The Failure Of Democracy

The title is sheer hyperbole and sensationalist, but this is really a book review and a rather appropriate one given the news yesterday.

Now that I’ve got your attention, let me begin first by saying that democracy and democratic institutions are far superior to other forms of social organisation. The principle of one person one vote, while honoured as much in the breach as in the observance, encapsulates the desire for all peoples for self-determination and the pursuit of life, liberty and happiness.

Democracy has flourished and has helped underpin the development of global trade, the advance of technology and the free working of markets, that has brought about an increase in human welfare that is both unique and unprecedented in human history.

That doesn’t mean it’s perfect however, but then, nothing is.

The point here is that democracies, embodying as they do the consent of the governed, also involve the desires of the governed. And from the perspective of economic growth and development, voters since time immemorial want the damnedest things.

Successfully growing economies have been derailed by popularly elected politicians with strong governing mandates –and these politicians continue to be popular even as their policies proved to be demonstrable failures. Voters sometimes espouse policies that make little to no economic sense, policies that while appearing to be personally beneficial yet reduce social welfare as a whole.

Most of Latin America fits this description – a century ago, living standards in Latin America were on par with the developed West but are now far below American or European income levels. Other examples also abound. Zimbabwe went from a promising middle income country to an economic basket case, by catering to populist sentiment.

While less harmful overall, some individual policies in democratic countries over the past half-century or so also certainly fit the bill, such as incomes and rent fixing policies, price controls, or fuel subsidies. None of these policies make much economic sense, yet they continue to attract widespread popular support. For that matter, the ideas of Karl Marx remain popular touchstones, even despite the manifest failure of communism.

One upshot of this observed behaviour is what’s called the Self-Interested Voter Hypothesis (or SIVH), where voters are thought to support candidates and political parties that support their own narrow interests. Under this hypothesis, politicians that implement policies that reward particular voting blocs would garner the votes of that bloc – hence the political popularity of giveaways.

Sound familiar?

SIVH fits in well with orthodox economic analytical frameworks – firms, households and even countries act in accordance with their own self-interest, to maximise their own welfare. Analysing voting patterns and public policy choices should be amenable to being treated the same way.

Yet…research into voting behaviour reveals something quite different. As a rule, despite “giveaways” and “goodies” and other indirect attempts at “vote-buying”, voters are actually quite altruistic. In other words, they will support those candidates who they think can best govern the country and bring about widespread prosperity, irrespective of inducements otherwise.

Yet we have the countervailing evidence that voters also support policies that work against that result, that cause slower economic growth and reduce their own welfare.

In short, while voters in a democracy live up to the social responsibility implied by the democratic system, they also appear to be quite maddeningly inconsistent with respect to their own welfare. Or to be more economically precise, they appear to be irrational.

So what gives?

Four years ago, in the last days of the US Bush Presidency, Bryan Caplan of George Mason University in the US published a book that looked into this very question. In “The Myth of the Rational Voter" (Princeton University Press, 2007), Caplan examines this “paradox of democracy”.  His conclusion? Voters are economic illiterates. They support sub-optimal policies because they don’t know any better.

More importantly, voters know that the marginal impact of any single vote is negligible, so they don’t feel constrained by self interest to support causes that will only benefit themselves. To be more technical, the expected private return from a vote is so negligible, that conventional utility maximisation doesn’t apply.

By the same token, they will support causes that they do care about, but don’t necessarily make any economic sense. They vote for policies that they feel good about, or for parties that they identify with, but not necessarily for that which would actually be socially beneficial to them personally.

So the average voter is rational, but that rationality is bounded by what they know of how economies work, which on average is not very much. This ignorance is compounded by highly resistant systematic biases in their beliefs about economics. In Caplan’s words, voters are therefore rationally irrational.

Homo economicus, the representative rational man who understands the “true” workings of the economy and takes in all presently available information to inform his actions in maximising his present and future utility, is an abstraction in academic economics that doesn’t exist in reality. People in the real world rely not on perfect information and complete knowledge, but on heuristics and “rules of thumb” – mental shortcuts, if I can use that phrase, or more popularly, “common sense”.

But common sense as it relates to economics is neither common nor sensible. If I can paraphrase Alan Greenspan, people too often look at economic policies in terms of single entry bookkeeping when what they really need to look at is double entry bookkeeping. Or more bluntly – for every action, there is an equal and opposite reaction.

One consequence of voter irrationality is that voter apathy, which civil society proponents wring their hands over, is actually a good thing – because the more citizens who come out to vote, the more likely the popular vote will be skewed towards bad economic policies. Good economic policies on the other hand get support when those who have the requisite knowledge are the predominant voting bloc or are in a position to influence the votes of others. Efforts to “bring out the vote” can thus be counter-productive for economic development.

Hence the mixed record of democracy in economic development compared to more autocratic regimes, especially in East Asia.

As you can imagine, this is an extremely elitist argument. It implies that the best outcomes would come from putting the “experts” in charge or letting only the “experts” vote, even if the level of knowledge of those experts is only slightly above that of the average man on the street. And it also doesn’t help when there remain fault lines and differences on even fundamental economic issues between individual economists.

But Caplan supports his line of thinking with persuasive data supported by clever theoretical insights. Better education is directly correlated with both better economic knowledge and likelihood of voting for example. It all makes an evil kind of sense.

Caplan doesn’t propose any solutions – the book is largely aimed at debunking conventional wisdom on political economy – but he does note that there’s some wiggle room for democracies to both survive and prosper.

In politics, a principal-agent problem might in fact be a solution, in that rational politicians can support populist measures while privately discouraging its implementation:

“When a master does not know his own best interests, a disobedient servant can be a blessing. The more misguided the electorate is , the less desirable it is for politicians to unquestioningly grant its wishes…The lesson is that agency “problems” temper majoritarian extremes. Good outcomes become less good, because corrupt politicians stand in the way of the public’s grand design. Bad outcomes become less bad, because politicians have the wiggle room to tone them down…If politicians have no choice but to carry out constituents wishes, democracy loses one of its main safety valves.”

Personally, I certainly don’t have any answers either. Better education is certainly called for, but given increasing specialisation of labour and knowledge, it’s probably tougher than it looks to spread economics knowledge around. Disagreement within the profession on some fundamental issues (*cough* fiscal policy *cough*) is another barrier – if even the “experts” disagree, what more the layman?

But the book is a rollicking good read, largely accessible to the layman, and highly thought provoking. I recommend it highly – particularly for politicians. It isn’t available locally, but Amazon carries it, as does The Book Depository.

Technical Notes:

Bryan Caplan, “The Myth of the Rational Voter”, Princeton University Press, 2007