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Dr. Yasam Ayavefe explains the link between politics, economics and the competition for authority

The new political economy, a recognized sub-discipline of economics, actually has several roots in economics and political science.

Dr. Yasam Ayavefe
Image courtesy Dr. Yasam Ayavefe
Image courtesy Dr. Yasam Ayavefe

This article is Sponsored Content written by Dr. Yasam Ayavefe

The new political economy, a recognized sub-discipline of economics, actually has several roots in economics and political science. The most recent approach to the origin of the new political economy is macroeconomic policy theory, notably with the founding work of 1995 Nobel Prize winner Robert Lucas.

Lucas was one of the first to consistently and rigorously integrate special agents’ expectations into economic analysis. Indeed, before Lucas, agents were assumed to make rational choices. (maximizing profit, utility, etc.) But they had expectations of a static or adaptive nature.

In other words, if the authorities responsible for economic policy decide on a change in policy orientation, this change is ignored by the agents. In short, agents make rational choices, but they also make irrational expectations, which poses an internal consistency problem in economic analysis.

According to Lucas, agents have rational expectations: They use all available information to establish their expectations. In particular, they take into account the announcements of officials responsible for economic policy. Under these conditions, not all economic policies that will be optimal are necessarily viable.

Policies that only after a certain period of time do not encourage the authorities to abandon are credible or temporarily consistent. Therefore, agents with rational expectations take into account the incentives of political authorities in their behavior.

This naturally led economists to choose more precisely the determinants of the behavior of political authorities. In this perspective, many studies have been carried out especially on the reliability of economic policies.

The roots of the new political economy are also rooted in the tradition of Public Choice. Researchers on this topic were among the first to insist on the problem of information asymmetry between government and voters.

They also played a leading role, putting pressure groups and their role in choosing economic policies at the heart of economic analysis. Finally, they clarified the fundamental distinction between the “constitution” and the economic policy decisions taken under this constitution.

Therefore, early studies of the new political economy used this distinction. The aim was specifically to examine reliability issues and the potential benefits of adhering to a set of rules and organizations.

This line of thought was developed specifically for monetary and fiscal macroeconomic policies, especially in the 1990s.

The third tradition behind the new political economy is social choice theory. It is the impossibility theorem that says it is impossible to construct a theory of collective choices from individual preferences. There are quite specific and disoriented researches in this area.

However, from the 1980s, and more so in the United States, formal political economy science has developed in political science departments. This school uses the tools of rational choice theory and non-cooperative game theory to model and study the collective choices implied by very specific political institutions. (electoral system, legislative procedure, etc.)

Types of Heterogeneity

The central aspect of political theory, public choice theory, and the new political economy is the heterogeneity of interests. Without preference heterogeneity, it doesn’t really make sense to aggregate preferences to form a collective choice. Also, without conflicts of interest, the choice of economic policy is fairly simple and consists in maximizing the welfare of a representative agent.

The importance of preference heterogeneity can be summarized in two propositions. First, this heterogeneity is necessary to have political constraints. In other words, it is a necessary condition of the new political economy.

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Second, political constraints have an economic impact on economic outcomes. It allows the heterogeneity of interests to be resolved and is subordinated to collective decision-making mechanisms. This is exactly what defines the new political economy.

Also, many types of heterogeneity cannot be resolved by a simple market mechanism. This applies to any decision that affects individuals as a whole. (for example, the choice of a common defense policy) Finally, political mechanisms sometimes simply and simply replace market mechanisms.

Since a conflict of interest is necessary for any study of political economy, it may be asked what are the important types of heterogeneity in political economy.

According to the researchers, there are several species that can be classified into two broad categories.

The first type of conflict has to do with the heterogeneity of specific agents, meaning they have different preferences, for example. The heterogeneity of actors’ choices may result from different starting equipment (in terms of income or inheritance) and more generally from different understandings of the workings of society.

Dr. Yaşam Ayavefe

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