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Political Decisions and the Economy

Bruno S. Frey Friedrich Schneider

• University of Zurich and Basel University of Zurich

“A Politico-Economic Model of the United Kingdom.” The Economic Journal (UK), (June 1978): 243–253.

It is scientifically and morally interesting to consider the political psychology revealed in the Frey-Schneider “positive model” of politico-economic interrelationships. The two economists base their model on empirical data gathered from the revealed preferences of politicians' policy decisions in the United Kingdom. They claim that their model (given data regarding both the current state of the economy and the current popularity of the in-party) would allow us to intelligently forecast future political and economic decisions that politicians would make because of political expediency. “The basic assumption advanced is that the governing party aims to stay in power and therefore seeks to increase its popularity with the electorate when its (perceived) re-election chances are low.”

The government's popularity is affected by the state of the economy. When, on the one hand, the government is popular and assured of re-election, it is free to choose its policies on the basis of its ideological preferences. (Following ideological preferences, a left wing government tends to increase, whereas a right wing government tends to decrease increments in the national budget.) When, on the other hand, the government's lead over the opposition party falls below a critical level, it resorts to inflationary or expansionary policies to win back voter popularity. In addition, the balance of payments has a significant effect on policy as does an autonomous “election cycle,” which tends to decrease the in-party's popularity between elections.

In the United Kingdom, the governing party's popularity (as revealed in regular Gallup polls of voters) depends on the state of the economy: “A rise in the rate of inflation by 1% reduces the government's lead by about 0.6% and an increase in unemployment by 1% reduces the government's lead by about 6%....”