Economic Theory of Democracy: Concept & Explanation

Introduction

In the democratic world, government has a prominent role to play, more or less, in all types of economic systems present in the society, but the role of government becomes more important in the socialist and mixed economy as compared to capitalism in the society. The government used to make every effort in its budget for the proper allocation of public goods to the people, which helps in promoting social welfare in the economy.

If provision for the supply of public goods is to be maintained in society, then the government should know about the preference, choices and priorities of the goods which is being demanded by the public.

In any type of economic system, the main concern of the government authorities is to maximize social welfare, but the government should be aware of the fact that for which public good people have shown their choices. It is not only the responsibility of the government to have an idea about public choice, but the same amount of responsibility is vested on the shoulders of the public that they should make a list of their choices and inform the higher government authorities about their choices and the goods which are being most preferred by them.

In democratic countries like India, the government keeps an account of public preferences and makes provision for the supply of public goods on time by allocating productive resources, which helps in the production of public goods. Proper allocation of resources by the government helps in the utilization of resources in an optimum manner, and social welfare is also maximized when the goods are being consumed by the public.

Consumption, allocation and production of resources are all being analyzed and studied in various theories of public economics. These theories are also known as theories of social choice in economics. These social choice theories show the problems in public choices and also study the problem of aggregating preferences revealed by the public.

The two most important theories which help in revealing the problems of public choice are :

• Economic Theory of Democracy and
• Politico Eco Bureaucracy.

Economic Theory of Democracy

The economic theory of democracy is a theory of political science written by Anthony Downs in his book published in 1957. Downs developed a model where economic theory can be applied in precise conditions and also shows the decision-making powers of the government in the democratic system.

Downs also presented a very rational approach to the voting procedure prevailing in the democratic society, and the significant conclusion that he gathered from this theory is that a rational voter will never be bothered to vote in society.

In a democratic country like India, while discussing about public choices of public goods, it is equally important to take into account the presence of political parties in the society that depict and represent the views of the public who elect them to parliament. The presence of political parties can be highlighted by the cost associated with the election process in society.

In the absence of political representatives elected by the public, then each individual in the society who wants information about various products and the benefits received from various policies will prove to be time-consuming because they have to spend extra time and resources for acquiring such information if political parties are not present in the society. The cost which is being undertaken by the public for gathering information about the resources will cut down the savings of the public, and they will leave aside most of their preferences.

Therefore, the existence of political parties and elected representatives of the public is used to reduce the cost of the public, help in collective decision-making, and promote social welfare in society. Anthony Downs has introduced the economic theory of politics, which is also known as the economic theory of democracy. This theory rests on two assumptions that:

• Voters are utility maximisers.
• Political parties are vote maximisers.

The theory by Anthony Downs shows that the political parties present in the society are not showing a keen interest in the allocation of resources in a proper and efficient manner in the society. Each political party in the society is interested in maximizing the number of votes they will be receiving from the public.

If the government also has the capacity to take the society in achieving the Paretian optimum situation, they will do so only if they are forced from the competition received from other parties. Thus, it can be concluded that inter-party competition always forces the government to help society in reaching the Paretian optimum situation.

Anthony Downs said that the elected political representatives of the public work for their own self-interest rather than they think of the ideal goals of the public interest. Politicians will work for the national interest and introduce social reforms in society only when they want to win with a maximum number of votes. Therefore, Downs concluded that vote maximization reflects the political parties’ behaviour towards the public in a positive and friendly manner. The political parties will behave in a reasonable manner only to get the maximum number of votes.

The economic theory of democracy rests on the assumption that every government in the economy needs political support, so they take each and every measure to maximize the political support. The government used to work in the democratic system, where elections are held periodically in the country.

The primary goal of any party is vote maximisation, which reflects a clear view of the behaviour of politicians. The party which receives the maximum number of votes controls the entire government until the next election is being held. This theory also shows that the preferences of the median voter play an important role in election time when severe competition is there between political parties. This theory is also known as the median voter theorem, which shows that in a majority decision model, individual preferences are always single peaked.

The median voter theorem says that politicians used to study the preferences of the median voter in order to get a maximum number of votes. Each political party works for the same objective, that is, to be elected, and therefore, they introduce policies in the public interest so that they can win the confidence of the median voter.

This theory is being criticized by various economists, and various modifications have been made to this model, which can be explained with the help of the following example. A voter who is not really aware of his future is also not aware of the fact that which party rule will give him the greater utility. So, he will compare the utility of party X provided in the previous election compared to party Y if he votes for Y in the present election. In this case, the voter is not considering the raw utility, but he is looking after the trends of political parties. The various critics of this theory are:

• This theory does not explain all aspects of voter behaviour.
• Voting proves to be a costly affair not only because of information costs but also because of the cost which is being incurred in acquiring the polling place.
• It is not necessary that vote maximization politics will always give a maximum number of votes to the political parties.

Though these were the various criticisms that this theory faces. However, still, this theory is not much affected by these criticisms because this theory is the only theory which describes the role of political parties in a democratic society and how public goods are being supplied to the public in a systematic manner.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives, & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment