An Economic Understanding of Populism: A Conceptual Framework of the Demand and the Supply Side of Populism

Abstract

This article assesses progress in the economics-centred literature on populism along three key themes and develops a conceptual framework to better understand the phenomenon. On the demand side (t−1), economics research identifies the effect of an exogenous economic shock on a marginalised segment of society and works with the economic voting hypothesis. On the supply side of populists in power (t), in the literature, populist rule is typically associated with unsustainable expansionary fiscal and monetary policies and with trade protectionism. At t+1, by using rational and biased belief assumptions, economists provide implicit inputs for a seemingly paradoxical question: why is a populist re-elected even if most populist policies assumably end up in Pareto inferior outcomes? This article summarises and criticises the relevant economic literature and shows that not only political science, but economics scholarship is instrumental for studying populism at all three stages.