Explain the Paradox of Electoral Economics

free essayThe economic state of the Europe is said to have grown rapidly since the end of World War II. Some factors contributed to this bloom in the economy. However, any talk about the sudden sprouting of the European economy cannot be complete without mentioning of the paradox of electoral economics that came in handy during this period.

To begin with, it is essential to identify relevant concepts about electoral economics. These factors are the market failure and government failure. Market failure can take many forms. The inability to supply public goods and services such as public defense, education, and health care are one form of the market failure. It can also take the form of undersupply of public goods and services for electoral reasons such as voters resisting paying taxes, land use charges, and tax increases. Due to short-term boost in private and public sector employment and instances of externalities such as political and environmental pollution, the oversupply of public goods and services is also the major element of market failure (“Electoral Economics 2016”).

Another core concept of electoral economics is the government failure. Such aspects as principal-agency problems, evasion, underpricing, overpricing, and unintended consequences are underlying this notion. Principal-agency problems refer to the issues associated with the government being the principal and the firms being the agents. After the World War II, the European governments invested heavily in state-owned firms in order to rebuild the economy by increasing capitalization and also creating employment for self-sustainability of their citizens. However, this strategy was not very successful due to the misallocation of resources to inefficient producers of coal, steel, and iron. On the other hand, evasion refers to the state where revenue collection was inhibited due to the existence of black markets and banking laws that promoted tax evasion (Eichengreen).

The paradox of democratic exuberance is one of those related to the rise of the European economy. It suggests that transition from non-democratic support to democratic one requires robust mass support. However, the latter destabilizes democracy by generating mass opposition to it. In simple terms, it can be said that democracy seems self-destabilizing, hence making it impossible to achieve. Some democracies are said to be stabilized while others are believed to be destabilized. To reach an equilibrium state (a stable democracy), mass elections should be conducted to replace incumbents with challengers without destabilizations like violence, civil wars, or military coups (“Electoral Economics 2016”).

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After the World War II, the Europe experienced rapid growth in its economy with a subsequent deceleration. This could be attributed to the institutions of coordinated capitalism that had been adopted to facilitate the growth of their economy. The paradox in the economic growth is the fact that the same institutions promoting a bloom in economy eventually led to the decelerated and eventual collapse of the economies within some countries in Europe (Eichengreen).

The biggest factor that facilitated the rise to economic power in Europe was the utilization of the untapped technologies during the period between the First and the Second World Wars. Most of these technologies were invented in the United States; hence, it can be said that they were far much ahead in terms of economic and technological advancement as compared to Europe. Some of these new technologies included improvement of the combustion engine and spread of the assembly line methods of production.

By emulating the American knowledge of mass production and personnel management practices, the Europe managed to fill the gap of economic differences. This was referred to as convergence. It is also possible to say that the application of untapped technologies for improving the European economy was called “catch-up” since these technologies were already in use in some other regions and had brought about massive economic improvements (“Electoral Economics 2016”).

“Catch-up” for the Europeans entailed capital formation, reallocation of labor, and efficient utilization of the factors of production. It was facilitated by individual trade unions, cohesive employers’ associations, and growth-minded governments that worked together to mobilize finance, savings, investments and stabilize wages consistently with full employment. As a result, independent industries were put up by the efforts of government planning agencies, state holding companies, and industrial conglomerates. It can thus be said that convergence and “catch-up” were successful because of the conformance to the Western European economy and technological advancements at the time.

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It was also paradoxical that the policies that were electorally popular had significant economic implications. For instance, the economy of Eastern Europe was a capitalistic one that was planned by bureaucrats partly to help favor their self-interests. They decided how many factories to build, what foreign technologies to acquire (whether through licensing or industrial espionage), and they also instructed banks to mobilize necessary resources. It was later discovered that these policies became the major hindrance to change. They made the economy inflexible; hence, any changes in the market, be it the technological advancements or changes in market trends, could not be assimilated into the economy. This was unlike in Western Europe, where the economy was mostly determined by market forces, and incorporation of new technologies was not as challenging as in Eastern Europe. Several factors could be attributed to the success of Western Europe economically. These are security of private property rights, reliance on the price mechanism to determine market prices, and formal and informal norms embodied in law to coordinate the actions of social partners (“Electoral Economics 2016”).

Capitalistic economies were not purely the reasons behind the economic failure in Europe after the 1970s. The economic and social institutions that were meant to help harness the power of catch up also became a source of European economic failure. The opportunities of “catch-up” were exhausted; thus, new ways to improve the economy had to be sought. However, this proved to be challenging since some of the policies imposed by these institutions were a hindrance to change due to their inflexibility.

To facilitate a stimulated increase in economy, both Western and Eastern Europe had to rely on increasing efficiency and promoting internally generated innovations. This was referred to shift from extensive growth-stimulated strategies to the intensive ones. Partly, it was hard to actualize this change since the institutions in place were tailored to meeting the requirements of the extensive growth. For instance, bank-based financial institutions were only effective at mobilizing resources using known technologies. Moreover, state holding companies became sources of bailing out failing companies and propping up declining industries rather than venturing into their initial course of resource allocation (Eichengreen).

Besides, the declining growth rate in Europe could also be attributed to the global forces that were beyond the control. For example, there were tsunamis hitting the continents periodically and also disease epidemics. Despite these factors, the decline in the economy was more pronounced in Europe than in America since the inherited institutions could not adapt to the changes in circumstances and rising market trends (“Electoral Economics 2016”).

The electoral economics paradox is that the short-term electoral benefits combined with allocated power of the modern state create robust incentives for elected governments to pursue politically efficient but economically inefficient policies.

This is a critical situation where the elected formulate policies that are likely to benefit their self-interests rather than the interests of the individuals that elected them into power. Therefore, some of these policies end up creating monopolies and oligopolies that do not promote fair competition in the market. The politicians will tend to use high regulatory policies such as the use of tariffs and industrial regulations. The economy in such a situation will stagnate due to the lack of competition to counter the existing product- and service-producing firms. Besides, such policies end up reducing the consumer sovereignty and ultimate low-quality production and service delivery. The long-term effect of this condition of the declining economic situation of a state as a result of misallocation of resources is economic stagnation. These events can be proven by the decline of the Eastern European economy, where resources were allocated to inefficient sectors of the economy such as the coal and iron industries. It is later realized that such sectors were not entirely economically productive as they did not focus on the core issues facing the economy at that time (“Electoral Economics 2016”).

Understanding the concept of electoral economics helps determine whether the allocation of resources by command or by the government is favorable compared to the allocation of them by market forces. Whereas allocation by command has its advantages, it is insignificant when compared to the benefits of market allocation of resources. Moreover, government allocation has many shortcomings compared to market allocation. The most significant one of these shortcomings is that it may lead to market failure which is sometimes resolved using non-governmental solutions such as volunteerism and non-state collective action.

The reason for the justification of government allocation is that it inhibits situations of incomplete markets. A complete market is a market whereby goods and services are available at the prices that consumers are willing to pay. For electoral reasons, the government may undersupply public goods and services such as health care and educational facilities. These reasons can range from voters resisting tax increase imposed on them by refusing to pay for increased land user charges (Eichengreen).

Eastern Europe bears witness to the impacts of the government allocation of resources. In the economies there, the bureaucrats or the government made all decisions and policies regarding resource allocation. The result of their actions was that inefficient decisions were made regarding resource allocation. They did not put into consideration the market situation before allocating resources. Hence, the sectors of the economy that required the most attention were not given the priority. Moreover, they made the policies too rigid such that it proved difficult to alter them for collaboration with the changing market trends. The result of this outcome was a collapse of the Eastern European economy.

These events can be explained clearly using the diamond paradox. It helps raise concern over the reason as to why water, an important aspect of human life, is of little financial essence when compare to diamond, a small shiny stone. Ironically, assuming that the sources of water have been fully depleted, the diamonds would be of no help no matter how many of them an individual may have accumulated. This paradox helps bring out the inefficient decision making that the bureaucrats did in the Eastern Europe when they put more of their resources on the non-core sectors of the economy, hence collapsing it. It can also be used to explain the circumstance where politicians opt for policies with short-term benefits rather than policies that would sustain the economy in the long run without creating monopolies or oligopolies within (“Electoral Economics 2016”).

Democracy is said to be the driving force towards economic prosperity, consumer sovereignty, and peaceful coexistence of the people. However, setting up and managing democracy is costly because there are some costs that may be associated with instilling it. For instance, there are transitional costs which may be necessary for them, for example, the costs of conducting elections and remunerating the elected and appointed individuals. The instances of potential instability may also occur since not all parties would be willing to accept the transition.

Another costs associated with democracy are problematics. These are characteristics of representative democracy that may prevent the translation of majority preferences to majority policies. They consist of perverse incentives, that are the incentives that create outcomes opposing the intended outcomes, intractable cleavages, and the problems of institutional design (a state where there are no perfect rules in a system). The major problematics of democracy can be classified into:

  • Free-ride or collective action problems

It is also referred to as the prisoner’s dilemma logic. It suggests that, given the lone power of a vote in any representative democracy, there is a probability that one vote will make or break ties. It also goes ahead to state that voters have a perverse incentive to free-ride at the votes of the general electorate. The institutional solution to this problem is the formation of political parties even though they are costly in terms of time, energy, and resources. It can also be solved by parties diverging from the electorate (“Electoral Economics 2016”).

  • Principal-agency costs

It suggests that the voters are the principals that chose official holders of power or agents within democracy. However, there may be agency loss when the agents’ preference and incentives diverge from the voter’s preference. For instance, the voters’ preference is x>y>z, party A’s preference is y>x>z, and party B’s preference is z; then voters choose A and diverts choose Y. In other circumstances, the diversion can also occur in bureaucracies.

  • Costs of monitoring interest groups

Activists form the interest groups and are mostly involved in checking to ensure that the elected meet the interests of the public. However, this may be costly since at times it may lead to unrest when the activists feel that their cries for action are unnoticed.

  • The balance of minority veto power and majority preference

It suggests that democracies must represent both majority preferences and protect minorities against majority predation or instability. However, strong minority protections such as the constitution may block any majority policies (“Electoral Economics 2016”).

  • Institutional distortion or rigidity

It suggests that no voting rule can represent interests without distortion of outcomes being overrepresentation or underrepresentation. For example, the absolute majority rules mean that any outcome are more costly and any attempt to exactly map votes and outcomes is costly or may fail.

  • Deadlock

It suggests that any representative democracy can deadlock. This simply refers to no policy outcomes. To overcome deadlock, the bargaining is costly, but it does not still guarantee that the outcome will be positive (“Electoral Economics 2016”).

In conclusion, it is evident from the text that the achievement of economic prosperity within democracy must strive in its setup, be it a country or an economy. Also, governments should always consider those sectors of the economy that are likely to benefit the country in the long run rather than dwelling on those that bring quick benefits at the present and jeopardize the economy afterward. It is also important for the elected individuals to always put the interests of the state before their own self-interests.