Open markets in the transfer state.

• Author: Buchanan, James M.

1. Introduction

   In this paper we make a simple point in elementary public choice theory, but one that has not, to our knowledge, been made. As the share of producers relative to nonproducers falls in a political economy, operating within broadly democratic institutions of governance, we may predict a reduction in the politicized restrictiveness of markets. The shortfall between total product actually generated and that which might be possible must, of course, increase with the increase in the share of nonproducers. But, within the producing sector itself, markets will be organized more "efficiently." This second effect will, at least to some small extent, offset the first.

   In summary generalization, our prediction suggests that the emergence and extension of the redistributive or transfer state in the decades following World War II should have been accompanied by some relaxation of mercantilist-like market restrictions. Results seem broadly supportive here. If the redistributive or transfer state continues to grow, as measured by the share of nonproducers in the electorate, we should expect further opening of markets. In the international setting, the markets within and among welfare states would be more open than markets within and among more productive, but equally politicized, "capitalist" states (those with less extensive transfer activity).

   The analysis here extends that which we developed in an earlier paper[1]. In that paper, we demonstrated that the political requirement for the organization of a coalition of cartels places severe limits on both the economic interests in, and the degree of, particularized market restriction, even on the part of members of specialized producer groups. The idealized situation for members of a single producing group, made up of the suppliers of all the inputs involved in the production of a single good, would be described by cartelization of the whole industry, with monopoly price and output adjustment, with all other industries in the economy operating under fully competitive conditions. The second part of this condition is important when it is recognized that the producers in the cartelized industry are, at the same time, consumers of the outputs generated in other sectors. As our earlier paper discussed in some detail, however, this ideal situation for a single producing group cannot be realized in a broadly democratic political regime. Any single producing group must recognize that attempts to secure a differentially advantageous position will be opposed by members of all other groups in the economy who, in terms of their own utility, will prefer that any industry, other than their own, remain workably competitive. Throughout this discussion, we assume that effective cartelization, whether by a single industry or by many industries, requires political enforcement and support.

   In order to secure effective political support for producer-motivated restrictions on particular markets, a coalition among several producing groups must be organized. And the necessity that other industries will, also, secure support for cartelizing price and output policies reduces the gains that any single industry membership can expect to secure from market restrictions. If the effective coalition of cartels should become sufficiently inclusive and extend over a large share of the economy's production, there may arise support for constitutional limits on the organization of cartels, even from members of the separate producing groups. The analysis in our earlier paper was concentrated on the parameters that might generate this apparently counter-intuitive result.

   In our earlier analysis, however, we did not allow for the influence of politically financed transfers on the size of a politically viable coalition of cartels. If we introduce the effect of transfer programs, the politics of coalition formation is altered in important ways. In particular, as opportunities to live off transfers increase, the minimal sized coalition required for political effectiveness increases, as measured by the number of member industries. The connection between the size of the redistributive or transfer state and the degree of competitiveness within the economy arises from the fact that, the more inclusive the coalition of cartelized industries, the less attractive are restrictions on competition, even from the perspective of members of the coalition.

2. A Simplified Model

   It is useful to develop the analysis in a highly abstracted and stylized model of an economy under the following initial assumptions: All members of the effective electorate are employed in one of N industries in a closed economy, with each industry totally specialized in the sense that all input is supplied in the production of a single good or service; there are equal numbers of persons employed in each of the industries, each person produces an equal imputed share in the value product of the industry, and, at the same time, each person purchases an equal share of the product of all other industries; each one of the N industries faces an identical demand curve for its product and each industry is organized competitively with many separate producing firms.

   Although each industry would ideally like to be the only recipient of political protection against competition, each industry also recognizes that such exclusive protection is unrealistic. In order for one industry to obtain a political...