Discussion Paper No.21

Preliminary (Not for quotation, for discussion only)

DYNAMIC STRUCTURALISM: AN APPLICATION

FOR POLITICO-ECONOMIC ANALYSIS

by

Office of Systems Analysis*

March 1979

Economic Research Institute

Economic Planning Agency

Japanese Government

Tokyo

* The paper is a part of the politico-economic project at the

office of Systems Analysis of the Institute. The project is

undertaken by Eisuke Sakakibara and Taizo Yakushiji in cooper-

ation with Y. Niimura, H. Inoue, T. Takahashi and Y. Yamamoto

of the office.

Table of Contents

Chapter Page I. Introduction: Dynamic Structuralism . . . . . . . . . . . . . . . . . . . . 1

II. Economic Context of Dynamic Structuralism . . . . . . . . . . . . . . . 6

III. Political Context of Dynamic Structuralism . . . . . . . . . . . . . . . . 15 IV. Dynamic Incrementalism: Politico-Economic "Ensemble" . . . . 28

IV-A Static Nature of the Wildavskian Incrementalism . . . . 28

IV-B Bureaucratic Structural Model: Two-Actor

Bureaucratic Politics Model . . . . . . . . . . . . . . . . 30

IV-C Empirical Results: Evolution of Relative Power . . . . . 36

V. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Appendix

I. General Dynamic Incremental Model . . . . . . . . . . . . . . . . . . . . . 50

－1－

I. Introduction: Dynamic Structuralism: An Application for Politico-

economic Analysis

"Structuralism" as espoused by Levi-Strauss is a general methodological

position that can be applied to any kind of social study.1) The essense of

"structuralism" as we understand it is to describe observed social relations

with the help of a model of social structure which is not observable. It is

important here to note that "the term 'social structure' has nothing to do

with empirical reality, but with models which are built after it". Social

relations as defined by Levi-Strauss are raw data on which the theorist must

build his models. These raw data are, of course, observable and their

correlations can be calculated. On the other hand, social structure belongs

to different epistemological dimension and can never be "reduced to the

ensemble of the social relations to be described in a given society." This

notion of "structure" corresponds to the concept of unobserved "state" in

control theory or state space models. The "state" in control theory is a

distributed lag function of inputs and white noise and uniquely determine

outputs with some stochastic errors. The state here completely defines the

system but because of the system noise and observation errors, it is usually

not observable. What we observe are outputs which are generated by the system

or by state variables. Social relations in Levi-Strauss definition can be

interpreted in the control theory context as inputs, outputs, and their

correlations. Also, "structure" or system can be defined by a vector of state

variables which are normally unobservable. In the politico-economic framework,

the structure that we want to model is, for example, a specific organization

or a combination of organizations where a certain politico-economic decision

1) Levi-Strauss (1949)

－2－

is made. In this particular study, we are interested in the structure of a

certain sector of government where budgetary decisions on public road construction

are made. The structure which relates to the particular decision making process

can be defined by a vector of unobserved state variables. What determine these

states are laws, regulations or a set of explicit rules and routines, ("conscious"

elements) and the deep rooted psychology of the members of the organization or

associated culture ("unconscious" elements).

In ordinary economic models, these "structure" or state are assumed to be

invariant over time and to be exactly known. This assumption allows the economist

to interpret the causality of events or social relations in terms of inputs and

outputs alone. In "classical" micro models, the relation of inputs to outputs

is always reduced to the level of individuals or individual firms and technical

relations and utility or profit maximization "mechanically" link the two.

The feedbacks or interactions among individuals which would give rise to

the dynamism of the "structure" or state of the social system is ruled out by

assumption. In macro models, inputs and outputs are simply related with each

other with some ad-hoc behavioral assumptions.

In the field of political science, concepts of state exist in abstract

terms. The notion such as power of structure of international relations are

exactly the state or structure that we are describing. However, the dynamism

of changes in structure has not been formally spelled out. Moreover, in many

existing models, rational behavior on the part of a single decision maker is

often assumed and this assumption has eliminated the necessity to describe the

structure or state of decision making process.

Herbert Simon1) and his behavioral school is one notable exception in economics

1) Simon (1959, 1965, 1969), McGuire and Radner (1972), Cyert and March (1963).

－3－

where the adaptive process of the organization has been a major focus. The

study of organizational behavior vis-a-vis such key concepts as factoring,

satisficing, search, uncertainty avoidence and repertoires replaced the

traditional rationality and optimization concepts by the detailed description

of the processes of decision making by the organizations. In Simon's own

words "Much of the activity of science is an application of that paradigm: given

the description of some natural phenomena, to find the differential equations

for processes that will produce the phenomenon."1) Although Simon does not

introduce the concept such as state or structure explicitly, this "differential

equations for processes" are nothing but the evolutions of states or structure

of the organization. Those decision making processes in organizations which

produce the observable phenomenon may not be observable and the aim of his

organizational theory is to describe the observable phenomenon in terms of the

dynamics of these unobservable decision making processes.

Graham T. Allison's2) organizational process paradigm and government (bureau-

cratic) politics paradigm can also be seen as a development in the same direction.

What he calls rational actor paradigm is nothing but the "mechanical" model

which connects inputs and outputs directly with the assumption of an invariant

and known "structure," which summarized by the concept of "rationality". His

second and third models,however, introduce the notion of state or structure

implicitly in terms of the rules and dynamism of organizational process and

bureaucratic politics. His emphasis on "standard operating procedure" as an

important concept in describing the organizational behavior is quite interest-

ing in this context. "Standard operation procedure" for an organization can

be interpreted in our framework as an important element of vector of state

1) Simon (1969). 2) Allison (1971).

－4－

variables that constitutes the state or structure of the government. The state

or structure of the government evolves as identified goals, standard operating

procedures and program changes. As in Simon, Cyert and March, the Allison

model can be interpreted as a description of the dynamic evolution of "structure"

or "state" that produce outputs given exogeneous inputs.

It is our contention, here, that one way to formally spell out this Levi-

Strauss-Simon-Allison "dynamic structuralism" is by the so-called state space

models or Kalman filter models in the engineering literature.1) Here, the

system is formally described by the following two sets of equations;

x(t) = f(x(t－1), u(t), v(t)) . . . . . . . . (1－1)

z(t) = g(x(t), u(t), w(t)) . . . . . . . . . . (1－2)

where x(t), u(t), z(t), v(t), w(t) are vector of state variables, vector of

inputs, vector of outputs, Gaussian system noise and Gaussian output measure-

ment errors respectively. Here the system or structure is completely defined by

a vector of unobservable state variables which evolves through time and reacts

to inputs and white noise. This set of unobservalbe state variables which

constitute the "structure" of the system determine the output stochastically

along with inputs. The Levi-Strauss notion of "social structure", Simon's

"differential equations for processes" and Allison"s "organizational and

bureaucratic politics processes" correspond to the differential equations for

state variables in equation (1－1). The "structure" or state which determines

the pattern of response of outputs to inputs are formally defined by vector of

unobservable state variables which evolve through time. The formal introduction

of this notion of dynamic structure or state which is unobservable to explain

1) See, for example, Athan (1974), Miyatake (1977), Yakushiji (1977).

－5－

observable social relations or phenomenon is the key to this "dynamic structur-

alism" approach.

In this paper, we formally adopt this "dynamic structuralism" or state

space models to describe the government budgetary decision making processes

for road construction in Japan. As explained in detail in the later section,

the Japanese budgetary decision making process for road construction can be

viewed as a "bureaucratic politics" model between Construction and Finance

Ministries with political and other intervention. The structure of bureaucratic

politics can be characterized by a set of unobservable state variables represent-

ing their relative power with regard to this particular decision. This structure

or state, evolving through time and reacting to various inputs, determines

the actual budgetary allocation for road construction (outputs). The model

which is built upon the incrementalist model is relatively crude but it is

hoped that it would fully illustrate the merit of "dynamic structuralism"

approach or the application of state space models for the description of

decision making processes of the dynamic structure of the government and other

organizations.

－6－

II. Economic Context of Dyanmic Structuralism

This "dynamic structural approach" to social systems could be effectively

employed to resolve some of the recent major controversies in economics.

First, we need to recognize that most existing economic models assume that

the "structure" or the "state" of the economic system is invariant over time

or at least within the period of analysis, and that the "structure" is known

to the analyst.

Let us take an example in the "classical" theory of the firm to illustrate

this point. There are three key assumptions in the classical theory of the

firm which define this invariant "structure" or "state" of the system; (1)

production funtion, (2) profit maximizing behavior of the firm and (3) the

"state" of the market summarized by the notion of perfect competition.1) Given

these three succinct assumptions about the "structure" and "state" of decision

making process of the firm "i", outputs of the firm "i" (supply of goods

produced (Y ) , derived demand for labor (L ) and capital (K )) can be expressed

as a function of relative prices (P

,P

) and the fixed parameters of the P P

production function alone.

L = f P

P

K = f P

(II-1) P

Y = f (f P

, fP

) P P

where f is the production function f(L , K ) and f and f are partial

derivative of f with respect to L and K .

1) See, for example, P.A. Samuelson (1948A), J.M. Henderson and R.E. Quant(1958). Indeed, there have been many researches in the field to overcome this classical nature of the theory, notable example of which, for example, is W.J. Baumol (1959).

－7－

If the functional form and the parameters of the production function is known,

outputs L, K and Y are obtained once inputsP

andP

are given. P P

Assumptions (1), (2) and (3) are nothing but the conditions which allow

the form and parameters of the production function, alone, to determine the

invariant "structure" or "state" of the system. One often mistakes the notion

of production function as being a neutral technical relationship, the form and

parameters of which can be determined mechanically. However, we need to re-

cognize here that it presupposes technical efficiency and denotes maximum

obtainable output from every combination of inputs. The second assumption of

profit maximization compels the firm to use the existing techniques most

efficiently to produce maximum output as expressed by the production function.

The beauty of the "classical" theory is that it allows economists to

describe the invariant "structure" of the process in a very neat and simple way.

In this classical world, the "structure" or the "state" of the system can be

completely defined by the functional form and the parameters of the production

function. This relationship among inputs, states and outputs is shown below;

－8－

The "structure" or the "state" of the system, above, is known and invariant as

long as the functional form and the parameters of the production function are

known and invariant. Ordinarily, it is presumed that the firm completely

knows the functional form and the parameters of the production function which

are fixed. This fixity assumption, along with other assumptions mentioned

above, renders the model "mechanical" in the Levi-Strauss sense. That is, the

model allows for "mechanical" correspondence between outputs and inputs without

introducing the concept of "structure" or "state" explicitly.

The classical theory of consumer behavior can be summarized in a similar

fashion. With the assumption of mutually independent utility maximization and

the prevalence of perfect competition, the "structure" or "state" of consumer

behavior is completely summarized by the notion of the utility function. If

the forms and parameters of the utility function are known, outputs of consumer

behavior (demand for goods, say, Y , and Y ) would be given once inputs (relative

price P / P and income Y) are given. This situation is depicted below;

It seems quite obvious that the "structure" or "state" in the above two

systems is unobservable while inputs and outputs are observable. Of course,

－9－

production function or utility function can be estimated using the raw data

for inputs and outputs. Estimation of Cobb-Douglas, CES and other forms of

production function1) or the theory of revealed preference2) are nothing but

attempt to calculate these unobservable states visualized in the theoretical

model by the use of observable data. However, it is often overlooked that

the calculation of the "structure" or "state" represented by the production

(or the utility) functions does not only involves technical or mechanical

relationship stated by the function alone, but also involve all the other

assumptions such as perfect competition and profit maximization in the model.

It is only with all those other assumptions that the simple concept of production

function can summarize the "structure" or "state" and can mechanically link

inputs with outputs. Despite the unobservability of the structure, it is usually

assumed in the theoretical and empirical discussions that the true structure

of the system is invariant and that the actors in the system as well as the

analyst completely knows this invariant structure or state. The "classicists"

as well as "neo-classicists" usually take such position.

Let us now turn to the macro or Keynesian model. In this type of model,

the "structure" (or "state") is usually a black box although some plausible

descriptive explanations are often given.3) However, these explanations do not

usually provide complete logical statements of the "structure" and on this

score, they are often termed ad-hoc models. Let us illustrate this point in

a simplistic Keynesian consumption function, the relationship among inputs,

states and outputs are as follows;

1) M. Brown (1967). 2) P.A. Samuelson (1948 B) 3) R. Dornbusch and S. Fischer (1978) is an excellent recent textbook in

this area. See, also, A. Leijonhuvud (1968) for a critical account of "Keynesian" models.

－10－

Since the form and the values of parameters of consumption function which

constitutes the "structure" or "states" of this model cannot be explained

logically from any basic assumptions of human or organizational behavior, the

model is called ad-hoc. One might claim that the life-cycle hypothesis or

permanent income hypothesis is exempt from this criticism of ad-hockery.1)

However, to the extent that forecasting procedure of consumers assumed in these

models is adhoc, the model is still adhoc. If one tries to make macro-consump-

tion models consistent with classical micro models of consumer behavior, the

notion of "rational" expectation needs to be introduced in the former.2)

Since total "structure" or "state" could never be completely spelled out,

some ad-hockery is a necessary evil if one is interested in the total explanation

of the system in question. Policy makers, who want to forecast and control,

are usually in this position.

The problem, viewed in this context, lies not much in the ad-hockery but

more in the assumption of perfect knowledge and invariance of the "structure"

or "state", Keynesians are similar to "classicists" in this respect. For

example, they take the form and parameters of the consumption function which

are estimated as fixed. That is, they mechanically connect input and output

1) J.S. Deusenberry (1949), M. Friedman (1957), A. Ando and F. Modigliani (1963). H.S. Honthakker and L.D. Taylor (1966).

2) T.J. Sargent (1978).

－11－

with these fixed parameters. In other words, Keynesian models are also "mechani-

cal" in the Levi-Strauss definition. In terms of policy analysis, both of these

two mechanical models, "classical" and Keynesian, calls for deterministic optimal

control.

It is this framework of deterministic optimal control, which is a result

of the assumption of known and invariant "structure" or "state, that sometimes

makes policy controversies between Keynesians and non-Keynesian (monetarists,

classics and etc.) unnecessarily metaphysical. The issue is often the subjective

choice of who is and should be the optimizer of this deterministic control

system where the real issue should be supplementary learning process or "adaptive

control".

In "Keynesian" models, government expenditures, taxes, money supply and

others are instruments of control and the government controls the output re-

presented by economic variables such as GNP and consumption through these inputs

given the "structure" which is assumed to be fixed and known. It is true that

frequent reestimation of econometric models used to identify the "structure"

implies some learning process or "structural" change but such adjustment is

ad-hoc and is not formally incorporated in the model.

In "classical" economic models, the same type of behavior, that is,

optimization of well defined objectives on the basis of perfect information,

is assumed for the private sector and the concept of government as a single

controlling agent is non-existent. The major difference between the two types

of model is whether it is the government or the private sector that optimizes.1)

1) The symmetry is not perfect in that the private sector is not a single entity in "classical" models. In "classical" models the private sector consists of infinite numbers of individuals and firms and it is the market which co- ordinates the infinite numbers of optimizing agents. Thus, the optimality achieved in these models which is called Pareto optimality is relative as against absolute or normative optimality accomplished in Keynesian framework with social welfare function. Also note that in these "classical" models, the problem of interdependence of expectations and controls which is probably the essense of multiple agents model is assumed away.

－12－

As a matter of fact, markedly different policy implications of the two models

which have been sources of constant debate and controversy1) in the economic

profession derives mostly from this alternative assumption about who actually

optimizes.

The "Keynesian revolution" challenged the classical belief that

it is the private sector that optimizes and should optimize by pointing out

rigidities in the private market. The rigidities such as inflexible wages

and unemployment renders the optimization mechanism of the private sector

imperfect and makes the government intervention necessary. Not only that, but

statistical macro economic relationships derived by Keynes and others presumes

the passivity on the part of private sector. The "Keynesian revolution", inter-

preted in this manner, is nothing but the complete shift of optimization visualiz-

ed in the theoretical framework from the private to the public sector. Thus,

it is only natural that government (fiscal and monetary) policies are considered

highly effective in controlling the private sector (real values of GNP for

example) in Keynesian models.

Recent debates on rational expectations focus again, on this issue.2)

If the expectation of the private sector is rational, then it follows that it

is the private sector which attempts to control. Note the important duality

relationship between forecast (expectation) and control. The assumption of

perfect forecast on the part of private sector is logically equivalent to its

1) See for example, A.S. Blinder and R. Solow (1973), M. Friedman (1977), F. Modigliani (1977).

2) R. Barro (1976, 1978), R. Lucas (1972, 1973), T.J. Sargent (1973, 1976),

B.M. Friedman, (1977, 1978), S. Fischer (1977, 1978), O.J. Blanchard (1978), R.J. Shiller (1978).

－13－

complete control. Thus, a major conclusion of rational expectation models

that only the nonsystematic parts of government policies can affect the private

sector follows naturally from the assumption that their expectation is "rational",

since "rationality" is defined in their models as the ability to correctly

forecast the economy except for random disturbances.

Forecasting here is only necessary for the white noise part of the

system. However, since white noise is zero on the average, forecasting or

control is complete on the average and errs only in the short-run. The long-

run classical property and short-run non-neutrality of rational expectation

models is nothing but another way of expressing the above definition of

"rationality".

Thus, as long as one maintains the assumption of invariance of the

"structure" of the system as in "Keynesian", "classical" or rational expecta-

tion models, the important policy question such as effectiveness of fiscal and

monetary policies always boils down to the subjective choice of the sector

which should or does actually optimally control the economy. If people believe

that it is the government which should optimize the economy and behave according

to this belief (thati is, the private sector behaves passively and government

optimizes), government policies are effective in controlling the economy.

On the other hand, if the private sector believes that it is the private sector

which optimizes and if both the government and the private sector behave

accordingly, classical neutrality results follow.1)

1) The situation where both sectors try to forecast and control the economy is inconsistent with the assumption of invariance and perfect knowledge of the "structure" of the system.

－14－

The reality probably is not in neither of these extreme situations. The

people do not know the true "structure" of the economic system and learn only

through experience. Equivalently, the true "structure" changes over time. As

pointed out by B. Friedman,1) rational expectation, in this situation, is actually

adaptive, and the innovation in information, that is, the difference in actual

and expected value of the observations become the key factor in describing the

forecast and control mechanism. The notion of adaptive rather than deterministic

optimal control is essential, here.

In terms of analyzing and describing the system, such methodology as a

"dynamic-structural" approach described in the previous section becomes

necessary. In the model, the concept of "structure" or state needs to be

introduced formally. Moreover, dynamics of "structural" change, or equivalently,

the mechanism of adaptive learning process needs to be explicitly spelled

out. The "structure" or the "state" of the system can be identified on

different levels according to the sophistication of the theory one develops.

One can only identify the "structure" given by visible institutions, laws and

norms or one can go deeper into the psychology of persons involved and the

culture associated.

In what follows, we would model the structure of bureaucratic and politi-

cal interaction in budgetary decision making on road construction in a most

crude way building upon the incrementalist model. It is attempted here to

describe the mechanism of evolution of the structure or state of interaction

between bureaucracy and polity and show how the "dynamic structural approach"

could be effectively employed to model the certain sector of politico-economic

system.

1) B. Friedman, (1977).

－15－

III. Political Context of Dynamic Structuralism

There appears the cyclical ups and downs of confidence of the "fuzzy"

theoretical advocates in social science against the Eaglet-like1) disdainful

criticism from natural scientists for the lack of the clarification of concepts.2)

Political science in particular, has suffered from a long agony since the

establishment of the Royal Society.3) When asked the clear definitions of

nomenclatures, political scientists have given almost no persuative answers.

In such a stormy cynicism, a clever sophistry is given to the declaration

of the end of "hyperfactualism" and the "conscious" borrowing of the matured

sciences.4) It is often true that reality is more cynical than optimistic

expectations: The amalgamation of political science with other disciplines

has often led to a dreadfully insensitive use of technical words and methods.

The frustrating dualism between the words-rich theoretical arguments on an

abstract level and empirical research with excessive foci on methodological

sophistication thus seems to be a prevailing dilemma for students in politics.

Whether it is a conscious borrowing or unconscious one is a difficult

issue. Easton wrote:

"In exploring theoretical alternatives in political science, we have usually succeeded in distinguishing clearly between methodology and the substantive treatment of theoretical issues, assigning to each its proper place and weight."5)

Our observation is, to regard this as simple political substance appears

in disguise of technical sophistication. Examples are numerous.6) What is

1) L. Carroll,(1960). 4) D. Easton ed., (1966). 2) J.G. Kemeny,(1959). 5) op. cit. 3) J. Salomon, (1973).

－16－

needed here is a counter argument within ordinary science.1) Given the

above examples, a strong motivation immediately arises in casting "conscious"

doubt against the above Easton's statement which looks too legitimate that

we "unconsciously" agree to. Our counterargument is that political theory

and methodology are inseparable. An improper weight on methodology is

misguided;

6) The Blalockian recipe for bit-by-bit figure calculation (H.M.Blalock, 1960.) was combined with fancy SPSS Kitchen tools(Statistical Package for Social Sciences), which has consequently inflated the budget bills as well as intellectual density in political research and eduction; A group of people were devoted to reconsideration of the 1930s Richardsonian differential equations (P. Smoker, 1969), which was reshaped into the sophisticated optimal control model; (J. Gillespie, et al., 1977), The Brunner and Brewer simulation of political develop- ment was based on Keynesian multiplier analysis (R.D.Burunner G.D. Brewer, 1971); In a similar fashion, Forrester's world dynamics (J.W. Forrester, 1971), what the economist Nordhaus called "measurement without data" (W.D. Nordhans, 1973), functioned as advocacy for the non-linear political system against the ubiquitous linearity in most political models; A new development in time-series analysis and the availability of computer packages (TROLL System) fostered a bold optimism for war-occurrence probability calculation (N.Choucri & R. C. North, 1974); A "search of the political curves" (A. Przeworski & G.A.D. Soares, 1971) turned out to be a deliberate application of classical control theory on the undergraduate level in engineering; An Anglo-American collaboration for the "noise filting" (G.E. Box & G.M.Jenkins, 1976), gave rise to the "ignorance-except-for-inter- ventions" model (D.A. Hibbs, 1974). 1) T. Kuhn,(1970)

－17－

and an improper weight on political theory is equally misleading. All problems

seem to originate from the fatal misunderstanding of the separability of political

theory and methodology. It is exactly this point to which our "dynamic structuralism"

addresses itself in the context of political science.

Consider, for example, the voting analysts' common conjecture on the causal

relationship between social atrributes and partisanship on voting.1) As sociologists

have consumed valuable energy, social attributes data can be collected in an

"observable" explaining variable vector. Gallop and other similar institutions

made partisanship data available. Then a political scientist (called the first

political scientist for convenience of discussion) who has read Blalock's (or

others') textbook and knows the existence of the SPSS (or similar statistical

packages) would immediately formulate the linear regression model:

y = xβ

where y: partisan voting variable

x: social attribute variable vector

β: regression coefficients.

Suppose that the second political scientist dislikes "methodology" so much as of

course knows neither Blalock or SPSS. He would maintain his own normative

political theory such that the some social attributes determine the political

partisanship through "political consciousness," "disposition to political

information," and the like2). These concepts are assumed to be "unobservable

time-invariant theoretical entities" but act as the linear transformation of

the associated social attributes. He might propose the same mathematical model

as follows:

1) A. Campbell,P.E. Converse, W.E. Miller and D.E. Stokes,(1967).

2) On this point, see, for example: S.M. Lipset,(1963).

－18－

y = xβ

y: partisan voting variable

x: social attributes variable

β: "political concepts" as the linear transformation of the associated social attributes.

Now the third political scientist comes along. He in virtual agreement with

the second political scientist, except that some of political concepts should

change cross-sectionally or over time. Then his theory is expressed equivalently

as:

Y = xβ ,

β = f (t),

where t denotes either time or an individual sample in

cross-sectional data.

As far as the mathematical expression is concerned, it is impossible to

identify which political scientist has which political theory. The difference

becomes clear only when we know how he "methodologically" treats empirical data

in his model. The first political scientist would have no strong political

theory. He is interested merely in feeding different social attribute data in

x and partisan voting data in y and "estimating the parameters." But he should

be certain that in applying the regression technique he adopted the "aggregated

political theory" such that individuals' social attributes make impacts on

partisan voting in a quite different magnitudes. What he estimates in β is the

aggregate magnitude in a sampled political group and can be no longer applied

to any individual.

On the other hand, since he has not acquired sophisticated methodological

－19－

tools, the-second political scientist can not but underutilize the available

data. He would pick up only a small sample data and see the relationship

between the social attributes and partisan voting trends. And, next, he

probably "simulates" a hypothetical situation by "subjectively" putting a

different value in β and calculates the resultant y in a weak attempt to check

his theory. Since he has no knowledge for estimating β, he can still maintain

his normative political theory, not on an aggregate level but on an individual

basis. He might, however, be condemned for a unscientific approach by other

political scientists who hold an excessive belief in regression technique. But

his methodology is quite appropriate to match his political theory. Political

scientists who criticize him meant to convert forcefully his normative politi-

cal epistemology to their aggregate world-looking. It is quite likely that the

theory of the second type political scientist might be strongly supported by

natural scientist who have extensive expertise in statistical methodology and

know the limits of regression. Thus, in place of the normative political scientist,

they spell out that the above normative political theory can only be tested by

a deterministic "maximum likelihood" simulation. They are the so-called "system

dynamics" advocates.

The political theory of the third political scientist best represents our

intuitive understanding of political phenomena. It releases the least likely

constraint such that the transformational political concepts are in eternal

quiescence. However, in political science methodology no one knows how to

handle empirical data for this theory except for the subjective "maximum likeli-

hood" simulation as in the second political theory. For,totally drowned in the

biased epistemology of linear regression, the first political scientist has no

－20－

idea that he can also admit the third mathematical model with the constraint:

β = β .

This idea comes only from the third political scientist for the above formula

is only a special case of :

β = f (N).

The implication drawn from the difference in political theory between the first

and the third political scientists is quite profound in regard to the methodologi-

cal choice. Let us see how the third political scientist treats the regression

methodology with a different viewpoint. First, reformulating the first model

gives,

β = β ,

y = x .β .

As discussed elsewhere than in political science,1) the recursive estimate

β would fluctuate as a new individual's data (y ,y ,・・・・; x ,x ,・・・・)

enter. Then, the change in β depicts somewhat one below:

("Recursive" Estimates of political concepts)

(Number of Individuals Counted)

1) D.G. Luenberger,(1969).

－21－

Until individuals are sampled up to N , the "aggregate" estimate of political

concepts remain unchanged. But, when the N+1-th individual is counted the

estimate drops sharply. This indicates the significant impact of one individual

data. As far as the ordinary regression technique is applied, this impact is

not conceivable. It is worth nothing that such an emphasis on the impact of

individuals shares the same epistimology as of the second political scientist.

More formally, the third political scientist's theory is in what we call

the "dynamic structural" approach. The excellent arguments by Przeworski and

Soares1) helps facilitate our further discussion. What they meant by the

Lockean interpretation of class-consciousness exactly coincides with the first

political theory, but in a concrete and simplified version such as:

y = a + px

where y: the proportion of left-party votes (i.e., partisan votes)

x: the proportion of workers in a constituency (i.e., social attributes of a class) a: y when x = 0.

In this model, they explain the Lockean theory of class-consciousness as:

"Intuitively, it seems that class-consciousness, as the term is used, connotes the extent to which the workers vote for the working class party, or move exactly, the proportion of the workers who vote this party . . . . . . this interpretation would imply that consciousness of a class is simply an aggregate of consciousness of individuals. Some individuals are class-conscious -- they vote for the party of their class -- and the class conscious of itself to the extent to which individuals who are conscious frequently occur within this class."2)

In contrast, the third political theory can more easily accomodate the Marxian

theory of class-consciousness3) such that:

1) A. Przeworski, and G.A.D. Soares,(1971).

2) op. cit., p.54.

3) R. Dahrendorf,(1959).

－22－

". . . . . . . . . . . the consciousness of an individual is determined by the consciousness of his class, not vice versa. . . . . . . it seems more appropriate to treat class consciousness as a nascent concept rather than as a characteristic of state. . . . . . . . . . It should be emphasized that "class- consciousness" is a theoretical construct and cannot be directly observed. Only the proportion of workers (x) and the proportion of the left vote (y) are directly observable."1)

Our dynamic structuralism accepts most of the above interpretation except

that we consider that class-consciousness is truly a characteristic of state

but it is a nascent state of a class. Implying the models of the first and

third political theory, we entertain the following block diagrams:

The First Political Scientist's Class-consciousness Theory (Lockean)

The Third Political Scientist's class- consiousness Theory (Dynamic Structuralism)

Rather than Przeworski and Soares' non-linear formulation of the dynamism of

P as the first derivative dy/dx, the dynamic structural political theory

smoothly maintains the Marxian definition such that class-consciousness is

the dynamic state of class structure and such a state completely governs the

partisan vote. Thus, we entertain the model:

1) op. cit.

－23－

P = f (p , p ,・・・・・・・; u , u ,・・・・・・・・)

y = P . x .

where u : causes to change class-consciousness (independent of x ).

It is worth noticing that class-consciousness has its own memory and is

perturbated by the real exogenous causes u 's. The methodology to handle

this theory has not been available until the 1960s.1) It is called the state-

space method, and which is still incomplete in the sense that f in p 's

equation must be linear.2) For a simpliest theory that class-consciousness has

only the first-order memory and is perturbated by the unknown random cause

like:

P = p + v

y = p . x ,

the afore-mentioned recursive regression is directly applied with a minor

change.3) It is quite cynical that the 19th century Marx's political theory

already implied the 1960's mathematical theory. This strongly suggests the

danger of the pseudo-expertization of methodology in political science, which

is exactly the same stance as structural functionalism takes.

Our dynamic structuralism can give further insight into what have been

called "synchrony" or "diachrony" by the system-analytic-minded political

scientists.4)

1) R.E. Kalman,(1960).

2) K. Furuta,(1967).

3 P.C. Young,(1971).

4) F. Cortes, A. Przeworski and J. Sprague,(1974).

－24－

By their definition, synchrony implies the time-invariant system structure

as in the previous reformulation of the first political theory by the third

political scientist such that:

β = β

y = x . β .

It should be noted that the above model a priori specifies dynamic causality.

In a similar manner, an example of diachronic model resembles our dynamic

structural formulation of class-consciousness discussed above:

β = f (β , β , ・・・・・・・; u , u ,・・・・・・)

y = x . β .

Thus, diachrony is the system property of the time-invariant structure, i.e.,

dynamic structure.

The fundamental difference between our epistimology of social dynamics

and Cortes, Przeworski and Sprague's system analysis is in regard to the

concept of the system "state". In their definition, the system states are

the "intermediate observable outputs", whereas by our definition they are the

"full information of the behavior of a system" or the "intermediate unobservable

concepts". This difference can be clarified in the example below.

Cortes, Przeworski and Sprague propose the dynamic process in which social

tension becomes open conflict through socialization, political repression and

political organization. Their theory is succinctly illuminated in the follow-

ing system diagram:

－25－

X and X are what have been called the "states" by Cortes, Przeworski and

Sprague. They are both observable intermediate outputs. On the other hand,

the application of our dynamic structuralism to the same model yields the

following flow diagram:*

－26－

*) The imput-output formula for Cortes, Przeworski and Sprague model is expressed with the z-function as:

y = PS/R

.u . z + [(1－R)/R]

Then,

Y(z) = PS/R .

u(z) z + [(1－R)/R]

Multiplying the both sides by [z .x(z)] becomes:

y(z) = (PS/R).[z .x(z)] . . . . . . . . . . . . . (1)

u(z) = x(z) + [(1－R)/R].z .x(z). . . . . . . (2)

(2) is rewritten as:

x(z) = －[(1－R)/R][z .x(z)] + u(z). . . . . (2)'

(1) and (2)' give the above flow diagram. And, their z-inverse yields the time-domain dynamic structural equations.

－27－

The above diagram is equivalent to the "dynamic structural" equations:

x = －[(1－R)/R].x + u

y = (PS/R).x .

The distinct feature of the dynamic structural formulation is the fact

that there exists only one state variable sufficient to govern open conflict.

This state is not observable. The first equation suggests that the state

evolves as the first order autoregressive scheme. The magnitude of the

autoregressive factor is (1 － 1 ) which is negative with the absolute value R

greater than 1. Thus, the state oscillates explosively. The coefficient of

the input (the level of tension) is unity, so that the dimension of the state

is equivalent with the level of tension. Therefore, the second equation

indicates that the state as the degree of tension of this system is multi -

plicatively accelerated by the effectivenesses of both political socialization

and organization of the system, and decelerated by political repression, in

becoming open conflict. If the initial state of the system tension is known,

the dynamic structural model suggests that the future behavior of open

conflict is completely known, while the two states in Cortes, Przeworski

and Sprague's synchronic model can not supply such complete information.

This is the implication of our dynamic structural epistemology of political

behavior.

－28－

IV. Dynamic Incrementalism: Politico-Economic "Ensemble"

IV-A Static Nature of the Wildavskian Incrementalism

The well known Wildavskian incrementalism model summarizes budgetary

decision making process of the government by a simple reduced form equation

of the following form.1)

G = gG + E (IV-1)

Although some modifications are made to allow for deviations from the above

rule, those are simply the exceptions and the basic hypothesis of the model

is that the state or structure of the system of budgetary decision making

process is invariant over time and can be represented by a single scalar. That

is,

g = g (IV-2)

Because of this static nature of the assumption, the system is closed

except for ad-hoc modifications inserted arbitrarily by the model builder and

a strange conclusion follows that bureaucracy cannot generally be influenced

by outside interventions. It is true that Allisonian standard operationing

procedure is quite rigid and, in that sense, bureaucratic response is

predictable. However, it is quite a different matter to assume the predictable

patterns of behavior, or the existence of structure or state, and to assume its

invariance.

This invariance assumption, as pointed out in previous sections, allows

the analyst to disregard the notion of structure or state completely and

jumps directly to reduced forms or input-output relations without explicitly

specifying interactions among observable inputs and outputs and unobservable

states. The Wildavskian incremental model is very typical, in this sense.

1) A. Wildavsky (1964), J. Wanat (1974), F.W. Hoole (1976), F.W. Hool, L.J. Brian and J.T. Harvey (1976). Y. Noguchi et al. (1976)

－29－

Behavioral models of budget a la Crecine1) attempt to spell out the

processes of the budget compilation in some details but they fail to avoid the

pitfalls of directly substituting the unobservable process by some observable

relation. Since there is no logical way to directly substitute unobservable

process by observable relation, their models usually suffer from some ad-

hockery or arbitrariness.

In the next section, we adopt the dynamic structural approach to the

analysis of the Japanese budget compilation where structure or state is assumed to

be time-variant and explicitly written down in terms of unobservable state

variables. Note that, we spell out the unobservable dynamics of the system

in terms of unobservable state variables, and not in terms of any observable

relation as in behavioral or SD models.

1) J.P. Crecine (1969)

－30－

IV-B Bureaucratic Structural Model: Two-Actor Bureaucratic Politics

Model

The Japanese budget compilation process is somewhat different from that

of the United States in that the role of Diet (Congress) is inconsequential.

Throughout the post-war years,the government draft, formally agreed upon by

all branches of bureaucracy, had gone through the Diet untouched except for

the 1977 budget where a very minor nominal change was made.1) The budget is

essentially completed through the interactions of three major participants,

Ministry of Finance, the Ministry or Agency in charge of particular budget

items and the ruling Liberal Democratic Party before it is submitted to the

Diet. Since the consensus of the ruling party which has had the absolute

majority in the Diet is achieved for the governmental draft, the revision of

the draft in the Diet is unlikely.2)

Thus, it is appropriate to model the Japanese budgetary process for road

construction as a two-actor (Ministry of Finance (MOF) and Ministry of Con-

struction (MOC)) Bureaucratic Politics Model with political interventions from

outside. There are some other minor participants in the proecess such as

1) For the details of Japanese budget compilation process, the reader is referred to J. Cambell (1977) and Y. Noguchi et al. (1977)

2) John Campbell gives a very good and concise overview of Japanese budget works in his book J. Cambell (1977), an revised except of which is given below: "Under the Constitution, the annual budget is prepared by the Cabinet, but provisions of the Finance Law assign the responsibility of actual preparation to the Ministry of Finance (Okurasho; MOF). The process begins shortly after the beginning of each fiscal year on April 1, when the various ministries and other agencies begin formulating their budget requests for the following fiscal year. Requests, are submitted to the Finance Ministry by August 31, after securing the general agreement of the Liberal Democratic Party (Jiyu Minshuto; LDP)--in particular, that of the appropriate division (bukai) of the Policy Affairs Research Council (Seimu Chosakai, or Seichokai: PARC) .

－31－

During the month of September, ministry officials appear at the MOF Budget Bureau (Shukeikyoku) to explain these requests to the budget examiners (shukeikan), who ask questions about programs but do not actually negotiate over budget figures. In October and November, examiners and their staffs go over the requests in detail, discussing possible options with the respon- sible bureau vice-director, the director and other officials. This process is what we term "microbudgeting"; at the same time higher-level MOF officials are discussing the total budget figure, the size of the yearly tax cut and other "macrobudgeting" matters. For about two weeks in early December, the MOF ministerial budget conference (yosan shogi) meets to ratify, and some- times modify, the draft budget prepared within the Budget Bureau; at time of release (naiji) it is called the "Finance Ministry draft" (Okurasho gen'an). At about the same time, a brief and abstract Budget Compilation Policy (Yosan Hensei Hoshin) is drawn up within the Budget Bureau, ratified at the MOF top level, and passed by the Cabinet.

For the most of this period the regular organs of the majority party do not intervene in the compilation process going on within the Finance Ministry, although individual Dietmen will often let their preferences be known (for example, by accompanying groups of petitioners to the Finance Ministry). However, in December the Policy Affairs Research Council's Deliberation Commission (Seisaku Shingikai or Seicho Shingikai) draws up the annual LDP Budget Compilation Program (Yosan Hensei Taiko). This program is then passed by the party's Executive Council (Somukai) and referred to the Cabinet and MOF before the release of the Finance Ministry draft.

The release of the MOF draft--scheduled for mid-December, although more often than not it is postponed into January or later--begins the "revival negotiations" (fukkatsu sessho) period of about a week. During this rather hectic period ministry appeals are heard by progressively higher levels of Finance Ministry officialdom, and small amounts of supplementary funds which are usually hidden unspecified in the MOF draft are doled out. The Liberal Democrats also formulate "political" revival requests though a series of brief divisional hearings followed by reviews at higher levels, which are presented during the penultimate Cabinet-level negotiations or at the final session, one which often has lasted all night, between top officials of the party and government. The resulting budget is then ratified by a meeting of the Cabinet to become the government draft (Seifu-an), and is sent on to the Diet for passage."

－32－

Economic Planing Agency (EPA), the press, pressure groups and etc. However,

the leverage of EPA and the press is usually concentrated in the overall size

of the budget and how that leverage is transformed to specific items of budget

depends upon LDP. The leverage of pressures groups on specific items also

filters through LDP. Thus, for the current study they can be clustered with

the LDP in a "political" sector. A major input to MOC each year in drafting

their original request is their "objective" estimation of demand for new road

construction and their repair which are based upon the successive Five Year

Road Construction Plans. The plan is a yardstick but it is informally revised

each year as original estimation of demand is corrected. MOC does have a

formal macro model to calculate new demand, the output of which is compared

to the cumulative micro figures collected from local agencies and revised to

obtain their original request.3) In what follows it is assumed that their

estimate of the growth rate of future road demand depends upon past growth

rates of changes in number of cars. For Ministry of Finance, what is important

is, of course, their estimate of revenue. For road construction, particular

taxes (Gasoline tax, oil and gas tax, local road concession tax, oil and gas

concession tax, light oil tax, automobile tax and automobile tonnage concession

tax) are earmarked but general tax revenue is also used. Moreover, funds from

Fiscal Investment and Loan Program (so called FILP, bulk of which come from

postal savings) are used mainly for the construction of toll road. Thus, the

MOF makes formal estimates of these revenues at the time of the budget compila-

tion which are released with MOF draft of the budget.

3) The reader is reffered to E. Sakakibara, T. Yakushiji et al. (1979) for a detailed institutional description of this and other processes described in this section.

－33－

First, corresponding to the two actors, we assume one state "RP" which is

an unobservable theoretical concept and which represents the relative power

of the two ministries. The basic assumption, here, is that the "relative power"

of the two ministries changes over time depending upon the magnitudes of demand

pressure, "political" interventions and other interventions. Specifically

RP = RP x x x e . . . . . . . . . . . . . . . . . . . (IV-3)

or logRP = αlogRP + βlogx + γlogx + δlogx + ε

where x : factors affecting estimated demand for road construction by

MOC (purely "rational" calculations without "political" considerations).

x : factors directly affecting "political" pressure x : interventions other than x RP: relative power of the two ministries ε: white noise

The relationship among various sectors are depicted in Figure 1. Given

this "relative power", the expenditure for road construction is given by,

R = RP ・T e . . . . . . . . . . . . . . . . . . . . . . . (IV-4)

or logR = logRP + logT + u

R = total amount of budget allocated for road construction

(National and FILP)

T = tax revenue for road construction as estimated by MOF

Note, here, that the state variable RP, relative power, is defined as the

proportion of road budgeting to MOF's estimates of revenue with an observation

error.

－34－

If the "relative power" of MOC is very strong, the road budgeting far

exceeds estimated revenue, while if MOF's relative power prevails, the budget

falls within the estimates of revenue. Our task, then, is to estimate the

following reduced form equation which is derived from equations (IV-3) and

(IV-4),

logR(t) = logT + β

logx +γ

logx 1－αL 1－αL

+ δ

logx +

ε + u . . . . . . . . . . . . . (IV-5) 1－αL 1－αL

where L is the lag operator.

－35－

Figure I

Bureaucratic Politics Model of

Japanese Budgeting Process for Road Construction

－36－

(IV-C) Empirical Results: Evolution of Relative Power

The two-actor bureaucratic politics model specified in the previous

section is estimated using two sets of data, original and revised budget figures

for road construction. The original budget is submitted by MOF in mid-December,

although it is often postponed into January and later, and approved by the Diet

during its regular session (150 days starting in January). As explained earlier,

original budget is virtually completed when MOF draft is released in mid-

December although minor changes are made in the "revival negotiation" that takes

place in its subsequent week. Thus, exogeneous factors x , x and x that affect

relative power, RP, in reduced form equation (IV-5) should be lagged one period.

Of course, longer delays and lags for x , x and x are theoretically possible.

It has been a rule in post-war Japan that the original budget is revised

around the second quarter of that fiscal year, considering the developments of

the economy since the compilation of the original budget. First of all, tax

estimates released by MOF at the time of submission of MOF draft in the previous

year is revised. The original MOF estimate is quite conservative and the re-

vision is ordinally upward. During the post-war period, downward revision has

been made only twice, in 1965 and 1975. Accordingly, budgets were revised up-

ward by the additional floatation of national bonds. Even in those years when

tax estimates were lower than actual (1965 and 1975), the budgets were revised

upward. Also since there is an interval of around nine months between the

compilation of original and revised budget, factors affecting internal and

external pressure (cyclical and external conditions of the economy) change

substantially. In the following estimation, such developments in taxes and

exogeneous variables are taken into account.

－37－

Road construction projects in Japan can be roughly divided into three

categories, general road projects (national projects and nationally subsidized

projects), non-subsidized local projects, and toll road projects (mainly

financed by Fiscal Investment and Loans Program). Since the leverage of both

ministries of Finance and Construction is relatively small for non-subsidized

local projects, only national and toll road projects are analyzed in this paper.

For the fiscal year 1978, the sum of national and toll road projects in the

original budget amounted to 3,301.9 billion yen (70.0%) out of total road

budget of 4,719.9 billion yen.

Since the reduced form equation (IV-5) contains autoregressive lag operator

term, (1-αL), the equation is estimated using the maximum likelihood estimation

algorithm a la Davidon-Fletcher-Powell. The algorithm allows for the estimation

of an ARIMAX model which is equivalent to rational distributed lag model where

rational lag distribution is allowed both for exogeneous and error terms. Although

there are severe restrictions of degrees of freedom because of the annual nature

of fiscal data, some experiments are conducted for various lag structure of

error terms and exogeneous variables.

Standard results for both original and revised road budget figures are

presented below.

(i-1) Original budget

(1 － 0.2732*L) [log R － logT ] = 0.0854logx － 0.6381logSTA

(].53) (1.45) (2.59)

－ 0.0768EXP － 0.1394I68 － 0.1410Ioil . . . . . . . . . . . . . (IV-6)

(1.26) (3.74) (5.14)

－38－

R = 0.7575

D.W. = 1.88

S = 0.0356

Period = 1959 － 1978

where R = original road budget for national and toll road projects

t = national revenue (national taxes and financial sources of Fiscal Investment and Loan Program--FILP) as estimated by MOF at the time of release of MOF budget draft. For specified taxes, original estimates are used while for general account and for FILP revenues, total general account and FILP estimates are multiplied respectively by the previous year's shares of road financing out of the total.

x = c

c

c = five year average of total numbers of automobiles owned

STA = this year's estimate of real GNP growth over five year average of real GNP growth lagged one period.

EXP =ΔFR

－ ΔEX HM EX

FR = Foreign reserves (average for the third fiscal quarter)

HM = high powered money (average for the third fiscal quarter)

EX = exchange rate (average for the third fiscal quarter)

I68 = a dummy for fiscal restraint campaign 1 for 1968 0 otherwise

Ioil = a dummy for "oil shock" 1 for 1973 and 1974 0 otherwise

(ii-1) Revised budget

(1 － 0.6001*L) [logR － logT ] = 0.3273logx － 0.6432log STA

(4.44) (2.75) (2.03)

+ 0.2711EXP － 0.1147I68 － 0.0726Ioil . . . . . . . . . . . . (IV-7)

(3.05) (2.01) (1.57)

－39－

R = 0.5517

D.W. = 1.51

S = 0.0515

period = 1959 － 1977

where R = revised road budget for national and toll road projects

T = average of T and T*

T* = realized national revenues for road construction. That is, realized specified taxes plus realized total of general taxes and FILP revenues multiplied respectively by the previous year's shares of road financing out of the total.

STA = this year's realized growth rate of real GNP over that of previous five year average

EXP =ΔFR

－ ΔEX HM EX

FR = foreign reserves (average for the second fiscal quarter)

HM = high powered money (average for the second fiscal quarter)

EX = exchange rate (average for the second fiscal quarter)

The fits for both equations is quite good for the dependent variable

which is essentially a percentage change. In view of the marginal significance

of some of the coefficients in (IV-6) and (IV-7), minor alternations are

introduced in the following equations,

(i-2) Original budget

(1 － 0.2551*L) [log R － logT ] = 0.1337logxl － 0.6229logSTA

(2.49) (2.44) (2.83)

+ 0.3094EXP *I7678 － 0.1481I68 － 0.1465Ioil . . . . . . . . . . (IV-6)'

(2.24) (4.29) (5.79)

－40－

R = 0.7943

D.W. = 1.85

S = 0.0328

period = 1959 － 1978

where I7678 = a dummy for U.S. pressure for inflationary policy 1 for 1976, 1977, 1978 0 otherwise

(ii-2) Revised budget

(1 － 0.5031*L) [log R － logT ] = 0.4280logx － 0.4813logSTA

(3.98) (3.83) (1.66)

+ 0.2356EXP + 0.9574EXP * I7678 － 0.1247I68

(3.01) (2.34) (2.64)

－ 0.0613Ioil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (IV-7)'

(1.48)

R = 0.6137

D.W. = 1.88

S = 0.0446

period = 1959 － 1977

For other versions the two equations, readers are referred to Tables I and II.

The estimation results seems to verify our general framework for budgetary

decision making. In particular, it is confirmed that exogeneous interventions

or changes in the environment have significant impacts on the compilation of

the road budget. Internal stabilization needs as well as external pressure

have considerable effects on the relative power of the two ministries. Their

combined effects are usually much greater than the autoregressive parts.

－41－

Also, discontinuous interventions or disturbances such as "the fiscal

restraint compaign" of 1968 and the "oil shock" of 1974 have considerable

impact. The "fiscal restraint campaign" was conducted under the leadership

of Kotaro Murakami, then vice minister of Finance, which was the reflection

of the general mood of the Finance Ministry, at that time, on the rigidity

and the secular increase of fiscal deficits. Murakami had intended to abolish

the "standard operating procedure" for regular revision of the budget but was

unsuccessful in persuading politicians. He resigned in the summer of 1968

just before the compilation of the revised budget for that year. Estimation

results that the value of coefficient on I68 is reduced somewhat between

original and revised budget is consistent with this episode, although formal

statistical significance of the difference is somewhat marginal.

In the Figures II and III, relative power of the two ministries, MOC and

MOF, are plotted for original and revised budgets, respectively. It could

easily be seen that both "fiscal restraint campaign of 1968" and "oil shock"

have substantially increased the relative power of Ministry of Finance while

the combination of "Nixon shock" and "American pressure of 76－78" with stabiliza-

tion needs raised the MOC power appreciably. Relatively strong power of MOC

in early sixties is related to mushrooming ownership for cars in the extremely

high growth environment. The instance of MOC power accerelation in 1971 and

1972 is generally associated with ex-Prime Minister Kakuei Tanaka who effectively

used these internal and external pressure to push his plan of "Reconstruction of

Japanese Achipelago".

Other implications from the estimation results are as follows;

(1) Autoregressive coefficient is increased substantially in the revised budget.

This is quite an interesting and plausible result. It implies that a part of

incremental nature of the budget, or the sluggishness of bureaucracy is hidden

－42

－

Figure II. Estimated Relative Power of the Two Ministries (Original Budget)

－43

－

Figure III. Estimated Relative Power of the Two Ministries (Revised Budget)

－44－

in the original compilation of the budget. Equivalently, the effects of

exogeneous shocks or interventions decline as the cooling off period is prolonged.

Since the revised budget is a sum of the original budget and the subsequent

modifications, the hypothesis of longer cooling off period is consistent with

the result.

Hidden sluggishness seems particularly notable when the interventions or

disturbances are negative. That is, MOF takes full advantage of such

interventions or disturbances at the compilation of original budget but as

it becomes apparent that revenues are more abundant than expected, it distributes

financial resources according to the incremental rule plus the demand of MOC.

This is reflected in the smaller coefficients for I68 and Ioil and larger

coefficient for logx , for revised over original budgets. The extra leverage

"oil shock" on the original budget is partially explained by the timing since

the "shock" started right in the middle of the compilation of 1974 original

budget.

(2) The constant term appears significant in the revised budget and not in

the original budget. Although the magnitude is rather small, this is consistent

with the hidden sluggishness or longer cooling off period hypothesis. We

might interpret this significance of constant term as an indication of hidden

stability as against hidden sluggishness of bureaucracy. Of course, the

constant term in linear regression is a catch-all item and the above inter-

pretation should be considered as a possible explanation.

(3) For positive interventions, the picture is somewhat different. Of course,

it is not easy to distinguish internal pressure (stabilization needs) from

external pressure since the two are correlated. Domestic economic slump which

generates domestic pressure normally leads to the accumulation of foreign

reserves and/or revaluation of yen, thus, causing external pressure to mount.

However, estimation results roughly indicate the following.

－45－

( i ) Despite the general hidden sluggishness, the budget revision seems to

take full account of mounting external pressure. This is reflected in the

result that the value of coefficient on EXP for the revised budget is sub-

stantially larger than that on EXP for the original budget. The budget

revision of 1971 and 1972 are typical of such examples. It is interesting

to note that both of those years are associated with ex-Prime Minister Kakuei

Tanaka and ex-Vice Minister of Finance Hideyuki Aizawa.

(ii) During the 1976－78 period, the U.S. pressure on the exchange rate and

trade liberalization mounted. Since the domestic economy was also in a slump,

the two pressure were combined to produce extra leverage on the budget.

(Significance of variables, EXP *I76－78 and EXP *I76－78)

To summarize, the impacts of positive interventions, particularly those

associated with external pressure tends to be accentuated in the budget revision.

The extra leverage in the revision seems to be stronger when internal and

external pressure are combined with shrewd political maneuvering.

(4) In the original budget, the lag of demand variable becomes somewhat

significant, implying that it is not only the growth rate of numbers of cars

owned but also the rate of acceralation that increase the relative power of

MOC.

All of the above interpretations needs to be interpreted cautiously since

there are only twenty or nineteen data points, and since the degrees of freedom

is relatively small. Also, some of the exogeneous variables are correlated

with each other rendering the estimates of some of the coefficients unstable.

－46

－

Table I

Alternative Versions for Original Budget (1959－78)

constant Autoregressive

part logx logx logSTA logSTA EXP EXP *I76－78 I68 Ioil R D.W. S

(IV-6)

(IV-6)'

(TI-1)

(TI-2)

(TI-3)

(TI-4)

(TI-5)

(TI-6)

(TI-7)

－

－

－

－

－

－

－

－

0.0067 (0.43)

0.2732

(2.53)

0.2551 (2.49)

0.2535

(2.39)

0.3769 (2.56)

0.3093

(3.28)

0.3799 (3.43)

0.3627

(3.06)

0.3722 (3.58)

0.2790

(2.57)

0.0854

(1.45) 0.1337

(2.44) 0.1233

(2.12) 0.1165

(2.31) 0.3472

(3.12) 0.2675

(2.08) 0.3057

(2.29) 0.2736

(2.23) 0.0600

(0.73)

－

－

－

－ －0.2423

(2.13) －0.1669

(1.26) －0.2555

(1.93) －0.1836

(1.45)

－

－0.6381(2.59)

－0.6229

(2.83) －0.5830

(1.78) －0.7178

(3.32) －0.7208

(3.29) －0.7647

(3.68) －0.7262

(2.66) －0.7019

(3.01) －0.6082

(2.35)

－

－

－ 0.4933

(2.20)

－ 0.3540

(1.24) 0.1426

(0.51) 0.3162

(1.16)

－

0.0768(1.26) 0.324

(0.53) 0.0902

(1.57) 0.0381

(0.65) 0.0644

(0.95)

－ 0.3094 (2.24) 0.2778 (1.84) 0.3699 (2.90) 0.2818 (2.23) 0.3324 (2.57) 0.2921 (2.12) －

－0.1394(3.74)

－0.1481

(4.29) －0.1469

(3.86) －0.1446

(4.61) －0.1566

(4.90) －0.1512

(4.97) －0.1481

(4.37) －0.1513

(4.90) －0.1426

(3.76)

－0.1410(5.14)

－0.1481

(5.79) －0.1461

(4.79) －0.1492

(6.53) －0.1326

(5.39) －0.1387

(6.04) －0.1279

(5.02) －0.1375

(5.74) －0.1494

(4.48)

0.7575 0.7943 0.7811 0.8281 0.8254 0.8348 0.8016 0.8228 0.8354

1.88 1.85 1.99 2.10 1.53 1.83 1.91 2.02 1.97

0.0356 0.0328 0.0325 0.0297 0.0300 0.028 0.0313 0.0277 0.0354

－47

－

Table II

Alternative Versions for Revised Budget (1959－77)

constant

Autoregressive

part logx logx logSTA logSTA EXP EXP *I76－78 I68 Ioil R D.W. S

(IV-7)

(IV-7)'

(TII-1)

(TII-2)

(TII-3)

(TII-4)

(TII-5)

(TII-6)

(TII-7)

－

－

－

－

－

－

－

－

0.0503(2.32)

0.6001 (4.44)

0.5031

(3.98)

0.6505 (3.62)

0.7159

(5.00)

0.7596 (4.33)

0.5209

(3.06)

0.6199 (5.11)

0.6302

(4.03)

0.4575 (3.44)

0.3273

(2.75)

0.4280 (3.83)

0.3813

(1.92)

0.1761 (1.26)

0.2359

(1.19)

0.4352 (2.46)

0.2753

(2.33)

0.2879 (1.62)

0.2053

(1.75)

－

－ －0.0996

(0.38)

－ －0.1000

(0.41) －0.0227

(0.10)

－ －0.0221

(0.10)

－

－0.6432(2.03)

－0.4813

(1.66) －0.5738

(1.65) －0.5788

(1.86) －0.5554

(1.68) －0.4256

(1.29) －0.4091

(1.54) －0.4049

(1.32) －0.5874

(2.14)

－

－

－ 0.6448

(1.80) 0.6450

(1.87)

－ 0.6564

(2.33) 0.6564

(2.21)

－

0.2711

(3.05) 0.2356

(3.01) 0.2884

(3.01) 0.2797

(3.32) 0.2885

(3.23) 0.2470

(2.84) 0.2444

(3.44) 0.2466

(3.24) 0.2185

(2.72)

－ 0.9574

(2.34) －

－

－

0.9553

(2.16) 0.9739

(2.72) 0.9680

(2.61) －

－0.1147(2.01)

－0.1247

(2.64) －0.1215

(2.12) －0.1147

(2.28) －0.1199

(2.28) －0.1277

(2.58) －0.1250

(2.95) －0.1261

(2.84) －0.1285

(2.73)

－0.0726(1.57)

－0.0614

(1.48) －0.0792

(1.59) －0.0764

(1.72) －0.0810

(1.70) －0.0647

(1.46) －0.0653

(1.81) －0.0664

(1.69) －0.0938

(2.28)

0.5517 0.6137 0.5255 0.6043 0.5733 0.5827 0.6873 0.6531 0.6089

1.51 1.88 1.51 1.67 1.71 1.85 2.06 2.07 1.81

0.0515 0.0446 0.0526 0.0477 0.0475 0.0456 0.0394 0.0394 0.0447

－48－

V. Concluding Remarks

In this paper, we have argued that a dynamic decision making process of

the government can be formalized by a "state space" frameword. What is im-

portant here is the distinction between observables and unobservables. The

"structure" is always a theoretical construct which is unobservable. Also, if

we allow for innovation or learning processes, such an unobservable structure

needs to be cast in a dynamic context. It is here, that the concept of dynamic

and unobservable "state" in the engineering literature can be usefully applied

to social sciences.

In both economics and political science, the "structure" or "state" has

traditionally been assumed to be either invariant or left unspecified. In the

analysis of interaction between economy and polity, however, we feel it is

necessary to introduce the concept of dynamic structure since political inter-

ventions in the economy often involve structural changes that remain in the

memory of the system. Enactment of laws and regulations that affect the

functioning of the economic system is an example of such interventions.

We have modeled a budgetary decision making process for public road con-

struction as a two actors bureaucratic politics model a la Allison. The pro-

cess is viewed as a "relative power" game between the Ministries of Construction

and Finance with political and other interventions from outside. Although the

model reduces to a simple reduced form equation, it seems to capture the essense

of bureaucratic politics in the Japanese context. Stabilization needs and

external pressure (though exchange market) are assumed to be two major leverage

for outside interventions.

－49－

The empirical results generally confirm the model specification although

the correlation among exogeneous variables and limited numbers of observations

require a cautious interpretation. The results indicate the effectiveness of

outside intervention, or openness of the bureaucratic decision making process.

However, effectiveness of interventions is generally reduced as the original

budget is revised in the fall, implying the hidden stability and sluggishness

of bureaucratic standard operating procedure, except for positive interventions

associated with external pressure. Both the "Nixon" shock and the American

pressure of 1976－78 had substantial leverage in increasing public road con-

struction particularly through the revision of budget.

Although the model presented in this paper is extremely simple, even this

level of sophistication may be too excessive for the numbers of observations

available. The empirical results of this paper, however, seem to warrant a

promising future for the application of dynamic structural model, or state-

space model, for the analysis of politico-economic decision making.

－50－

Appendix I General Dynamic Incremental Model

a) Structural State Model and Corresponding Reduced Form

Given the discussions on the linkage between dynamic structuralism and the

engineering state-space concept in the text, we treat the incremental factor to

be a structural state to govern the social system output G . In so doing, we

first hypothesize the linear discrete dynamic model for the log-natural value

of g in the following way:

g = φ (L) g + φ (L) v (A-1)

where φ (L), φ (L) : the lag polynomial transfer functions,1)

v : the random distarbance to perturbate the log-natural incremental factor (assumed: v ～ N(O, Q)).

Note that since (IV-1) is of a multiplicative form, the structural equation

was conveniently expressed in terms of log g rather than g itself in avoiding

the expected non-linearity of the reduced system output equation. In other

words, our dynamic assumption on g is of the form:

g = ∏ ∏exp(β v ). (A-2)

If G in (IV-1) is an observable variable, the unobservable structural

state g in either (A-l) or (A-2) can be derived given its initial state

1) L is the lag operator (or known as the inverse of the "z" operator, the discrete counterpart of the Laplace operator) to be defined as: L x x .

i

Δ =

－51－

which consequently means that (IV-1) is the definitional process to calculate

g . Taking the same reason employed for proposition of the multiplicative

structural state model (A-2), we should not take the additive observational

model like (IV-1) but adopt the following multiplicative (or log-linear)one:

log G =log G + log g + e . (A-3)

Substituting (A-l) into (A-3), we now obtain the reduced form as:

log G =log G + φ (L)log g + φ (L)v + e

Letting log G Y , log g G , the above reduced form becomes a typical

univariate polynomial structural form (PSF)2)3)as below:

Y =φ (L)

G + φ (L)

v +1

e . (A-4) 1－L 1－L 1－L

It is worth nothing that in the reduced form (A-4) the unobservable

incremental factor or state variable g is hidden below an observational level.

2) On an PSF model, see Wall, K., The Rational Distributed Lag Structural Form－ A General Economic Model, NBER Working Paper No. 65, 1974.

3) By definition, G = e , in which both terms are equally functions on time. Hence, G = e , whose long-natural form is G = Y .

Δ =

Δ=

－52－

b) Exogenous Intervention to Influence the Incremental Factor

As shown in (A-2), our dynamic incremental model is a log-linear

autoregressive and moving average (ARMA) model which involves no exogenous

input. It is quite difficult to conceive G in (A-4) as the exogenous input.

It is a constant that appears in autoregressive transfer function (i.e., homo-

geneous different equation). Explicit incorporation of exogenous intervention

to change dynamic evolution of the incrementalism requires the following system

equations:

x = φ (L)x + φ (L)v + φ (L)p

(A-5)

y = y + x + e

where x g

p : a set of exogenous interventions.

The reduced form for this system is readily obtained as:

y = φ (L)

x +φ (L)

p +φ (L)

v +1

e . (A-6) 1－L 1－L 1－L 1－L

Fig. IV-1 illustrates a conceptual scheme of the above argument.

Δ =

－53－

Fig. IV-1

－54－

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