When pro-free-market critics of democracy explain why laissez faire is not a winning election issue, they usually say that voters have a no incentive to research economic policy because one vote won't sway the election and the expected payoff to any individual voter is infinitesimal. So they, quite rationally, vote on other bases. This rational ignorance leaves space for special interests to have their way, despite the fact that if the voters paid attention to what was going on, they wouldn't put up with it.
That explanation leads to the conclusion that democracy does not work because outcomes diverge from what people really want but are powerless to obtain. On the other hand, fans of democracy think that the rejection of laissez faire shows the system is working just fine. But both sides agree that voters are rational (employing reason) under the circumstances.
Which story is true? Maybe neither.
Bryan Caplan's new book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies, which is beginning to make a splash (see this New York Times Magazine article), offers another reason why consistent pro-market policies don't do well: Voters feel that interventionist policies are good policies and have no incentive of any kind to acquire information that would upset long-held preferences. He turns to this explanation because he finds too many problems with the rational-ignorance alternative. As Caplan writes,
In the naive public-interest view, democracy works because it does what voters want. In the view of most democracy skeptics, it fails because it does not do what voters want. In my view, democracy fails because it does what voters want.
For Caplan, as for other economists and political theorists, the basic problem is that in a democracy, individuals don't pay the price for their preferences:
In economic jargon, democracy has a built-in externality. An irrational voter does not hurt only himself. He also hurts everyone who is, as a result of his irrationality, more likely to live under misguided policies. Since most of the cost of voter irrationality is external—paid for by other people, why not indulge? If enough voters think this way, socially injurious policies win by popular demand.
If bad economic policies are winning political platforms, the majority of voters are getting what they want. This is not good news.
Caplan says lots of people systematically (not randomly) make foolish choices at the ballot box about economic policies because they dogmatically believe those policies are good for the country. They don't understand the benefits of the free market, and would resist the evidence. He quotes Ludwig von Mises in agreement: There is no use deceiving ourselves. American public opinion rejects the market economy. But this doesn't imply that they also make foolish choices in their private lives, because the political and personal arenas are substantially different. At the level of personal economic choice, the chooser bears most of the costs. If you want to buy Cheerios, your choice is decisive, you enjoy or suffer the consequences, and act accordingly in the future. If you vote for a protectionist, your choice is not decisive (the winner would have won anyway) and you don't bear all the consequences but only a minute fraction of them. I nearly applauded when I read Caplan's words asking us to drop specious analogies between markets and politics, between shopping and voting.
When shopping, you won't refuse to examine a bad idea for long because it's costly to you. But, Caplan writes, the price of ideological loyalty is close to zero. So we should expect people to 'satiate' their demand for political delusion, to believe whatever makes them feel best.
Why do people have faith that bad economic polices are good? Because they incorporated biases into their worldview as they grew up and have no desire to examine them. Most people don't study economics, and most who do don't let their studies corrupt their biases. Market ideas are not intuitive. Caplan points out that while political scientists have been empirically documenting voters' systematic bias against free markets, economists have failed to assimilate the findings. Economists' blind spot is particularly hard to excuse because they stand at the end of a long tradition with a lot to say about bias, Caplan writes. Many of the most famous economists of the past, like Adam Smith and Frederic Bastiat, obsessed over the public's wrongheaded beliefs about economics, its stubborn resistance to basic principles like opportunity cost and comparative advantage. (It's why Bastiat wrote about what is not seen and why, in our time, Manuel Ayau called his article on comparative cost The Most Elusive Proposition [pdf].)
Caplan breaks the bias down into four varieties: antimarket bias, antiforeign bias, make-work bias, and pessimistic bias. Antimarket bias refers a tendency to underestimate the economic benefits of the market mechanism. This comes from the counterintuitiveness of spontaneous order (invisible hand), win-win exchange, general good arising from self-interested action, the social role of profit, market pricing, and so on. I think this bias stems partly from the derogation of self-interest so common in religion and moral philosophy. Caplan writes, …[Adam] Smith's thesis [that general good grows out our private gain] was counterintuitive to his contemporaries, and remains counterintuitive today.
Antiforeign bias means underappreciation of the benefits of trading with people in other countries. This apparently results, primarily, from some natural but unreasonable fear of foreigners, as well as a lack of understanding about the division of labor and law of comparative advantage, or costs. The result is a disposition against unconditional free trade. Even when trade is liberalized, it has to be done in a perverse way—by promising it will lead to more exports, which is irrational since it's imports (consumption opportunities) that people ought to be concerned about. That misplaced concern goes back to the reason Adam Smith wrote The Wealth of Nation, the public's mistaking money for wealth.
The make-work bias, Caplan writes, is the tendency to underestimate the economic benefits of conserving labor. It shows up whenever something—technology, foreign competition, whatever—makes particular domestic jobs unnecessary. Here's a way to think about that bias. Imagine that a person from America circa 1800 traveled to our era in a time machine. You show him your iPod and explain what it does. He says, That's wonderful, but really, you people are foolish. How can you have workers making those things when they are needed to grow food? The answer, of course, is that they aren't needed to grow food because machines and knowledge enable us to grow far more food than was grown in 1800 with a far smaller fraction of the population. Yet popular prejudice would have it that when people were no longer needed on the farm, they faced a life of unemployment. What's missing? That fact that wants always exceed resources and labor. So when we can accomplish a task with fewer resources and less labor, the savings are available for new things we couldn't afford yesterday. There's no need to make work, which wouldn't be hard to do anyway. We can create jobs whenever we want—by, for instance, outlawing any machinery invented after 1920—but we wouldn't be creating prosperity. Quite the opposite.
The final category of bias is the pessimistic bias—a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy. This is the prevalent belief that the present does not live up to some golden age. Of course, back in that supposed golden age, people were saying the same thing about some previous golden age, and so on, ad infinitum. Caplan notes that this belief has been attributed to the gradualness of progress (Smith) and to human nature (David Hume). Regardless of the cause, the tendency toward pessimism seems resistant to facts. People think ours is an era of decline, while economists argue over whether the rate of growth is slowing or not.
Caplan's thesis is more complex than I've indicated here, so interested readers should buy the book. (Here's an extract [pdf].) I've not dealt with many questions, such as the role of special interests and whether government's systematic historical intervention on behalf of business has tainted people's sense of what free markets and capitalism mean. But the core of the thesis strikes me as sound. It's not what voters don't know that brings them trouble, but what they know that isn't so. (That's Artemus Ward applied to politics.)
Caplan's solution is to rely more on private choice and the free market. Good idea, though you'd have to get people to vote for that, so I'm not sure how effective that will be. Economic education for the public also would also seem in order. But just straightforward teaching won't be enough, for as Caplan elaborates, people hold fast to their errors through emotional commitment. A good teacher could change some minds, but the best teacher in the world would be lucky to convince half, he writes. Dogma dies hard.
At the very least, this implies that the case for liberty must be pressed across the entire cultural front, especially in movies and novels where emotions as well as reason can be appealed to. We must find emotional commitments in the population that are consistent with freedom. Libertarian strategic wisdom may well begin with Jonathan Swift's insight: It is useless to attempt to reason a man out of a thing he was never reasoned into.