Many social scientists would agree that political institutions are central for economic policy choice. A better understanding of the political driving forces behind the adoption of certain policies is not only interesting in its own right. It may also hold the key to a better understanding of what institutional environments help promote the right kind of policies for successful economic performance and economic development. The new political economy, a thriving field in the past fifteen or so years, uses ideas from incentive theory to understand the interaction of political and economic forces in shaping policy. The aim of the lecture is to provide an overview of the achievements in this field in a way that is accessible to a wide audience. We will discuss the main theoretical ideas and the growing body of evidence that supports their relevance. It will also set the ideas in the history of economic thought. The lecture will also demonstrate how the ideas have practical relevance in thinking about specific policy issues including on-going debates about the organization of government and the role of the state. The new political economy puts the importance of accountability at the heart of its idea of good government. It also stresses the importance of open information flows and civic traditions in improving the quality of government. The ideas in the new political economy are at the heart of many contemporary debates about the reform of public institutions and reforming public services. They are also important in understanding how interactions between government and the economy may be a source of under-development problems.
Professor Tim Besley FBA, London School of Economics and Political Science