ECONOMY

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aggregate distributed information about the mapping of economic policy into policy
outcomes, then special interests or high demanders on congressional committees
may well supply the requisite information, with the result that the quality of
economic policy improves (because policy-makers are well informed) even though
policy outcomes are biased (because policy-makers pander to special interests or
high demanders) (Gilligan and Krehbiel 1987; Lohmann 1995). The implication is
that we should not automatically assume that special interests and high demanders
on congressional committees are a Bad Thing; we need to consider the workings of
the economic and political system as a whole, in which case a Political Bad might
cancel out an Economic Bad, and the net effect is a Good Thing. Because political
economy traded off the gains and losses of imperfect markets and imperfect politics,
it came up with more complex and more flexible institutions, compared to public
choice.
To see how traditional economics, public choice, and political economy relate to
each other, imagine a 2 × 2 matrix with two sides labeled “market failure yes/no”
and “government failure yes/no,” respectively. Traditional economics would inhabit
the box “market failure yes, government failure no,” public choice, the box “market
failure no, government failure yes,” and political economy, the box “market failure
yes, government failure yes.”Thereisoneboxleft,“marketfailureno, government
failure no,” and inevitably it, too, came to be filled.
Donald Wittman, in “Why democracies produce efficient results” (1989), proposed
that political markets, just like economic markets, tend to yield efficient outcomes. 4 If
there is an externality, or some other source of potential market failure, the system of
political and economic actors will endogeneously adjust in the direction of solving the
problem. Indeed, the Coase theorem implies that in the absence of transaction costs,
the problem will be solved in full. For example, if the underlying problem in the
political market consists of an information asymmetry, then information providers
will have an incentive to enter the political market, and voters will have incentives to
take information cues from them (Lupia 1994).
Buried here is an important point. Ever since the Coase theorem hit the books, we
no longer assume automatically that economic actors are frozen in place in the face
of externalities or other market failures, and in this regard we should treat political
and economic actors symmetrically. That said, Wittman’s argument ultimately did
not prevail, perhaps because the persistence of both market failure and government
failure is rather too obvious to be brushed off with reference to the Coase theorem.
Wittman’s argument was an intellectual exercise, and as such influential, for it forced
political economists to refine their arguments as to exactly why failures, market or
government, persist in the presence of rationality and equilibrium.
In the mid-1990s, behavioral and experimental economics relaxed the assumptions
of greed and rationality (less so the assumption of equilibrium), thereby undercutting
the political economy program of producing ever more refined rationality-andequilibrium
explanations of market-cum-government failure. Today, the extreme
⁴ See also Wittman 1995.