The readings this week provide a survey of the competing perspectives on the formation of public policy. Howlett and Ramesh in chapter 2 of “ Studying Public Policy: Policy Cycles and Policy Subsystems” divide the various approaches to public policy into deductive and inductive theories, and define six broad categories of public policy theory. While, Joseph Stiglitz in his lecture “ The Private Use of Public Interests: Incentives and Institutions” provides four instances in which government failure can exist and demonstrates “how misaligned incentives can induce government officials to take actions that are not, in any sense, in the interest of the public” Stiglitz, 1998, pg.5). In this short paper I shall highlight the key points made in the Howlett and Ramesh chapter and use their discussion of welfare economics as a bridge to the Stiglitz lecture that to me demonstrates the one-sided focus of welfare economics.
In presenting the different approaches to public policy, Howlett and Ramesh distinguish between deductive and inductive theories. They maintain that deductive theories are based on the application of general concepts or principles to specific phenomena while inductive theories are based on observation and testing of empirical phenomena (Howlett and Ramesh, 2003). Deductive theories include; Public Choice theory, Class Analysis and Transaction Cost Analysis while inductive theories include; Welfare Economics, Pluralism and Corporatism and Statism. What differentiates these theories from each is whether they focus their attention on the activities of individuals, groups or institutions (Howlett and Ramesh, 2003).
Public choice theory for instance, is based on rational choice theory and assumes “that political actors like economic ones, act rationally, that is, in a calculating fashion, to maximize their utility or satisfaction” Howlett and Remesh, 2003, ch.2, pg.22). The authors argue that this theory is based on an oversimplification of human psychology and behavior that does not reflect reality and therefore has poor predictive capacity. Class analysis is based on Marxist Social Theory and interprets public policies in capitalist societies as reflecting the interest of the capitalist class. The weakness of this approach is that it cannot be proven that public policies are enacted at the behest of capital and it fails to explain the enactment of social welfare policies that are opposed by capitalism. Transaction cost analysis argues that institutions exist to overcome impediments caused by information asymmetries. Government should therefore not interfere in transactions related to private goods and services rather it should enforce property rights and prevent criminal behavior from undermining these transactions.
Pluralism/Corporatism is based on the assumption that the political process is dominated by different interest groups which vary in terms of the financial and organizational resources they possess as well as their access to government. Critics of pluralism argue that this is an oversimplified unclear view of government based on misconceived notion of government responding to group pressure. Statism is another inductive theory described by Howlett and Ramesh in which the state is viewed as the key agent in a political process that is influenced by other organized social actors. Critics of Statism argue that it fails to account for the existence of civil liberties or why states cannot always enforce there will. Welfare economics is based on the notion that in the presence of market failure political institutions can act to supplement or replace the market. The main criticism of welfare economics is that these theorist fail to recognize that policy decisions are ‘political’ in the truest sense of the word.
The main issue that emerges this week for me is the seemingly one-side notion of public policy presented by most welfare theorists. Welfare economics teaches that government intervention is needed when market failure exists. Howlett and Ramesh list these market failures as the existence of; natural monopoly, imperfect information, externalities, tragedy of the commons and destructive competition (Howlett and Remesh, 2003). Several theorists however, believe that market failure is but one half of the equation for effective public policy. These theorists agree that policy analysts should be aware of and indeed anticipate the potential failure of government to properly implement its decisions (Carly, 1980, Minogue, 1983 and Hogwood and Gun, 1984). Stiglitz (1998) sites four reasons why government interventions ‘pareto improvements’ fail including: the inability of government to make commitments, the formation of coalitions and bargaining, destructive competition in the political arena, and uncertainty about the consequences of change (imperfect information).
The examples discussed by Siglitz demonstrate that some of the same failures that affect the market also plague the government in its implementation of policies to enhance social welfare. Yet in the field of welfare economics there are appears to be an obsession with market failure and a neglect of the potential failure of governments in enacting policies. A fallacy as efficiency of public policy depends on the analyst’s ability to both recognize market failure and anticipate government failure.
References
Howlett and Ramesh, Chapter 2: “Understanding Public Policy: Theoretical Approaches”, 2003
Stiglitz, Joseph, “The Private Uses of Public Interests: Incentives and Institutions”, Journal of Economic Perspectives, 12(2), 1998.
In presenting the different approaches to public policy, Howlett and Ramesh distinguish between deductive and inductive theories. They maintain that deductive theories are based on the application of general concepts or principles to specific phenomena while inductive theories are based on observation and testing of empirical phenomena (Howlett and Ramesh, 2003). Deductive theories include; Public Choice theory, Class Analysis and Transaction Cost Analysis while inductive theories include; Welfare Economics, Pluralism and Corporatism and Statism. What differentiates these theories from each is whether they focus their attention on the activities of individuals, groups or institutions (Howlett and Ramesh, 2003).
Public choice theory for instance, is based on rational choice theory and assumes “that political actors like economic ones, act rationally, that is, in a calculating fashion, to maximize their utility or satisfaction” Howlett and Remesh, 2003, ch.2, pg.22). The authors argue that this theory is based on an oversimplification of human psychology and behavior that does not reflect reality and therefore has poor predictive capacity. Class analysis is based on Marxist Social Theory and interprets public policies in capitalist societies as reflecting the interest of the capitalist class. The weakness of this approach is that it cannot be proven that public policies are enacted at the behest of capital and it fails to explain the enactment of social welfare policies that are opposed by capitalism. Transaction cost analysis argues that institutions exist to overcome impediments caused by information asymmetries. Government should therefore not interfere in transactions related to private goods and services rather it should enforce property rights and prevent criminal behavior from undermining these transactions.
Pluralism/Corporatism is based on the assumption that the political process is dominated by different interest groups which vary in terms of the financial and organizational resources they possess as well as their access to government. Critics of pluralism argue that this is an oversimplified unclear view of government based on misconceived notion of government responding to group pressure. Statism is another inductive theory described by Howlett and Ramesh in which the state is viewed as the key agent in a political process that is influenced by other organized social actors. Critics of Statism argue that it fails to account for the existence of civil liberties or why states cannot always enforce there will. Welfare economics is based on the notion that in the presence of market failure political institutions can act to supplement or replace the market. The main criticism of welfare economics is that these theorist fail to recognize that policy decisions are ‘political’ in the truest sense of the word.
The main issue that emerges this week for me is the seemingly one-side notion of public policy presented by most welfare theorists. Welfare economics teaches that government intervention is needed when market failure exists. Howlett and Ramesh list these market failures as the existence of; natural monopoly, imperfect information, externalities, tragedy of the commons and destructive competition (Howlett and Remesh, 2003). Several theorists however, believe that market failure is but one half of the equation for effective public policy. These theorists agree that policy analysts should be aware of and indeed anticipate the potential failure of government to properly implement its decisions (Carly, 1980, Minogue, 1983 and Hogwood and Gun, 1984). Stiglitz (1998) sites four reasons why government interventions ‘pareto improvements’ fail including: the inability of government to make commitments, the formation of coalitions and bargaining, destructive competition in the political arena, and uncertainty about the consequences of change (imperfect information).
The examples discussed by Siglitz demonstrate that some of the same failures that affect the market also plague the government in its implementation of policies to enhance social welfare. Yet in the field of welfare economics there are appears to be an obsession with market failure and a neglect of the potential failure of governments in enacting policies. A fallacy as efficiency of public policy depends on the analyst’s ability to both recognize market failure and anticipate government failure.
References
Howlett and Ramesh, Chapter 2: “Understanding Public Policy: Theoretical Approaches”, 2003
Stiglitz, Joseph, “The Private Uses of Public Interests: Incentives and Institutions”, Journal of Economic Perspectives, 12(2), 1998.
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