State or Market?

Abstract

We argue that politics matters in relation to the fundamental choice of allocation between public resource allocation and the market. These two forms of collective choices can be substituted only to a certain extent. It is difficult to pin down that politics matters for de tailed variation on kinds of public expenditures, particularly in rich countries, but we pre dict that politics is crucial to the basic choice between state and market when different types of countries are included in the analysis: OECD nations, Communist systems and Third World nations. The empirical analysis of variation in a few major expenditure items in 78 countries supports the argument. Estimating a number of regression equations mod elling the place of political factors in the context of public policy making, we find that poli tics is the single best predictor of the overall civilian size of the public sector, as well as of the welfare state ambition in education and health.