I develop a model of ideologies as collectively sustained (yet individually rational) distortions in beliefs concerning the proper scope of governments versus markets. In processing and interpreting signals of the efficacy of public and market provision of education, health insurance, pensions, etc., individuals optimally trade off the value of remaining hopeful about their future prospects (or their children's) versus the costs of misinformed decisions. Because these future outcomes also depend on whether other citizens respond to unpleasant facts with realism or denial, endogenous social cognitions emerge. Thus, an equilibrium in which people acknowledge the limitations of interventionism coexists with one in which they remain obstinately blind to them, embracing a statist ideology and voting for an excessively large government. Conversely, an equilibrium associated with appropriate public responses to market failures coexists with one dominated by a laissez-faire ideology and blind faith in the invisible hand. With public-sector capital, this interplay of beliefs and institutions leads to history-dependent dynamics. The model also explains why societies find it desirable to set up constitutional protections for dissenting views, even when ex-post everyone would prefer to ignore unwelcome news. (JEL: H11, D72, D83, P16, Z1) (c) 2008 by the European Economic Association.
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Volume (Year): 6 (2008) Issue (Month): 2-3 (04-05) Pages: 321-352 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism Z1 - Other Special Topics - - Cultural Economics