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Working Paper #27

Political Systems, Economics of Organization, and the Information Revolution (The Supply Side of Public Choice)


Abstract: The political history of the twentieth century was characterised by great variability in the social and political systems in both time and space. The initial trend was one of general growth in the size of hierarchical organizations (giant firms, internal and external growth of States) then reversed in the last third of the century with the universal return to the market mechanism, break-up of conglomerates, re-specialisation and downsizing of large firms, the privatization of the public sector, the lightening of the tax burden in a number of countries, the atomization of several States (U.S.S.R., Yugoslavia, and Czechoslovakia) and the triumph of democracy. This paper extends the Coase analysis to the field of Public Choice. It shows how the cost of information is the basic determinant of the choice between markets and hierarchies. The relative scarcity of information thus explains the great cycle of political organization which lead decentralized and democratic societies at the end of the 19th century to the totalitarian regimes of the first part of the 20th century, and then brought back most countries towards democratic regimes and market economies by the end of the second 20th century.

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