Political versus Economic Decision

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While economic principles are important, economic actions take place within a framework of laws and government policies that are shaped by political principles, which may or may not be consistent with economic principles. The interaction of political and economic incentives makes the study of economic policy issues more challenging—and more revealing—than a study of either economic or political principles in isolation.

People tend to respond to the incentives and constraints confronting them, whether they are in the marketplace or in politics. However, those incentives and constraints are very different in these different situations, so it can hardly be surprising that voters tend to behave differently than consumers, and politicians tend to behave differently than sellers of goods and services.

Voters

Economic decisions and political decisions are made in different ways, even when the same person makes both kinds of decisions, for example as a consumer and as a voter. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another—or perhaps even one car rather than another. The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions vary correspondingly. It has been said of many laws and policies that “the devil is in the details.” But, if most voters are not likely to look into those details, many devilish results can be expected from legislation and policies that look good at first glance, when packaged with inspiring rhetoric.

Politics and the market are both ways of getting some people to respond to other people’s desires. But people whose professional careers are in politics operate under different incentives and constraints from those whose careers are in the economy. Consumers choosing which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office. However, the two processes are profoundly different. Not only do individuals invest very different amounts of time and thought in making economic decisions versus political decisions, those decisions are inherently different in themselves. Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc., to purchase.

In short, political decisions tend to be categorical, while economic decisions tend to be incremental. Voting is a package deal: You may agree with candidate A on economic policy, candidate B on foreign policy and candidate C on environmental issues but, in the end, when you enter the voting booth you have to vote for one candidate’s whole package of policies on the economy, foreign policy, and the environment. Moreover, you don’t get to change your mind until the next election. It is not like buying one brand of bread today and a different brand tomorrow if you change your mind.

Incremental decisions can be more fine-tuned than deciding which candidate’s whole package of principles and practices comes closest to meeting your own desires. Incremental decision-making also means that not every increment of even very desirable things is necessarily desirable, given that there are other things that the money could be spent on, after having acquired a given amount of a particular good or service. For example, although it might be worthwhile spending considerable money to live in a nice home, buying a second home in the country may or may not be worth spending money that could be used instead to send a child to college or to buy an annuity for later retirement years.

One consequence of incremental decision-making is that additional increments of many desirable things remain unpurchased because they are almost—but not quite—worth the sacrifices required to get them. From a political standpoint, this means that there are always numerous desirable things that government officials can offer to provide to voters who want them—either free of charge or at reduced, government-subsidized prices—even when these voters do not want these increments enough to sacrifice their own money to pay for them. Ultimately, of course, the public can end up paying as taxpayers for increments that they would not have chosen to pay for as consumers. The real winners in this process are the politicians whose apparent generosity and compassion gain them political support.

No political message has proven to be more welcome, in countries around the world, in both democratic and undemocratic nations, and among peoples of every race and culture, than the message that your problems are not your fault, but the fault of others—and it is they who must change, not you. Moreover, it is they who must pay the consequences if they do not change, but not you. Not only particular political candidates but, in some countries, whole revolutionary movements, have risen to power on the wings of that message.

Politicians

While politicians can be expected to pay far more attention to political decisions than the average voter will, the nature of that attention is also likely to be different. Elected officials’ top priority is usually getting reelected, and their time horizon seldom extends beyond the next election. Laws and policies that will produce politically beneficial effects before the next election are usually preferred to policies that will produce even better results some time after the next election. Indeed, policies that will produce good results before the next election may be preferred even if they can be expected to produce bad results afterwards.

Thinking beyond the immediate consequences of a law or policy is a task which neither voters nor politicians have much incentive to undertake. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages—and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to short-run public perceptions.

The very way that issues are conceived tends to be different in politics from the way they are conceived in economics. Political thinking tends to conceive of policies, institutions, or programs in terms of their hoped-for results—“drug prevention” programs, “gun control” laws, “environmental protection” policies, “public interest” law firms, “profit-making” businesses, and so forth. But for purposes of economic analysis, what matters is not what goals are being sought but what incentives and constraints are being created in pursuit of those goals.

We know, for example, that many—if not most—“profit-making” enterprises do not in fact make profits, as shown by the high percentage of new businesses that fail and go out of business within a few years after getting started. Similarly, it is an open question whether drug prevention programs actually prevent or even reduce drug usage, whether public interest law firms actually benefit the public, or whether gun control laws actually control guns. But such outcomes may be very surprising to people who think in terms of political rhetoric focussed on desirable goals—and who do not think beyond stage one.

The point here is not simply that various policies may fail to achieve their purposes. The more fundamental point is that we need to know the actual characteristics of the processes set in motion—and the incentives and constraints inherent in such characteristics—rather than judging these processes by their goals. Many of the much discussed “unintended consequences” of policies and programs would have been foreseeable from the outset if these processes had been analyzed in terms of the incentives and constraints they created, instead of in terms of the desirability of the goals they proclaimed. Once we start thinking in terms of the chain of events set in motion by particular policies—and following the chain of events beyond stage one—the world begins to look very different.

In trying to understand the effect of politics on economics, we need to consider not only officials’ responses to the various pressures they receive from different sources, but also the way that the media and the voting public see economic issues. Both the media and the voters are prone to what might be called one-stage thinking.