Open Markets in the Transfer State

Abstract

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