The Populist Paradox

Abstract

While economic theory indicates that macroeconomic populism is doomed to failure, history shows that populist experiences are frequently repeated, ignoring both theory and past failures. In this article, we explore the origin of this paradox: why a strategy that is considered inconsistent and, therefore, doomed to failure, is adopted by governments? The “populist paradox” represents a challenge to general equilibrium frameworks based on purely rational behavior. Our explanation is that there are situations in which governments face a strong tension between two policy objectives: macroeconomic balance and social peace. This type of situation can be analytically characterized as a case of structural disequilibrium that occurs when there is a structural distributive conflict: a tension between social demands and the productive capacity of the economy. The economic policy strategies that prefers the objective of social peace over macroeconomic balance are what the literature calls “populist”. The repeated implementation of this type of strategies arises from the social pressure to satisfy popular demands. To illustrate and give historical background to our hypothesis, we use the Argentine economic history. As a solution to this type of conflicts, we offer some guidelines of a tentative strategy based on a social agreement that includes the possibility of trading income for equity between labor and capital.