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9 - THE CONTRAST BETWEEN FIRMS AND POLITICAL PARTIES

Published online by Cambridge University Press:  22 July 2009

Harold Demsetz
Affiliation:
University of California, Los Angeles
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Summary

Politicians and political parties compete, just as do firms. There is division of opinion about the consequences of this. Some think this gives voters the policies and management of these policies that they want, just as competition between firms is thought to deliver products they want at the lowest possible costs of producing them. Thus, Joseph Schumpeter (1950) writes:

[T]he social meaning or function of parliamentary activity is no doubt to turn out legislation and, in part, administrative measures. But in order to understand how democratic politics serve this social end, we must start from the competitive struggle for power and office and realize that the social function is fulfilled, as it were, incidentally – in the same sense that production is incidental to the making of profits.

Surely, Schumpeter oversimplifies. Private goods, in the main, are divisible. To the limits allowed by scale economies, their production can be tailored to individual wants. The output of the state, in the main, is indivisible; the public-good nature of policy and of its administration cannot be tailored to individual wants. Serving political majorities necessarily disappoints political minorities. Even the median voter model has winners and losers.

Stigler (1971) and other writers modify the analogy, contending that political policies respond to special interests, either because special interests deliver more votes or because they deliver more financial support. In this case, special interests get what they want.

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Chapter
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From Economic Man to Economic System
Essays on Human Behavior and the Institutions of Capitalism
, pp. 130 - 140
Publisher: Cambridge University Press
Print publication year: 2008

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