State and economy: the inevitable dualism (Part One)

An adequate interaction between government and economy is the key problem of modern countries.
How can we improve the functioning of the government if this conflict of interests would be systematic and unavoidable by its nature? What would be better: to have more government — and more limitations for business; or less regulation (with more freedom for business) — and less economic stability? Although an admissible solution depends on many factors, including a concrete situation in a country in a certain period, the right answer could be found only if we use the right instrument of analysis. The article provides a series of arguments for the game theory as an optimal method of analyzing interactions between government and economy at this stage of economic development. Examples from the area of monetary policy are given.
State and economy: the inevitable dualism
The problem of dualism “society-state”, like “society-market”, are eternal and always relevant. It is through society that there is a link between the state and the economy. As the philosopher and economist P. Kozlovski rightly notes (Kozlovski, 1998. C. 3): “Absolutely depoliticized (market, economic) society is a fiction.” The state and society are always a compromise of interests achieved by political means, and, if possible, these means should not pass the critical line of coercion on the part of the state.
The state is a very complex mechanism for management, requiring professional knowledge in all areas of its political institutions, the purpose of which is to preserve the integrity of society. State administration is carried out by executive bodies in the person of state officials, who may have their own personal interests, including corruption, that in itself exerts a significant influence on other subjects of economic and political life and, as a consequence, on the economic situation of the modern state.
Thus, in the series of theoretical works published in 2008 by Acemoglu, Golosov, Tsyvinski, (2008a, 2008b; 2008c), the policy objective function (in the words of the authors “political utility”) depends on the size of his personal consumption, determined by the appropriated political rent. The share of political rent in the total amount of income depends on the political characteristics of society and on its historical traditions. Additional efforts of “politicians” can contribute to some smoothing of fluctuations in the sphere of personal consumption. At the same time, the redistribution of incomes inevitably increases in favor of those participants who can appropriate political rent.
To achieve its interests, the state represented by the Central Bank and the Government will pursue one of the policies affecting the economy: stimulating, restraining, stabilizing, anti-inflation. Moreover, the state policy can not always correspond to the adequate and obvious needs of the economy in view of the internal political problems. Such a policy is often carried out during “pre-election races” in order to attract the largest electorate.
In turn, the interests of the economy consist of the interests of its private agents. The interests of private banks are to make profit through cheap loans from the Central Bank. The interests of private enterprises are connected with obtaining more profit at the expense of tax breaks, with an increase in demand in the domestic market, with the possibility of hiring labor. The interests of households arise from the realization of expectations on wages, the willingness to be hired for work, the desire to invest in banking products.
Each of the private agents, like the state, in the event of internal political problems, strives, on the one hand, to adhere to the terms of “mutually beneficial cooperation” with its counterparty and at the same time seeks ways to “circumvent” these conditions. From this complex interweaving of actions, counteractions, reactions and counter-reactions, expectations and predictions, a strange picture of the economic reality that we see before us emerges.

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