and agent
- asymmetric information can be due to hidden action of agent (leading to moral hazard) or hidden characteristics of agent (leading to adverse selection); principal must tradeoff efficiency and incentives, paying rents (income above marginal product) to induce effort from efficient agent and separate out inefficient types
- to say anything interesting about what the public officials will do we need to assume something about their objectives: are they public-spirited, self-interested, or what?
- under predatory state model, public official extracts rents from society via theft or usufruct--ie, either appropriating fiscal residuum (patrimonial state) or merely enjoying perks of public office in excess of their next best use (bureaucratic state)
- patrimonial state will undersupply public inputs to production (shitty roads); bureaucratic state will oversupply public inputs to production (grand boulevards)
- accountability mechanisms like democratic elections can constrain both if with model official as maximizing rents/perquisites over time
- elaborating the model, we can have elected politicos (principals) who set policy and then delegate the implementation to unelected bureaucrats (agents), and in turn the bureaucrats regulate market actors; "One of the most puzzling, and poorly understood questions, is 'Why do people who have guns obey people who do not have them?'"
- "To solve for such equilibria, we must work backward. We must first ask about the effects of regulation on individual actions, then about the effects of decisions on the actions of those who implement them, and finally about the collective decisions. For every implementation, there exists a course of action that is best for private agents given their constraints. The bureaucrats know this (perhaps imperfectly or incompletely), so that they can choose an implementation that is best for them given private agents' reactions. The decision makers know this, so that they can choose the decision that gets them the best implementation. Such asymmetric Nash equilibria are called Stackelberg equilibria..."
- again, it turns out bureaucrats will face the typical tradeoff between principals and agents: either pay the agents rents or accept socially worse outcome -- eg, cost-plus contract or fixed priced contract. "It turns out that the regulator will want the efficient firm to exert the efficient level of effort and will allow the inefficient firm to shirk. This result, sometimes called, 'efficiency at the top,' is generic for this kind of problem"
- paradox of regulation: political systems that can easily pass legislation cannot credibly commit to any course of action, undermining their ability to regulate
- one endogenous regulation model is regulatory capture: powerful interests extract rents from powerless. but unclear why voters would permit it: needs to postulate rational ignorance or active obfuscation by state
- another endogenous regulation mode is virginia school, where government distorts markets and awards rents to regulated firms; author casts doubt that these are true rents or would necessarily distort economy, as government could play vying factions off each other and choose non-distortionary policy
- empirically hard to tell whether money buys policy or merely follows it
- oversight of bureaucracy is helped by fact that regulatory losers tattle to lawmakers
- oversight of bureaucracy can rely on incentives (ex post, managerial control) or conformity with rules (ex ante, bureaucratic control), also "fire alarm" of information provided by affected parties
- political control of bureaucracy of ambiguous value: if guided by partisan interests devolves into clientelism
- partisan motivation does not imply socially suboptimal
- checks and balances another institutional fix: multipartisan system (doesnt work well, as bureaucracy can play partisans off of each other to their benefit via "implementation coalitions") or contramajoritarian (oversight of the elected by non-elected, courts and independent agencies -- dubious democratic legitimacy)
- kind of remarkable that insulated bureaucracies work to the extent they do, and unclear what alternatives for oversight would be
- "Voters have only one instrument - the vote - to reach two goals: retrospectively sanction the incumbent and prospectively choose a better candidate. If they care about both, they must trade these goals against one another."
- on politics of economic growth: "Whereas everyone wants to consume, each wants all others to invest. Because an individual who consumes at one moment also wants to consume in the future, when the possibilities of one's future consumption depend on the stock of productive inputs accumulated by others, at each time each individual wants everyone else to invest as much as possible."
- median voter model founders if multiple policy dimensions not easily collapsed into unidimensional ideology: "The median voter model is simple and analytically tractable but wildly unrealistic and limited in scope. In turn, multidimensional models suffer from multiple equilibria and are ... analytically intractable"
- one reason egalitarian redistribution of income may not follow from median voter model: government does little pure income redistribution, and variety of public services lead to multiple orderings of voters, so no single median voter
- still, remarkable that taxes on rich are not higher. various theories: aspirant rich etc.
- social insurance emerged in sweden for militaristic reasons: "healthy boys to fight in wars"
- private insurance faces asymmetric information problem, risk pooling results; easy state fix here--compel insurance
- an endogenous models of public insurance: as smaller fraction of polity in dangerous jobs, voter demand for public insurance falls

[Aaron Crofut · Rating 1 out of 5]

One of the funnier moments of grad school was the seminar in which we "discussed" this book. Seven other students, the professor, and myself spent about two minutes trying to even state what the book was about before the professor admitted it was mumbo jumbo and we adjourned for the day. Kind of like having the Golden Plates of Joseph Smith but without that funny little interpreting stone. Perhaps the author had some important point to make in this book, but I will never know.

[John · Rating 4 out of 5]

very usedul primer for teaching.