THE STATE AND THE INVISIBLE HAND

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This article discusses the consequences for resource allocation of the behavior of self-interested groups within and outside the government. The power groups that are considered are the state as a surplus maximizing monopoly, the self-aggrandizing bureaucracy, and private lobbies with divergent interests. The article uses the analytic tools of neoclassical political economy and discusses recent writings in the field. Among the problems dealt with are the supply of public goods, the severity of trade barriers, and the choice of tariffs, quotas, domestic content rules, and voluntary export restraints as instruments of commercial policy. The discussion takes into account the cost of lobbying and rent-seeking, the competition for spoils resulting from government imposed restrictions on the free allocation of resources. The article shows that for society as a whole the outcome of group rivalries is, in general, less favorable than outcomes based on atomistic individual behavior and benign government, which is the framework adopted in most standard economic analysis.