THE PRINCIPLE OF POLITICAL-ECONOMIC ASSIGNMENT: ANALYSIS OF A MACRO-ECONOMIC MODEL WITH POLITICAL FEEDBACKS

Abstract

This paper formulates a medium-term macroeconomic model of disposable income, unemployment, inflation and the balance of payments, proposes a theory of qualitative choice to explain government popularity in terms of these variables and develops a satisficing formulation of political-economic policy. This approach to economic policy relies on the promotion of ideology and satisficing popularity and gives rise to an interdependent system of political-economic reaction functions for the tax rate and state spending. Using a theorem for the stability of “patched-up” systems, the principle of political-economic assignment is derived and the stability (instability) of a left-wing (right-wing) system of reaction functions is proved. The paper concludes with some implications for the orthodox theory of economic policy.