Conclusion

Conclusion
Since the late 1980s there has been a major revival of political economy
utilizing the tools of modern economic analysis. A common theme running
throughout this ‘new political economy’ is the need to integrate the political
process into mainstream economics. In the mid- to late 1970s the seminal
contribution of Nordhaus (1975) reawakened interest in the idea of political
business cycles, an idea which can be traced back to the work of Schumpeter
and Kalecki. However, for a period following the rational expectations revolution,
interest in politico-economic models lost momentum. The theoretical
shortcomings and inconclusive empirical results of the non-rational opportunistic
and partisan models led to a temporary demise of this line of research.
On the empirical front Alt and Chrystal (1983) declared that ‘no one could
read the political business cycle literature without being struck by the lack of
supporting evidence’. While interest in the politico-economic approach ebbed,
new classical theorists were busy following through the policy implications
of rational expectations market-clearing models. The emphasis in these models
on policy ineffectiveness and rationality was initially interpreted as being
inconsistent with politically motivated policy manipulations. Nevertheless,
new rational politico-economic models have been successfully developed
which incorporate features such as asymmetric/imperfect information, noncontingent
nominal wage contracts and uncertainty over election results. The
policy-making process does not consist of a benevolent dictator taking advice
from economists in order to maximize social welfare; rather it consists of a
complex game played out by various competing groups whose interests do
not coincide.
While the importance given to political influences in causing aggregate
instability in industrial democracies remains highly controversial, few commentators
would challenge the view that politicians, faced with a regular election
cycle, will tend to develop short time horizons. The desire to be re-elected or
regain office may lead politicians to pursue or promise an economic policy
package which creates aggregate economic instability. If this line of argument
is accepted, then it follows that what is needed is an institutional framework
which creates an environment conducive to the more frequent implementation
of sustainable economic policies geared to longer-term objectives. The dilemma
faced in industrial democracies is how to constrain the over-zealous
short-term discretionary actions of politicians through institutional reform without
threatening the basic principles of democratic government. Trying to find a
solution to this dilemma will ensure that the relationship between economic
and electoral cycles will remain a rich and fertile area of research for
macroeconomists.
Not only have economists enhanced our understanding of aggregate instability
by adding a political dimension to their models; they have also explored
the deeper determinants of growth miracles and disasters. In doing so they
have highlighted the important constraint on economic growth imposed by
‘bad’ institutions and policies. Recent research has explored the interaction of
politics and economics, yielding new insights into the political economy of
economic growth and development, and the impact of international economic
integration on the size of nations. These are certainly areas where much more
research is required (see Chapter 11).
Just as economic forces cannot be ignored by political scientists, the message
coming from the research discussed in this chapter is that economists
interested in positive models of economic policy ‘cannot and should not
ignore the political arena’ (Alesina, 1988).