This chapter represents a political-economy approach to understanding the existence and behavior of public enterprises. It begins with a critique of the pure economic approach not because such an approach is irrelevant but because it is incomplete. The missing element, supplied here, is the interplay of political, economic, and social forces that affect the policy making of the state toward public enterprise. Although I bring together many disparate ideas from the literature, in no sense is this a complete survey. The purpose is only to illustrate the political-economy type of analysis. My aim is to seek broader answers than the usual narrow technical economic ones.

Traditional economics versus political economy

Neo classical economics has endogenous limitations because it assumes away the interwoven linkages between polity, society, and economy. The interplay of social forces has little impact on the analysis, except as it indirectly affects the market through such measurable variables as income distribution. This branch of economics typically assumes “economic men” who are free and rational, who pursue their individual self-interests by maximizing perceived utility, and who operate in perfect markets. Further, it uses concepts of equilibrium and optimality that, though defined with mathematical precision, are at best only an approximation of reality. Political economists find this high degree of abstraction difficult to accept amid the reality they perceive. They find the quest for “harmony” unrealistic as they see conflicts of interest unfold every day. They see group interests as having a reality independent of individual interest. They prefer to study the interplay of socio-political forces in a historical context.