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Evolution, uncertainty, and the asymptotic efficiency of policy

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Abstract

Politics, like any social system, involves selection mechanisms. This paper presents a model of politics as an evolutionary process. Our model yields three main results. First, the political process selects for efficient policies in the long run. We call that attribute asymptotic efficiency. Second, bargaining amongst interest groups bounds the inefficiencies that can exist in the short run. Potential inefficiency declines when organizing interest groups becomes less costly. Finally, policies that appear to be inefficient in a static analysis can be efficient once economists consider the dynamic nature of political decisions. We argue that viewing the political process as a selection mechanism allows political economists to use efficiency as a criterion for positive economic analysis. In our approach, applied political economy involves looking for relevant costs that make the policy efficient. However, our approach does not rob political economists of the ability to make meaningful normative statements; it only constrains the type of statements made.

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Notes

  1. See IGM Forum (n.d.).

  2. While many definitions of “efficiency” are possible and it is not always clear what individual authors have in mind, we mean Kaldor-Hicks efficiency, whereby an outcome is efficient if the benefits outweigh the costs and could, in principle, involve transfers to make the policy Pareto efficient, whether or not those who benefit actually compensate anyone. Buchanan (1959) discusses criticisms of Kaldor-Hicks efficiency, notably that side-payments (compensation) to those who lose from policy changes are almost always hypothetical. Without actual compensation, "the whole controversy over the appropriate tests [for welfare-enhancing policy] becomes meaningless" (Buchanan, 1959, p. 128). Our arguments extend Buchanan's insight. We discuss Buchanan's (1959) paradigm for doing welfare economics more fully in the Conclusion. However, in our model, compensation is paid, so the distinction does not matter: Kaldor-Hicks efficient policies are Pareto efficient.

  3. By efficiency, we are referring to what we call “planner efficiency”. In doing so, we follow how most economists use the term, which implicitly ignores the political costs of implementing a policy. Our result that policies are efficient (in that sense) in the long run is stronger than saying that they are efficient once we account for all costs, a criterion adopted by Cheung (1998) and Leeson (2020), among others. We elaborate on the distinction in the next section.

  4. We could similarly assume that political actors maximize some measure of “political success”, such as votes. However, for simplicity, we assume that they maximize wealth, since the rest of our analysis is framed in terms net of simple cost and benefits.

  5. While it is referred to as the “Coase” theorem, the theorem is credited to George Stigler and bears little resemblance to Coase’s interpretation of his own paper. See, e.g., Medema (1994), McCloskey (1998) and Albrecht and Kogelmann (2020). On the application of the Coase theorem to politics, see Acemoglu (2003), Parisi (2003), and Munger (2019).

  6. Note that we have assumed that \(\mu \ge 0\). If \(\mu <0\), then the net costs of the policy would have a negative drift over time and eventually would be insignificant without any action needed.

  7. Multiplying both side of the discrete time representation by \(1+\rho \Delta t\) and rearranging yields.

    $$\rho V\left(N\right)=\frac{1}{\Delta t}EdV,$$

    where \(EdV:=EV(N{^{\prime}},t+\Delta t)-V(N,t)\). Taking the limit as \(\Delta t\) goes to zero yields the continuous time representation.

  8. For recent work, see Brendon (2013), Lockwood and Weinzierl (2015), Lockwood and Weinzierl (2016), and Heathcote and Tsujiyama (2021).

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Authors and Affiliations

  1. Coles College of Business, Kennesaw State University, Kennesaw, GA, USA

    Brian C. Albrecht

  2. International Center for Law and Economics, Portland, OR, USA

    Brian C. Albrecht

  3. University of Mississippi, University, MS, USA

    Joshua R. Hendrickson

  4. Rawls College of Business, Texas Tech University, Lubbock, TX, USA

    Alexander William Salter

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  1. Brian C. Albrecht
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  2. Joshua R. Hendrickson
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Albrecht, B.C., Hendrickson, J.R. & Salter, A.W. Evolution, uncertainty, and the asymptotic efficiency of policy. Public Choice 192, 169–188 (2022). https://doi.org/10.1007/s11127-022-00978-2

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