Agenda rules

In chapter 6 it appeared that bureaucratic supply induced a good deal of stability in the model of the budgetary game as it was presented in the opening section. As far as public goods are concerned, the model is able, in principle, to explain stability, provided that bureaucratic price discrimination is possible.

The stability question remains to be answered for the cases in which bureaucratic supply does not induce stability. This is the purpose of the present chapter. One must then think of services with unevenly distributed benefits such as minority private and group goods, and of public goods in situations where price discrimination is not possible.

In the initial analysis of political decision-making, it was mentioned that budgetary games generally lack cores or other stable solutions, so that attention has to be focused on the institutions of the budgetary process. Institutions are, of course, not an invention of economic theory. Indeed, the importance of rules that lead to the selection of a small group of ‘feasible’ proposals before any political decision-making in the proper sense starts, has since long been recognized in the organizational process branch of budgetary theory: recall, for instance, the notion of ‘taking the base for granted’ as a major ingredient of the organizational process perspective on budgetary decision-making. In this light, the recent upswing of interest in the institutional aspects of collective decision-making among economists can be interpreted as a late recognition that the organizational process theorists have been looking at the crucial factors all along. However, this interpretation must be qualified in two respects.

Elements of game theory

Political authorities are often collective bodies: cabinets, councils, houses of parliament, etc. The analytical tools for the study of interaction among members of collective bodies will be taken from the theory of games, especially from the theory of a specific type of n-person game that will be introduced and described in the present section and that will be called a ‘budgetary game’. In the next section some additional concepts with respect to budgetary games will be defined, namely those of the preference set, the dominant set and the Pareto superior set. With the help of these concepts it will be possible to review in the following sections some elementary game-theoretic results and to consider the consequences of these results for the problem of stability in budgetary games.

Up to this point the theory of public demand has been considered only at the level of the individual politician. In reality, we observe collective bodies. These bodies do not only decide for themselves but for all citizens of government. This state of affairs raises the question of how individual politicians interact with one another as members of a committee in the process of reaching decisions, and this question leads to the analysis of collective decision-making in the proper sense. As it turns out, game theory is an almost indispensable analytical tool when entering this domain.

The required elements of game theory will be introduced in a way that is understandable to the reader who has no prior knowledge.

Public and private goods

An important building block for the theory of legislative demand is the distinction between ‘public goods’ and ‘private goods’. The term ‘public good’ will be used in this book for an economic good that can, and does, benefit everybody. This is the definition which is known as the ‘polar case of a pure Samuelsonian public good’. A pure public good in this sense has two outstanding characteristics. The first is the supply characteristic known as ‘non-rivalry’ among consumers. It implies that at given costs of supply, an additional consumer does not affect the benefits of existing consumers (the good ‘can benefit everybody’). The second is the demand characteristic of ‘universal demand’. A good can qualify as a public good, only if it actually figures in everybody's utility function (the good ‘does benefit everybody’). This definition stands in opposition to the one of a pure private good: an economic good that can, and does, benefit only a single person.

In view of the important consequences of the distinction between public and private goods, it seems useful to review the concept of a Samuelsonian public good. It is also useful to consider some intermediate cases.

First, it must be emphasized that the concept of ‘public good’ as defined here has nothing to do with government. Public goods are provided privately and publicly. Conversely, governments are providing public and private goods. Of course, there are certain reasons why public goods, according to certain normative criteria, may be provided more efficiently in the public than in the private sector, but there are also circumstances under which the opposite will be the case.

Public Choice should be a tool for improved management of the government. Dr Kraan has taken a major step in this direction by applying it to the actual process of budgeting. The book is not only a step forward in theory, it should be a major step towards making Public Choice a practical aid to a number of officials and politicians.

Speaking for myself, one of the more important aspects of this book is that it indicates that a lot of theoretical work which was actually developed to a large extent by Americans looking at the open American government also applies to European governments, although there things are less open. This is no surprise to me. I had always thought this was true, but I am delighted to have evidence instead of having to depend on my instincts. Here, again, Kraan has made a major step forward and pointed the way to what we hope will be considerable additional research.

There are also fairly sizeable theoretical improvements here. Relying on his experience, Kraan argues that the bureaucracy, in those areas where the differences among politicians are not too great, plays a constructive role. It tends to clarify and bring together the positions of the politicians, with the result that the endless cycling which may be regarded as the inevitable consequence of the Arrow theorem does not occur. In those cases where the differences among politicians are sizeable, Kraan follows a hint from the ‘Calculus of Consent’, arguing that as long as all of the proposals are for increasing the budget it is possible for log-rolling to lead to a definite outcome.

Demand and supply in the public sector

Market economies are characterized by the public protection of private property rights. In such economies, goods can be alienated only on the basis of mutual agreement between proprietors. Usually such alienation involves exchange between suppliers and demanders, where suppliers are households that want to sell certain economic goods at a certain price and demanders are households that want to purchase certain economic goods at a certain price. The exchange decision is a contract that specifies quantities and sums of money to be transferred. The term ‘market mechanism’ is commonly used to denote the rule that relates the result of a contract or a set of contracts to the characteristics of demand and supply.

However, many households in market economies consist of more than a single individual. As far as the private sector is concerned, one can think of business corporations, families, foundations and associations. As far as the public sector is concerned, one can think of governments and incorporated public agencies. Since such a collective houshold can own property, it needs a mechanism of internal coordination in order to express its demand or supply in markets.

The term ‘budget mechanism’ is commonly used to denote the rule that relates the characteristics of demand or supply by a collective houshold to the preferences of its members. Note that the budget mechanism is not an alternative for the market mechanism, but rather a necessary complement to it for the case a household comprises more than a single individual.

The extended budgetary game

In chapter 4 bureaucratic supply behaviour was considered from the perspective of its effects upon the preferences of the individual politician. It seems reasonable to assume that if the political authority consists of a collective body, the bureaucrat will not only take into account the effects of strategic cost revelation upon individual preferences, but also the effects upon the outcomes of political decision-making. In other words, the bureaucrat will pay attention to interaction among politicians and she will make her strategy choices in view of her expectations. Furthermore, it may be assumed that as soon as decision-making involves more than a single service, not only does politico–bureaucratic interaction become a relevant aspect of the budgetary game, but also interaction among the bureaucrats themselves. That is to say, bureaucrats will take into account the supply behaviour of other bureaucrats in order to optimize their strategies.

The endogenization of bureaucratic strategies implies that bureaucrats enter as fully-fledged players into the budgetary game. In the resulting extended game, the bureaucrats are entirely different kinds of players than the politicians. This distinction concerns both the objectives which motivate each kind of player and the types of ‘moves’ each kind of player is allowed to make. The objectives and the moves have been discussed in chapters 3 and 4 respectively; it has been assumed that politicians seek the implementation of preferred policies, and that bureaucrats seek some optimal combination of Managerial Discretionary Profit (MDP) and output. Furthermore, the moves of politicians were assumed to consist of votes and those of bureaucrats of transformations of the Apparent Budgetary Cost Function (ABCF), in the sense discussed in chapter 4.

Perspectives on budgetary decision-making

The subject of this book is the analysis of the budgetary process in representative government from the perspective of public choice theory. Since there is a large literature on the budgetary process as well as on public choice theory, it seems appropriate to start with some clarification about the place of the present volume within both areas of scholarly activity.

The budgetary process in representative government is a theme which is being studied from different theoretical perspectives, public choice theory being only one of them. Looking at the postwar literature, four main perspectives can be distinguished.

The first is the normative perspective. This has been characteristic of the mainstream public finance literature, as exemplified, for instance, by the seminal handbook by R.A. Musgrave (1959). The central concern in this literature has been the application of welfare theoretical principles to the budgetary decisions of government. Major new developments in this literature originated in revisions of welfare theory itself. One can think, for instance, of the generalization of the conditions for optimal allocation of public goods, as initiated by Samuelson (1954), and the development of a new approach to social welfare functions (so-called ‘social choice theory’), as initiated by Arrow (1951).

Within the normative literature there is also a more practically oriented current, alongside the welfare theoretic branch. This is the area of financial management that gave rise to procedural innovations such as the Planning–Programming–Budget–System(PPBS), Management by Objectives (MBO) and Zero-Base-Budgeting (ZBB) in the USA, Programme Analysis and Review (PAR) and the Financial Management Initiative in the UK and the Reconsideration Procedure in the Netherlands.