General Equilibrium in a Pluralistic Economy

Abstract

AN IMPORTANT FEATURE of modern pluralistic societies is the presence of interest groups whose behavior is a major determinant of economic and political life. Individual citizens tend to form themselves into pressure groups largely along socio-economic lines, whose purpose (whether stated or not) is to pursue the interests of their members in whatever instances may arise. Such groups as trade unions, industrialist associations, political parties, tax payers associations, chambers of commerce, farmers associations, local governments, etc., may all be considered-to a higher or lower extent-as pressure groups. The classical views on pressure groups are due to Bentley [4], Key [20], Lindblom [22] and Truman [30]. An economic theory of pressure groups has been recently developed by Olson [25]. The aim of this paper is to discuss a model of an economy in a pluralistic society that includes a private and a public sector. All decision in the private sector are taken by individual economic agents via a market mechanism. There is a central government coordinates the production of public goods and levies taxes but does not intervene directly in the decisions concerning the size of the budget and the allocation of public expenditure. Such decisions, instead, emerge as the outcome of a bargaining process among the various pressure groups, one of could be the central government itself. Thus, the body politic is regarded as a coalition of groups of divergent interests cooperate in the provision of public goods to themselves. The approach followed here is strictly a descriptive one, e.g., the question is being addressed is how does such a mixed economy work? It is therefore quite different from the traditional approach of public finance and of the theory of public expenditure as expressed in the works of Bergson [5] and Samuelson [26], where the normative motive has been predominant. In those contexts it is necessary to introduce a social welfare function in order to define optimality. Here no social welfare function is assumed to exist ex-ante. Such a question as which social welfare function is revealed by the observation of decisions in the public sector? is relevant but not my main concern. Whereas the choice of the social welfare function is a political act presupposes some political process behind it, such processes have seldom been the concern of economists, save a few exceptions. The best bridge between the ideals established in the framework of welfare economics and the pull and pushes recognized by institutional political approaches is provided by a paper by Bowen [7], proposes a voting procedure intended to perform the same functions in the political sphere that competitive markets perform in the economic one. My own interest is in that vein, although I have preferred to stress the bargaining process