John Freeman
Democracy and Markets


Freeman, John R. and Daniel Houser. 1998. "A Computable Equilibrium Model for the Study of
Political Economy." American Journal of Political Science 42(2):628-660.


Theory. This quantitative study explores the relationship between democracy and markets, and attempts to understand whether they are compatible. To this end, the researchers develop a complex model that balances political and economic theory. The study provides insight of how to study relatively small scale but complex social systems with stochastic elements.

Design. The model fuses a branch of real business cycle theory and the theory of presidential approval. This enables the researchers to understand the joint or simultaneous equilibration of democracy and markets. While the model can be employed to understand how different political institutions create different political economic equilibriums, it is parameterized for the U.S. in this particular study. More specifically, the model is meant to mimic the United States in the 1980s.

Measurement. The researchers took macroeconomic data from a number of sources for the decade of the 1980s. Their political data came from public opinion polls on approval management and the level of approval of the president.

Data Analysis. The parameterized model is used to study two counterfactuals. The first concerns the impact of increased approval volatility on political–economic equilibration. The second counterfactual is the impact of presidents pursuing relatively high levels of approval.

Interpretation. The researchers find that there is a slight decrease in social welfare that comes from increased approval volatility. However, they also conclude that the president's pursuit of a consensual approval target is not necessarily socially harmful, but in fact actually enhances social welfare.


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