Does David Cameron understand the purpose of politics? I ask because of his claim that "it's time Britain had a pay rise."

We must distinguish here between the interests of a specific individual business and the collective interests of all businesses.

It might be in the interest of an individual business to increase pay because doing so might motivate staff and reduce turnover; this is what Cameron meant when he told the BCC: "it's good for you to have happier and more productive staff."

However, it's also possible that higher wages are in businesses' collective interests. This might be because, as wage-led growth advocates say, they would give a net boost to aggregate demand. Or it might be because, as Cameron believes, higher wages would create a feel-good factor and so increase the chances of the re-election of a pro-business government*.

Herein, though, lies the problem. If higher wages were in firms' individual interests, they would already have raised wages. If, on the other hand, they are in firms' collective interests, we have a collective action problem. Even if each individual firm thought that it was in everyone's interests to raise wages, it would not do so for fear that others would not follow with the result that it would have higher costs with no offsetting benefit in the form of higher demand or pro-business public opinion.

In either of these cases, Cameron's speech is pointless. If a pay rise is in firms' individual interests, it would have raised pay already. And if it is in their collective interests, each firm needs more than words to convince them to raise pay. For this reason, serious advocates of higher pay, such as the TUC, have called (pdf) for policy measures to force pay up, such as stronger union rights, full employment policies or a higher minimum wage.

What then, is Cameron doing?

One possibility is that he's just playing the old trick of raindance politics. He's demanding something which might happen anyway - so when it does happen he can claim to have been in control of events.

There is, though, another possibility. Cameron is committing an error which, as I've said before, is a consistent theme of this government - a blindness about the collective action problem.

We see this in its welfare policy. Whilst it is likely that a clampdown on benefits would force any individual benefit recipient** to seek work and possibly get it, this cannot be true to the same extent for all recipients, because labour demand is constrained by the state of the economy.

We see it too in fiscal policy. It might be rational for you to pay off your credit card, but if we try to pay off "the nation's credit card", the rise in desired saving merely reduces aggregate demand and so deficit reduction proves to be counterproductive.

Which brings me to my initial question. The purpose of politics is to ameliorate problems of collective action: if individual interests always coincided, there'd be no need for politics. A politician who doesn't understand this doesn't grasp the very basics of his profession. Perhaps being Prime Minister is just an ego trip before Mr Cameron begins a serious career.

* Uncertainty about EU membership and the risk of recession because of overly tight fiscal policy are of course in businesses' interests.

** Is it just me, or does the word "claimant" have ideological undertones?