Abstract
Entangled political economy views societal phenomena as featuring substantial interaction between economic and political entities, but questions have been raised about the conceptual properties of entanglement. The political economist Randall Holcombe has raised questions concerning the economic influences affecting uneven patterns of entanglement between entities. Drawing upon his own transaction costs-based framework of political stratification, Holcombe suggests that political elites incur relatively low transaction costs associated with bargaining over policies, whereas non-elites incur relatively high costs. This suggests that elites actively participate in policy design and implementation and can outmaneuver the non-elite public to externalize the costs of political decisions, yielding noticeable clustering effects within entangled network structures. This article seeks to build upon Holcombe’s insights, as well as the transaction cost politics of Charlotte Twight, illustrating how groups engaging in political processes attempt to manipulate transaction costs to secure favorable outcomes. Transaction cost manipulation by elites to secure advantages is commonly studied, but less so is how non-elitists succeed in adjusting the transaction costs of political exchanges to help prevent fiscal exploitation by elitists. The public finance case of Colorado’s Taxpayer’s Bill of Rights is used to illustrate how dynamic entanglements between elites and non-elites delivered institutional change better aligning with non-elite fiscal preferences.
Introduction
Entangled political economy seeks to understand social coordination possibilities by examining the nature and effects of interdependencies between economic and political activities. Viewing individuals and the various organizations they maintain as being interconnected in overlapping exchange relationships, entangled political economy distinguishes itself from mainstream economics. It does so by treating economy and polity as conceptually and analytically connected phenomena, avoiding conceptualizations of a unified, yet separated, political actor intervening exogenously to alter economic conduct in Pareto-improving directions. Entangled political economy draws upon complexity processes, evolutionary change, and network relations to assess the dynamics of economics and politics. Attributed to the research efforts in political economy, public finance, and fiscal sociology by Richard Wagner (2007; 2010; 2016; 2020), entangled political economy has been represented in a growing literature (see, for example, Allen et al, 2018; Novak, 2018; Hebert and Thomas, 2021; Podemska-Mikluch, 2021; Boettke and Coyne, 2023), as well as academic networks (most notably, the Entangled Political Economy Research Network).
As with all research programs, entangled political economy has been critically appraised. The political economist Randall Holcombe (2023b; 2023c), a prominent expert on Austrian economics and public choice, raises some important questions. Holcombe enquires about the nature of arguably the most pivotal concept—entanglement—when asking to what extent various actors relationally entangle in economic and political contexts. Would it be accurate to depict the average taxpayer-citizen as being as entangled with politics as might be, say, a lobbyist, head of a bureaucratic government entity, or a legislator? The raising of this question invites one to take a step backward to ask something else: what is entanglement? Once these issues are considered, another question arises: to the extent that heterogeneous actors are not uniformly entangled, then what factors might explain such a lack of uniformity?
Holcombe’s (2018; 2023a) recent scholarship is especially notable for its novel application of transaction cost economics to describe political stratification between elites and masses. Political elites, such as legislators, senior bureaucrats, and influential interest group affiliates, incur relatively low transaction costs associated with political exchanges. By contrast, individuals and groups that are classified as being non-elites are those who tend to incur relatively high transaction costs. As Holcombe (2023a: 130) states, “[p]eople who face low transaction costs can engage in exchange to maximize the value of resources to those in that low transaction cost group. Those who face high transaction costs are prevented from bargaining, so for them, resources may not be allocated to their highest-valued uses.” In an edited volume celebrating Wagner’s career achievements, Holcombe indicates that the transaction cost-induced stratification of elites versus non-elites gives rise to network structural properties: “[b]ecause of high transaction costs, not every entity can interact with every other entity, and transaction costs determine which entities can interact with each other” (Holcombe, 2023b: 37).
The elevation of transaction cost considerations appears, at first glance, to be at odds with the analytical focus of entangled political economy. This is because Wagner prioritizes the relational attributes of exchange, as opposed to the foregrounding of relative prices, costs, and resource allocational decisions under the standard Walrasian approach (Wagner, 2010; 2014; 2016). Wagner (1994; 2020) is critical of resolute claims to the effect that transaction costs alone determine the presence, or absence, of observed political economy arrangements, and he seeks to identify additional (economic, sociopsychological, and other) factors informing entangled economic-political conditions (Wagner, 2010: ch 4). We agree that costs, including transaction costs incurred during the consummation of bargains, might well serve as part of the backgrounded conditions of political economy in the Wagnerian view but add that backgrounding these does not (or, more precisely, should not) imply their elimination from the purview of inquiry altogether. Therefore, potential value is gained in exploring how transaction costs influence (but not determine) the configuration of entangled network structures.
This article seeks to build upon Holcombe’s constructive input to the advancement of entangled political economy theory and analysis. It does so by illustrating how interest groups and other political collectives manipulate transaction costs to secure favorable outcomes, broadly construed as bundles of advantages inclusive of the likes of payments, privileges, rents, and rights (Novak, 2023). The possibility of transaction cost manipulation is explicitly addressed by Twight (1988; 1994), whose studies in transaction cost politics are used as a foil to integrate Wagner and Holcombe, and is considered in historical studies of the boundaries between production and predation (see, for example, North, 1990; North et al, 2009). If anything, we think that using transaction cost analysis in the way recently presented by Holcombe and used earlier by Twight can amplify the evolutionary dimensions of entangled political economy. Specifically, transaction cost manipulability is a factor underlying shifts in the networked structure of an entangled political economy over time.
Holcombe’s analysis implies that non-elite political groups, encumbered by relatively high transaction costs, are unable to wield a decisive influence upon the policies established by the elites. Analytically, this anticipates a network structure with a noticeable degree of clustering between actor-nodes—elite actors have a high degree of connectivity with elite peers, and political non-elites tend to connect with each other, but the connections between elite and non-elite actors would be relatively sparse (save, in the fiscal sense, for the likes of taxes and financial transfers). This network structure is theoretically explained as the outcome of elites striving to increase the transaction costs of political exchanges borne by non-elites. However, we think that this is not the only structural possibility raised by an awareness of transaction cost politics. In this article, we consider a case as to how non-elitists also attempt to manipulate political transaction costs, in this instance, to encourage elitists to become more responsive to public concerns over fiscal exploitation (Brennan and Buchanan, 2000 [1980]). Specifically, we illustrate that the “constitutional moment” in US politics during the last quarter of the 20th century (Brennan and Buchanan, 2000 [1980]; 2000 [1985]), as reflected in state-level tax and expenditure limitation (TEL) programs, may be modeled as a shift in entanglement motivated by non-elite displeasure toward tax increases (and related issues like overspending or a lack of value deriving from public sector spending initiatives).
The structure of the remainder of this article is as follows. In the next section, an overview of Wagner’s theory of entanglement is provided, together with an assessment of how Holcombe has sought to interpret entangled political economy through the prism of transaction cost economics. This is followed by the development of a framework of transaction cost manipulation countenancing elite efforts in raising the costs of political involvement by non-elite counterparties, and vice versa. Following this, the case study of the US state-level TEL movement of Colorado will be used as an illustration of the theoretical framework. The article culminates in a conclusion briefly summarizing its key arguments and discussing potential future research directions.
Visions of entanglement between economic and political relations: Wagner and Holcombe
Wagner on entangled political economy: dyadism, triadism, and oligarchic political propensities
Entangled political economy stands as arguably Richard Wagner’s most original contribution made during his over 50 years of academic life. Wagner describes entangled political economy as being an intellectual counterpoint to orthodox (or mainstream) political economy. One problem for Wagner is that under orthodoxy, the entire economy is reduced to a point-mass entity labeled (explicitly or implicitly so) as a “representative” agent. This economic reduction has the effect of, among other things, obscuring the productive contributions made by diverse individuals seeking to promulgate their entrepreneurial plans. Adding to the problematic caricature of an economy is that the political domain, likewise, is similarly conceived as its own point-mass entity that intervenes upon the economic domain to produce Pareto-superior outcomes. It is here, too, that political reduction conceals from explicit analytical view the coexistence of heterogeneous political actors, such as legislators, bureaucratic agents, special interest groups, and so on.
a public square of some form must be populated for a market square to operate. On the one hand, a society ordered exclusively through a market square cannot generate and maintain the rules of just conduct that are required for such a society to reproduce itself. On the other hand, a society ordered exclusively through a public square cannot generate sustainable patterns of activity because the absence of alienation eliminates both knowledge of valuation and incentive to act so as to attain higher valuation. The two squares depend on each other and thus exist in a symbiotic relationship that involves a good deal of parasitism. (Wagner, 2007: 59–61)
A related implication of the entangled political economy approach is that the properties of systems of macro-level activity, such as economy and polity, complexly emerge from micro- and meso-levels of activity (and relational interactivity) between individuals and their collective entities. To treat, as in the case of orthodox political economy, the economy and polity as holistic entities or as objects therefore commits a fallacy of composition insofar as macro-level phenomena are mistakenly perceived to exude the same underlying characteristics as those observed at micro- and meso-levels.
The interactive character of economic and political activities that Wagner speaks of can be graphically represented by networks. In his numerous studies outlining the entangled political economy approach, Wagner (2007; 2010; 2012a; 2014; 2016; 2020) represents entanglement as networked connections (or ties) between nodes. The analytically admissible set of connections may represent economic exchanges orchestrated by economic and/or political actors but need not be limited to those: “connections are not singular but entail a structured multiplicity of connections, some surely more foundational than others … we can think of material, legal, and moral levels of connection, all of which operate jointly in generating observable patterns of societal interaction” (Wagner, 2010: 46). Wagner usually identifies nodes in his framework as either for-profit commercial enterprises or non-profit bureaucratic (or political) enterprises, but it is possibles that nodes could represent individual actors or other kinds of collective entities, such as non-profit associations, social movement organizations, and so on (Wagner, 2012a; Aligica and Wagner, 2020; Novak, 2021).
Structure emerges in entangled political economy because not every actor-node is connected to one another. In network-analytical parlance, an entangled political economy is typically characterized by non-random and incomplete connectivity across nodes. This intuitively corresponds with the economic idea that agents operate in an environment of divided knowledge. Furthermore, this pattern is consistent with social-scientific insights that heterogeneity among agents in terms of capability, endowment, and other relevant variables will structure trading activities and the exchange patterns these bring forth.
Structural patterns are crucially reflected in Wagner’s proposition that an entangled political economy encompasses a mixture of “dyadic” and “triadic” exchanges (Podemska-Mikluch and Wagner, 2013). Dyadic exchanges are represented by network connections between two (or two sets of) actors who willingly engage with a given exchange opportunity: “[t]he dyadic relationships of market catallaxy are between equals who must continually attract one another in an environment of open competition where there are no entitlements to receive continued support outside of mutual attraction” (Wagner, 2016: 125). A triadic exchange appends a dyad by introducing into the networked relations a host of unwilling third parties who endure losses resulting from the transaction by the two willing dyads. Political exchanges are viewed as being quintessentially triadic because the exercise of fiscal, legal, or regulatory compulsion forcibly rearranges market-generated returns and, as a result, generates losing constituencies.
Entanglement indicates encounters between different kinds of enterprises and polycentric meso-level systems. This is crucial, for a triadic assertion of the political pursuit of gain is suggested to lead to what are called “tectonic clashes” between competing and other conflicting activities among the economic and political realms. Commercial enterprises may not necessarily be co-opted by politics, but politically orchestrated alterations of entrepreneurial plans are still likely to create economic instability and aggravate broader societal tensions. This is because incongruent principles of conduct, let alone logistical and organizational methods and priorities, are at play when economics meets politics (Wagner, 2012b). Commercial enterprises find themselves becoming increasingly sensitive to (and obliging) political considerations and intrigues in their daily affairs. A clash of governance and operating logics ensues from close-knit entanglements between certain commercial and political enterprises. Worse still is that entanglement may lead to drastic changes to the character of certain commercial enterprises themselves, transforming into what Jane Jacobs (1992) described as “monstrous moral hybrids” in which standards of conduct and performance are simultaneously (and awkwardly) informed by both the “commercial syndrome” of trading and the “guardian syndrome” of taking.
There is a final implication of entanglement warranting our attention. Economic networks informed by dyadic relationships are scalable, in that “the size of a network is pretty much irrelevant because there is no significant change in network qualities as networks become larger” (Wagner, 2016: 75). A large firm is a scaled-up version of a small firm because its production technologies and profit-seeking incentive structure remain invariant to scale in the face of competitive market pressures. Such scalability eludes politics. This is because political connections between individual citizen-voters and political agents become increasingly distanced and estranged as the size of the polity increases. According to Wagner (2016: 76), “if economic relationships are scalable while political relationships are not, a system of entangled political economy might feature a form of increasing returns to political power within society,” threatening a transition into oligarchic political arrangements dominated by elitist concerns. Certainly, the non-scalability of political interactions is seen to be aggravated by the machinations of so-called “Big Player” political enterprises wielding discretionary coercive powers in a manner that is simply unavailable to others (Koppl, 2002; Smith et al, 2011).
Holcombe on entangled political economy: transaction costs and stratified political engagements
Randall Holcombe has sought to integrate public choice and elite theories. In doing so, he theorizes that variations in the degree of political activity are partly informed by exposure to political transaction costs. Most citizen-voters experience relatively high transaction costs associated with political participation, and these not only prevent them from direct policymaking involvement. The relatively high transaction costs experienced by non-elites are seen as lending explanatory support for such phenomena as low voter turnout during elections, rationally ignorant voting behavior, and prioritizing “cheap talk” expressive (rather than instrumental) behavior politically (Holcombe, 2018; 2023a).
Non-elite individuals and groups bear relatively high political transaction costs, but there is a small subset of the polity that incurs relatively low transaction costs. The latter group is regarded as the political elite, as represented by the likes of legislators, bureaucrats, politically connected representatives of special interest groups, and professional lobbyists. According to Holcombe (2023a: 131), “[t]hose legislators, lobbyists, and others who are well connected can bargain to create public policies that maximize the value of … policies to themselves…. People in the low transaction cost group are the political elite who design public policy.” The shared experience of bearing relatively low transaction costs is not only seen to enable political elitists to more easily collaborate and negotiate the terms and conditions of public policies among one another. Holcombe’s thesis is that elites tend to capitalize on their transaction cost advantages by imposing fiscal, legal, regulatory, and other policy costs and obligations upon the politically disconnected non-elites (Holcombe, 2023a; Novak, 2023; Trantidis, 2023).
The role of group-based transaction cost differentials in politically exploitative outcomes is discussed not only in Holcombe’s (2018) Political Capitalism but also in his most recent work, Following Their Leaders (Holcombe, 2023a). In both works, it is suggested that elite personalities attempt to eliminate open-ended, or unfettered, public access to the most significant opportunities to originate (and modify) public finance settings, as well as public policies generally. There exist numerous entry barriers to political participation—such as educational background, lack of familiarity with bureaucratic, legal, and policy languages, and barriers to political entrepreneurship—all of which raise the transaction costs of political exchange for non-elites. Elitist political advantages are likely compounded by other facilitators of intra-elitist political bargains, such as shared expertise and worldviews forged through schooling and similar work (or life) experiences (Novak, 2023). A very important condition perpetuating the elite–mass distinction identified by both Wagner and Holcombe is the persuasive projection of justificatory rhetoric by political elites (and their supporters throughout society) (Wagner, 2016; Holcombe, 2023a). There are today numerous arguments legitimizing the existence of the state, parasitical attachments to market activity by governmental organs, and the largely non-transparent (if not secretive) methods of policy design and enforcement.
Politics is an intricately networked world filled with political leaders, key legislators, senior officials, and influential figureheads operating in interest organizations, consultancies, think tanks, and lobbying firms. It is difficult, but not impossible, for members of the public to access this world, as Holcombe argues. In addition to the turnover of legislators and bureaucratic staff, resourceful and canny agents, originally situated outside the “polite society” that is the elite stratum, may opportunistically “purchase” recognition, influence, and esteem from elitist incumbents (Holcombe, 2023c; Novak, 2023). Generally, policymaking itself is an emergent process with elements of contestability, but the typical practice is that fiscal and other policy settings are designed and implemented in limited-access arenas largely closed off to the outside world.
The “rationality” presumption is that an elitist policymaker wants to ensure that policy more closely reduces to that of a choice made by (or at least benefiting) them. Elites would prefer this than bear higher transaction costs stemming from an uncertain order of tenuous compromises resulting from protracted negotiations among rivalrous members of the elitist cadre (which could risk involving policy processes extending out to embrace non-elite involvements and concerns). To avoid the politically odious outcome of inclusive policymaking, elitist actors strive to raise political entry barriers, suppress ideological competition, and embark upon other means to reduce their own political transaction costs (including by potentially raising the costs borne by others, especially non-elites).
To be clear, there are additional factors contributing to uneven political participation within an entangled political economy network. Political enterprises do not parasitically attach themselves uniformly to every commercial enterprise, in line with the varied applications of different tax bases and regulatory arrangements. Another reason why all entities are not completely connected is that commercial and political enterprises typically perform specialized roles and functions, leading to a lack of connectivity if the activities of a given enterprise are irrelevant to one another’s activities and performance (Wagner, 2007). Even so, these caveats are not considered to undermine the merits of Holcombe’s core thesis of elite–mass political stratification.
Comparing and contrasting Wagner and Holcombe
The approaches to political economy advanced by Wagner and Holcombe share numerous points of similarity. This is unsurprising, given their joint positionality within the broader intellectual domain of what is now described as “mainline” economics (Boettke, 2012; Farvaque and Gannon, 2018). Both scholars adhere to a “neo-Mengerian” conceptual and methodological agenda recognizing the contributions of individual agency toward the establishment of dynamic and complex human relations. Wagner and Holcombe not only see economic and political realms as being inseparable, but it appears that they mutually recognize that an economy itself is not a unified object (or organization) amenable to exogenous policy intervention.
The similarities between Wagner and Holcombe continue when it comes to considerations of politics and public policy. They jointly appreciate the insufficiency of neoclassical (for example, social welfare function) and conventional public choice (for example, median voter) explanations of political action, with both expounding the value of elite theory as a realistic alternative (see, for example, Wagner, 2018). Furthermore, Wagner and Holcombe challenge neo-Walrasian framings that construe public policies as simple objects of choice that encapsulate individual preferences. Wagner (2016; 2020) describes the “shell game” distractive function of policy design and articulation, giving rise to such effects as fiscal illusion. Holcombe (2023a) shows how citizen-voters unreflectively mimic elite preferences and, from there, politically justify those elite preferences expressively in voting patterns.
Key contrasts between Wagnerian and Holcombian approaches to entangled political economy seem to concentrate upon different points in emphasis. To repeat, Wagner does appear to give credence to the oligarchic nature of politics in his entangled political economy framework. This is illustrated by his appraisals of the non-scalability of politics vis-à-vis commerce. For Holcombe, transaction costs are a key factor driving the separability of elite actors within economic-political systems from their non-elite counterparts.
Figure 1 illustrates the network structures of a hypothetical political economy as conceived by Wagner (see Panel A on the left-hand side of the figure) and Holcombe (see Panel B on the right-hand side).1 In both panels, there are circles denoting commercial enterprise nodes and squares denoting political enterprise nodes. In each panel, one of the squares is shaded in grey, denoting a legislative assembly. The lines between the nodes are ties reflecting economic or political exchanges of financial and/or material resources between enterprises.
Wagner’s and Holcombe’s versions of entangled political economy
Citation: Journal of Public Finance and Public Choice 2024; 10.1332/25156918Y2024D000000009
There are a host of visual differences between the Wagner and Holcombe panels. Focusing on the Holcombe panel, the enterprise nodes are identified (using various sizes and colors) as embodying diverse qualities. The node sizes vary within the Holcombe panel, reflecting differences in network degree (that is, the number of ties that a node has to other nodes) for each node within the network. Certain nodes are colored in black, signifying their participation (along with the grey-shaded legislature) within the low transaction cost elite sub-network. Non-colored nodes are non-elite network participants. Also of note is that the Holcombe panel illustrates a small number of hexagonally shaped nodes depicting “monstrous moral hybrid” commercial enterprises that are closely entangled with political enterprises.
The Holcombe panel’s depiction of entangled political economy also bears a distinguishing feature with respect to the visualization of network ties. The Wagner panel on the left-hand side indicates that the ties are undirected, meaning that all the exchange relationships between connected enterprises are bilateral in nature. By contrast, the Holcombe panel consists of ties with arrows. This network illustrates directional ties, indicating either unilateral (one-way arrow) or bilateral (two-way arrow) relationships between participants within the political-economic system. Added to the Holcombe panel are variations in the thickness of ties that reflect connective frequency between the nodes.
Holcombe’s recent reflections upon entangled political economy present at least two sources of intellectual value. The first is that Holcombe reinforces Wagner’s proposition that structural properties do happen to underpin networks of economic and political entanglement. The second provides a crucial lesson in the application of foregrounding versus backgrounding emphasis in theory and method. Wagner often shares the insight of his mentor, James M. Buchanan, that political economy invariably involves the selection of “analytical windows” through which to investigate relevant phenomena. Wagner (1994) at no point peers through the “neo-Walrasian window,” an example being his observation that transaction costs need not be assumed to be zero. Holcombe’s transaction cost emphasis, nonetheless, reminds us not to be afflicted with bouts of intellectual amnesia on the question of cost (and related) variables when peering through non-Walrasian windows of contemplating and reasoning. In other words, Wagner’s foregrounding of entangled relations does not nullify that transaction costs remain a variable influencing the networked structure of political economy.
Transaction cost manipulation within an entangled political economy
Transaction cost manipulation: revisiting Twight’s framework
Economic-political networks possess structural characteristics, and structure is informed by differences in relative political transaction costs experienced by elites and non-elites. “Public policy making is indeed an entangled political economy,” states Holcombe (2023c: 39), “with the policies of public entities influencing private entities, and private entities influencing the policies created by those public entities. However, high transaction costs prevent most people from being a part of that entanglement.” Political transaction cost differentials imply neo-feudalistic political stratification, as indicated by effective exclusions of the masses from access and participation. Given that “[t]housands of people cannot simultaneously participate in designing public policy … public policies will be designed by a few individuals who face low transaction costs and can bargain with each other” (Holcombe, 2018: 131). These propositions are central to Holcombe’s refinements of Wagner’s entangled political economy.
Holcombe appreciates as much as Wagner does that networks are dynamic. To the extent that transaction costs are malleable, then, cost adjustments may play a role in altering the network structure. The implications of political transaction cost adjustability are key to the thought of Charlotte Twight, who says that transaction costs are endogenously determined via the interactions of individuals seeking political exchanges. Charlotte Twight (1993: 500) clarifies political transaction costs as “the costs of reaching and enforcing collective agreements that define the role and scope of government.”2 This politicized perspective of transaction costs contrasts with the economically oriented version, with the latter incorporating “negotiation and enforcement costs specifically attributable to the multiparty character of market exchange” (Twight, 1996: 300).
Twight has cataloged an impressive array of political techniques enlisted by legislators and bureaucrats to increase the relative transaction costs faced by others.3 Many of the examples she laid out may be classed as belonging to either one of two categories: information costs; and agreement and enforcement costs. Information costs not only refer to the costs of obtaining accurate information through official channels but also pertain to costs absorbed when attempting to evaluate the relative benefits and costs of private (or non-state) alternatives to government controls (Twight, 1988). An example of an information cost arises from political efforts to project “fiscal illusion” effects, altering perceptions of the costs and benefits of fiscal instruments—such as taxes—on the part of the masses (Wagner, 1976; Blount, 2001).
The other main cost category identified by Twight relates to agreement and enforcement. These are “the costs of acting on private perceptions of appropriate government functions and policies. Thus, in large measure, these strategies alter costs of reaching or enforcing political agreements pertaining to the scope of governmental authority and concomitant individual rights” (Twight, 1994: 202, emphasis in original). Agreement and enforcement costs include “deliberate increases in organizational costs … facing private citizens and other political actors in decisions influencing the role and scope of government” (Twight, 1996: 302). It is imaginable that certain policy innovations and acts of political entrepreneurship may have the effect of shifting the relative transaction costs experienced by political elites vis-à-vis non-elites, for example, legal suppression of watchdog bodies and other political scrutineers grounded upon suppressing so-called “disinformation” or “misinformation.”
When rent-seeking interest groups cause changes in the law that increase the transaction costs of political resistance by the taxpaying public, thereby reducing the already minimal incentives of rational voters to become informed and politically active, they increase the margin by which total societal costs may exceed the total benefits of particular fiscal programs. That is, the excess of total costs over benefits—the net cost to society of the redistribution—will exceed the net cost that would be tolerated in the absence of transaction-cost augmentation. This means that, when transaction-cost augmentation prevails, the net social cost is greater and hence efficiency less than what would be attained under an alternative achievable set of institutional rules. (Crew and Twight, 1990: 22–3, emphasis in original)
As will be described later, an important rationale for institutions—including explicit constitutional limitations—is to deter cost-manipulative behaviors by political actors who would wish to develop and entrench triadic networks (Macey, 1988).
Ideology could also shape the public acceptability of manipulative behavior regarding political transaction costs. As Twight (1993: 500) suggests, “endogenously determined transaction costs play a more central role than previously accorded them in models of ideological change. Through skillful shaping of such transaction costs, government actors can influence in systematic ways the degree of political opposition that they encounter in advancing their own policy objectives.” Twight’s remarks bear similarities to Wagner’s and Holcombe’s descriptions of the use of political sentiments as an instrument to cognitively amplify support for governmental programs.
Turning the tables: transaction cost manipulation through non-elite coalitions with sympathetic elites
The information, agreement, and enforcement aspects of political transaction costs are strategically manipulable by elitist political actors. Consider two groups within the polity: the elite (Group A) and the non-elite (Group B). Twight (1992: 93) explores transaction cost shifting whereby “the A’s and their governmental benefactors may be able to reduce political opposition by the B’s while increasing their own privileges.” The Twightian conception is consistent with Holcombe’s suggestion that political elites strategically coordinate to increase the relative transaction costs of policy engagement experienced by non-elitist citizen-voters. From an entangled political economy perspective, transaction cost manipulability of this kind leads to the stratification of economic-political network connections between elite and non-elite actors.
The impression has been given that political transaction costs are unilaterally manipulable: elites possess the capacity and power to augment the transaction costs borne by non-elites, and non-elites are apathetic (or otherwise passive) in the face of this elite capability. This article suggests an inversion of Twight’s logic: political outsiders might possess an interest, and indeed a capacity, in resisting the imposition of political transaction costs by political insiders. Admittedly, there is a difference between interest and capability. Taking Holcombe’s argument about the persistence of the elite versus non-elite network stratification into account, we assume that non-elites would need to form strategic coalitions with certain rivalrous elite interests to effectuate a reversal in elite-driven transaction cost shifting.5 It could be the case that under certain circumstances, highly motivated cohorts within Group B ally with certain cohorts within Group A to opportunistically challenge rulers, thereby preventing an elite-driven transfer of relative political transaction costs to non-elites.
Consistent with this proposition, certain individuals or organizations oftentimes attempt to strategically position themselves as intermediaries between rivalrous groups. The payoff for the successful intermediator is that they may acquire valuable economic, political, and social resources (Burt, 1992). Neither is it inconceivable that these intermediary groups, or, perhaps more crucially, sub-cohorts of the political elite, develop a sense of sympathy with non-elite arguments concerning the impropriety of elite-driven transaction cost augmentation. While such positioning by intermediaries is sometimes criticized as “astroturfing,” or an insincere representation of non-elite concerns (Walker, 2014), our substantive point remains. With the aid of (sincere or opportunistic) allies, non-elites can sometimes exert enough political influence to limit transaction cost manipulation by elite interests.
The phenomenon of resistance to elite rule has long puzzled political economists. This has been the case ever since Mancur Olson’s (1965) identification of individual incentives for abstention from costly collective actions. However, the possibility that politically contrived transaction cost augmentation could be resisted is countenanced by Twight. She entertains, as do other certain critics of Olson’s position,6 a strongly ideological grounding for non-elite mobilization: “under an existing rights structure rife with transaction-cost augmentation, those harmed usually do not have incentives to take political action to make institutional changes aimed at enforcing the original constitutional contract absent strong, value-driven personal commitments to that outcome and to principled political activism” (Twight, 1992: 107, emphasis added). Our argument is that it is possible for reasonably organized non-elites to resist economic and political threats and, in so doing, successfully check elite efforts to shift political transaction costs.7 Twight’s remark alludes to a role for affect in mobilizing non-elitist collective actions. For example, non-elites use speech faculties, physical gestures, and other approaches to arouse shared senses of anger, contempt, fear, or indignation regarding the (presumably adverse) implications of elitist imposition of political transaction costs (see, for example, Glaser and Salovey, 1998; van Winden, 2007).
As indicated, Twight cataloged various strategies adopted by elites to raise the effective political transaction costs experienced by non-elites. We suppose that non-elites, if sufficiently organized to do so (including in coalition with politically influential allies, if necessary), can resist unpopular policies. On the information costs dimension, non-elitist citizen-voters may publicly communicate their displeasure toward policy proposals that have the implication of entrenching triadic political exchanges. Non-elites may collaborate with disaffected elitist interest groups, opposition political figures, and perhaps even subversive bureaucrats to articulate alternative policies that, among other things, openly question the efficacy or legitimacy of elitist policy offerings or public finance settings. Similarly, non-elite groups may respond to elite-generated transaction cost manipulation by generating countervailing campaigns, for example, educating the public about the attributes and implications of fiscal illusion and other elitist policy sleights of hand (Twight, 1992).
Non-elites may raise the costs of elitists reaching political agreements and enforcing political terms of exchange. An expansive social movement studies literature, for example, highlights an incredible array of contentious, politically counter-hegemonic activities by non-elite groups to express dissent toward policies lacking support. Such activities include: political lobbying for direct policy reversal; petitioning for referenda and similar ballot initiatives; public meetings, rallies, and protests; strike actions and boycotts; and so on (Sharp, 1973; Novak, 2021).
Literature also points to so-called “venue shopping,” a discovery process of ascertaining which site (or sites) of decision-making will prove most amenable to claims made by non-elite representatives and their allies (Baumgartner and Jones, 1993). For example, non-elite cohorts petition court systems for legal rulings to prevent elite attempts to impose costs upon them. Non-elites could otherwise seek to constrain elitist tendencies toward transaction cost manipulation by relocating to another jurisdiction. Of course, the mentioned cost elements are likely to be interdependent in character—for example, protest actions against an unpopular policy measure manifest a broad unwillingness by non-elites to enter into an agreement with elites and concretely provide information to governments about (a lack of) receptivity toward such agreement.
The long history of tax resistance in the US provides a good example of novelty being exercised by non-elite (and allied) political actors with respect to tactical choice. Academic and popular treatments of US tax resistance indicate the ingenious methods embraced by non-elite groups in registering dissent against unappealing new tax proposals or increases to existing taxes. Examples include lobbying and petitioning legislators and heads of state, voting referenda and ballot initiatives, demonstrations and protests, refusals to pay owed tax liabilities, and other forms of fiscal disobedience (Burg, 2004).8 In the next section, we discuss a modern strand of tax resistance that has sought to constrain the power of US state-level governments to tax and spend. However, at this stage, one should note the entanglement implications of tax-resistance cases. Non-elite groups are instrumental to the “coalitional uprising” of resistors who are seeking stratification within the economic-political network. If resistance to transaction cost manipulation by elite groups is successful on the tax policy front, we predict, other things equal, a reduction in the extent and severity of parasitical tax attachments within entangled political economy.
How does resistance thwart the imposition of political transaction costs onto unwilling non-elite interests? The tactical aspects of contentious assembly, expression, and mobilization available to non-elites implicitly signal to the elites that the (transaction) costs of public policy implementation and enforcement are unwillingly borne. Dissent is presumed to increase the cost of maintaining effective public administration generally, including the enforcement costs of maintaining public order. Furthermore, dissension is likely to raise political transaction costs where information withholding by disagreeable members of the public (or even deliberate acts of informational obfuscation and inaccuracy) reduces the ability of the political elite to effectively maintain unpopular policies and political advantages.
Public expositions of political disagreeability increase the perceptual risks surrounding policy implementation. Prolonged protests and other severe acts of political contentiousness increase the perceived dysfunctionality of government and threaten a sense of illegitimacy of elitist priorities. These issues could make it difficult for elite members to easily bargain among themselves vis-à-vis the masses. Holcombe (2023a: 147–8) indicates that elites ideally prefer to avoid popular resistance because such contentiousness contradicts a desire for political stability. The desire for stability could well be so paramount that, in some cases, the elites will yield to demands for accommodative or remediating policy changes.
The entangled political economy of Wagner provides a basis for understanding complex phenomena that cannot be adequately captured by the allocational paradigm of mainstream public finance and public choice. Holcombe builds upon Wagner’s approach regarding the determination of voter preferences, and we see strong complementarities with Twight’s transaction cost politics. All three appear to agree that the liberal order is not necessarily self-sustaining. This is because a mix of consent and coercion is omnipresent in human governance, but the key is to understand what circumstances might come into play to either support or undermine liberalism. Our transaction cost-based framework of entanglement aims to highlight how the political proclivity to degrade liberal fiscal governance standards may be countered by non-elite groups.
TEL reforms in US states, with specific reference to Colorado
Holcombe (2023c: 35) advances the thesis that “when transaction costs are figured in, they create a barrier between most people and government entities.” There is little to dispute the generic accuracy of this claim, which is one similarly endorsed by Wagner through his treatment of oligarchic tendencies in politics. Our contribution considers the contrary case wherein non-elites—perhaps with the aid and support of certain elitist rivals seeking greater influence within the halls of power—instigate opposition against those elite policymakers seeking to entrench predatory capabilities within policy systems. In a case that shortly follows, the experience of TEL reform in the US state of Colorado will broadly illustrate our approach.
Twight (1994: 191) acknowledges that “government sometimes reduces transaction costs (economic or political),” or at least abstains from policies associated with augmenting transaction costs borne by non-elites. There is literature (Olson, 2000; Candela, 2023) indicating that political elites can come to an understanding that limiting their predatory behavior incentivizes economic productivity and market development.9 As indicated by Levi (1988: 10–11), “[r]elative bargaining power and transaction costs account for the fact that rulers in history do not always rob their subjects blind and are not always running protection rackets. Rulers cannot simply advance any policy that appeals to them.” Indeed, political elitists “must interact with constituents, agents, and the representatives of other polities. To achieve their ends, they must coerce and bargain, develop their resources, and, often, alter their constraints” (Levi, 1988: 11). As part of this contentious process, non-elites (in combination with their sympathetic allies) occasionally remind elites of the perceived boundaries with respect to the legitimate exercise of coercion. Under some circumstances, non-elite-led coalitional uprisings persuade elites to withhold attempts to augment the transaction costs of political exchange.
TEL reform experience in the US state of Colorado
The western US state of Colorado, with an estimated population of some 6 million, is generally regarded as maintaining the best-practice “gold standard” of TEL provision. The Taxpayer’s Bill of Rights (TABOR) amendment to the Colorado state constitution was approved by a majority (in this case, 54 percent) of voters in 1992. TABOR limits the amount of revenue and expenditure that all levels of government in the state (including local counties and school districts) can raise or undertake. The provision requires voter approval for certain tax increases and that excess revenues be refunded to taxpayers (unless otherwise approved by voters). The state TABOR revenue limit is generally equal to the prior fiscal year’s limit plus the rate of inflation and population growth in Colorado, subject to a voter-approved floor (Colorado Department of Revenue, 2023).
Before proceeding to details concerning TABOR, it is useful to provide additional institutional and historical background. The ability of Coloradans to vote on ballot measures emerged during the late 19th and early 20th centuries, initially for legislatively referred measures and, later, extended to popular measures contingent on enough signatures to trigger a ballot initiative. An impetus for such ballot initiatives came from the urgings of the Colorado People’s (Populist) Party, whose representatives argued that popular, citizen-led ballot initiatives were a necessary bulwark against elitist political dominance (Smith, 2011a). Over the following decades, numerous ballot initiatives (either citizen-led or those led by the state’s General Assembly) expanded the size and scope of government in Colorado.
It is well known that a catalyst for the wave of statutory and constitutional TEL measures across the US states was the so-called “tax revolt” of the 1960s and 1970s. Across state jurisdictions, various individuals and groups organized with the objective of restraining the growth of government. This tax revolt is emblematically represented by California’s Proposition 13 ballot-initiative process of 1978, which amended that state’s constitution by imposing a rate limit upon property taxation, which in turn facilitated a process of fiscal reform diffusion across US states. In Colorado, efforts pre-dating TABOR sought to constrain the growth of spending and taxation. Notable among these was the “Gallagher amendment,” a legislative-led referendum passed in 1982 and repealed in 2020, for determining the value assessment of properties liable to property tax. Another provision was the 1977 “Arveschough-Bird” legislative statute that originally capped the growth of the state’s general revenue fund spending to 7 percent (later amended to 6 percent in 1991, which was eventually repealed in 2009. The Gallagher and Arveschough-Bird provisions had important interactive effects with the TABOR provision, thus highlighting the catallactical interaction of public finances (Poulson, 2003; James and Wallis, 2004; Natelson, 2016).
Prior to TABOR’s enactment in 1992, a key advocate for TEL in Colorado, Douglas Bruce, failed on three previous ballot-initiative attempts requiring voter approval for tax increases. Undeterred by previously failed statewide efforts, and in the wake of successful tax-limitation efforts in the Colorado Springs municipality, Bruce’s activism was pivotal to the ultimately successful 1992 TABOR ballot initiative. Available scholarly accounts of the campaign experience indicate little by way of improvised, or spontaneous, tax protests by Coloradans during the TABOR ballot-initiative campaign period. Greater attention has been given to Bruce’s strategic choice of developing a media campaign to bring awareness of the issues surrounding tax and expenditure limits at the state level (Smith, 2011b). Bruce received small donations from individuals and businesses to help generate support for the ballot initiative, as well as funds from several taxpayer advocacy organizations (Smith, 2011b). Speculatively, the nomenclature of a “bill of rights” to describe the 1992 TEL reform proposal was not chosen by accident, with the assumption that the longstanding political salience of bill-of-rights concepts in US constitutional development had some effect in attracting public attention, mobilizing TEL proponents, and garnering voter support to some extent.
Whereas some researchers have criticized the representativeness of Colorado’s TEL movement (see, for example, Smith, 2011b), it is noted that the pro-TABOR campaign was outspent by a three-to-one ratio by “elitist” interest group coalitions seeking to avoid voter ratification of a Colorado TEL (Kennedy, 2010). The anti-TABOR groups included a “No On #1 Committee” consisting of the Greater Denver Chamber of Commerce, the Colorado Municipal League, the Colorado Municipal Bond Dealers Association, the Colorado Education Association, and the American Federation of State, County and Municipal Employees (Smith, 2011b: 152). According to Hollenbeck (2008), anti-TABOR coalitions were almost perfectly uniform in their expressed desire for legislative discretion to continue governmental growth and, by implication, extend the presence of triadic fiscal entanglements throughout the Coloradan economy. Despite the organized resistance to a comprehensive statewide Colorado TEL by elite (and elite-aligned) interests, the TABOR proposal gained over 53 percent of support from participating voters. An opportunity for future research is to empirically identify the structure of network connections between the protagonists involved in TABOR and other tax and expenditure reform episodes—including estimation of clustering effects among elite and non-elite groups, and identifying actors that structurally bridged interactions between those groups (Burt, 1992).
The implementation of a TEL scheme does not nullify entanglements between commercial and political entities as a whole. Nor does it extinguish the evolution of triadic exchange networks. Under TELs, political elites can still engage in a “discovery process” regarding what forms of taxation and expenditure would enjoy public support (or, perhaps more accurately, avoid the opprobrium of popular resistance). From the entangled political economy standpoint, the intention of TELs is to negate political impulses to impose triadic arrangements in contravention of given TEL provisions, thereby deterring overall fiscal rent-seeking activity to some extent. In Colorado’s case, fiscal entanglement is limited by TABOR, which ties spending growth to inflation and population growth. Additionally, tax increases without majoritarian voter approval are prohibited, implying a sparser set of entanglements under TABOR than would otherwise be the case. Elite interests cannot parasitically attach themselves to non-elites to the extent that discretionary political desire would otherwise fully allow.
An outstanding question is to what extent TELs are durable in a dynamic regime of entangled political economy. Buchanan and Tullock (1999 [1962]) identified supermajority voting rules as one mechanism to prevent the fiscal-political exploitation of democratic minorities. Crew and Twight (1990) similarly speculate that such provisions could curtail the extent of elite-driven transaction cost augmentation within a polity. A key difference between supermajority rules and the Colorado ballot initiative provision is that in the latter case, a simple majority is the minimum required threshold for constitutional change. As indicated by Poulson and Kaplan (1994), the mobilization of taxpayer interest groups (rather than the median voter) to resist the imposition of unpreferred budgetary outcomes is met with counter-resistance by incumbent interests wanting to protect their discretionary policy powers to tax and spend. The costs associated with transaction cost manipulation are lower than under the supermajority threshold; thus, incentives to externalize the transaction costs of political exchange onto unwilling parties appear to remain highly prevalent.
There is ample evidence to suggest that contentious public finance remains applicable to the Colorado case. In addition to the curtailment of pre-TABOR fiscal limits, coalitions amenable to public sector growth have successfully persuaded Colorado voters to ratify constitutional amendments relaxing the stringency of TABOR provisions. In 2005, voters passed “Referendum C” by a 52–47 majority, allowing the state to retain and expend funds above the original TABOR limit for specific purposes, including education, healthcare, and transportation. This provision, in effect from Fiscal Year 2005–06 to 2009–10, was advanced to overcome a “ratchet effect” reducing the formal revenue limit whenever revenues are lower than the TABOR limit, such as in a recessionary period of subdued economic growth (see New and Slivinski, 2005). TABOR is intended to apply to lower-level public authorities in Colorado; however, since the early 1990s, there have been numerous efforts to “de-Bruce,” or override, the TABOR provisions as applicable to counties and school districts (Billings and Carroll, 2012). Similar efforts have come in the shape of legislative or judicial attempts to override or water down the state’s fiscal limits (Natelson, 2016; Wall Street Journal, 2023).
Despite the efforts of interest coalitions seeking to emasculate the TABOR framework, its architecture remains intact. TABOR proponents argue that it continues to serve as a functional constraint upon public sector growth in Colorado vis-à-vis other US states with less effective TELs (Laffer et al, 2024; Poulson, 2024). That certain TEL arrangements may be less effective points to the importance of both TEL design features and implementation mechanisms for overall effectiveness. Studies indicate that the more effective TELs, such as Colorado’s TABOR regime, will tend to: be constitutionally (rather than statutorily) codified; focus upon spending restraint; provide a refunding mechanism of budget surpluses (or excessively collected taxes or revenue); and rely upon supermajority thresholds to override or otherwise adjust the TEL arrangement (Mitchell, 2010; Merrifield and Poulsen, 2016; compare with Guan et al, 2023). These findings provide strategic insights for non-elite interests to formulate credible limitation proposals that are more likely to survive entropic pressures by pro-government elites to degrade their effectiveness. The institutional groundings of the Colorado experience—especially the use of the ballot-initiative procedure to generate public attention and advocacy funding support and to formulate allyship networks dedicated to registering non-elite preferences for fiscal restraint—appear instructive in this regard.
There are studies offering varied explanations for TEL adoption in the US states. Some of these refer to perceptions of rapidly increasing tax burdens, a perceived lack of value from public services, or inefficiencies in public administration (Lowery and Sigelman, 1981; Alm and Skidmore, 1999). Other studies have investigated the contribution of general economic, demographic, and social trends in eliciting support for TELs (see, for example, Steel and Lovrich, 1998). Whereas investigations are likely to continue with respect to the empirical strength of differing explanatory factors behind TELs, our contribution offers a generalized theoretical framework to describe why and how episodic moments of fiscal retrenchment occur—especially when it is contrarily presumed that elitist, pro-government interests possess overwhelming influence and power to enforce their preferences. It is supposed that our non-structuralist, emergent presentation of entangled public economy may be applied to other cases of resistance against fiscal expansion (for example, other tax protests and similarly coordinated efforts against unpopular proposals).
Conclusion
Richard Wagner has developed a compelling account of political economy as a process of interaction traversing the economic and political domains of activity. It has spawned a vibrant research agenda among a growing cohort of scholars. The recent engagement by Randall Holcombe on the topic of entangled political economy is an example of this, encouraging scholars to consider what entanglement means and what its value is in a theory of political economy. Holcombe has identified that the most consequential aspects of political entanglements—concerning the exercise of public powers and the wielding of coercive instruments to achieve various political objectives—are being most greatly influenced by a limited subset of elite actors within the population. The relative lack of engagement by non-elitists (mainly ordinary citizen-voters) is informed in Holcombe’s view by the relatively high transaction costs non-elitists face when trying to generate favorable political bargains. This intuition is supported by theoretical contributions by Charlotte Twight concerning the scale and scope of elitist manipulability of political transaction costs.
We have built upon discussions surrounding the place of transaction costs in entangled political economy by considering how non-elites resist political transaction cost manipulation by elite actors. Our framework has described how the likes of social movements, interest associations, and other pressure groups may enact coalitional deterrence strategies against elitist measures to increase the relative size and scope of government. This at least prevents elites from raising political transaction costs associated with public sector expansion, with the potential for enduring deterrence through institutional change. The Colorado experience of TEL reform was nominated as an example of this process at work.
It is hoped that this article will encourage research efforts to add further nuance to the entangled political economy framework. Engagements between political elites and non-elites appear to provide numerous cases that are likely to be identifiable through detailed investigations, as well as new methods of modeling entangled political economy processes. In addition to general empirical analysis of network structure, statistical techniques can elaborate upon the extent of elite and non-elite stratifications. Complementing the analyses of Wagner, Holcombe, and Twight in these suggested ways is likely to provide crucial insights into the performance and survivability of liberal-democratic systems of order more generally.
Notes
In the Festschrift volume marking the career of Richard Wagner (Boettke and Coyne, 2023), Holcombe (2023c: Figure 2.3) illustrates a stratified economic-political network that is referred to as “untangling political economy.” The figures in this article modify the original Holcombe diagram.
It is possible to make a distinction between inter-group political transaction costs, such as the relative transaction costs subjectively perceived by elites and non-elites, as explained by Holcombe, and intra-group political transaction costs that derive from desires by certain actors to establish varied mechanisms and rules that minimize the costs of opportunism (such as free-riding on collective action efforts). For an application of the latter to social movement organization and mobilization, for example, see Lichbach (1995). Our focus is on inter-group transaction costs. That said, a certain degree of interdependence between inter- and intra-group political transaction costs is acknowledged. Twight refers to Robert Young’s (1991) “tectonic politics,” which relates to strategic attempts by political elites to manipulate the environment in which their political rivals operate.
For the relevant listings, see Twight (1988; 1991; 1994).
A strain of social movement literature (see, for example, Tilly 1978) similarly refers to institutional dimensions informing counter-hegemonic activities within society.
Another option noted by Holcombe (2018) is for individuals to obtain membership of a special interest group or enroll in political parties, though it is noted that Olsonian imperceptibility regarding an individual’s contribution to the joined group is likely to remain present.
For a discussion of key criticisms of rational-choice collective action theory, see Novak (2021: ch 2).
We are not suggesting that Wagner or Holcombe spare no attention to the possibility of popular (non-elitist) resistance. In his 2018 and 2023 books, Holcombe refers to, among other things, protest activities by Occupy Wall Street against crony capitalism, as well as the Lockean presumption of revolution where governments persistently fail to fulfill their implied “social contractual” obligations (Holcombe, 2018; 2023a). Wagner’s discussions about fiscal sociology implicitly suggest that public agitation was a contributing factor in epochal historical changes to public finance systems.
Historical episodes of tax resistance in the US have commanded interest from sociologists and political scientists (see, for example, Beito, 1989; Martin, 2008; Smith, 2011b).
This intuitively provides a rough explanation as to why microeconomic and macroeconomic reforms were embraced by social-democratic parties during the 1980s and 1990s in countries like Australia, Canada, and New Zealand. In these cases, the receipt of “growth-dividend” taxation and other revenues enabled governments to expend on redistributive programs that “bought off” reform-averse constituencies.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
Acknowledgments
I thank the editors and anonymous referees for their feedback on a draft version of this manuscript. The usual disclaimers apply.
Conflict of interest
The author is Deputy Executive Director, Entangled Political Economy Research Network (EPERN).
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