Explaining Orbán: A Political Transaction Cost Theory of Authoritarian Populism

Abstract

Based on the theory of transaction cost economics, the paper argues that by vertically
\norganizing political exchange, populist regimes reduce market-type political transaction costs
\n– primarily bargaining, enforcement and information costs – prevalent in democracy.
\nHowever, management-type political transaction costs – mainly organizational costs, partly
\nstemming from corruption – rise as populists in power leverage government control through
\nhierarchically organized clienteles. Operation of such clienteles is costly as maintaining them
\ntakes political and economic resources, including a corruption surcharge that government
\ncronies are allowed to appropriate while accessing public resources. Transaction cost
\neconomics suggest that a shift from democratic towards authoritarian populist regimes occurs
\nwhen formal and informal political institutions prove unable to maintain horizontal political
\nexchange, and society seeks to internalize market-type political transaction costs through
\nincreased government discretion. Institutionally, this is based on a majoritarian approach to
\npower, sidelining the system of checks and balances that constrain democratic governments.
\nThis is demonstrated on the example of Hungary that has turned into a textbook case of
\nauthoritarian populism under Viktor Orbán since 2010.