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Wednesday, March 28, 2012

Comparing the Morality of Government and Markets

Beyond a very limited role in our economy and our lives, further expansions of government retard economic efficiency and reduce human liberty. The most important contribution of the Public Choice school of political economy has been to use economic analysis to realistically compare the efficiency of government and markets and to explain the tendency to substitute government activity for market activity far beyond the point where economic efficiency is reduced. Yet this substitution continues.

I shall argue that by limiting its concern almost entirely to efficiency comparisons, Public Choice has limited its influence over the prevailing political ideology, which has made the continued growth of government possible. Economic efficiency is important, but efficiency arguments are less convincing than moral arguments. As Joseph Schumpeter observed, “The stock exchange is a poor substitute for the Holy Grail.” So even if people are convinced that markets generate more efficient outcomes than government, it will still be favored over markets as long as most people believe it is more moral than markets. Unfortunately, convincing them otherwise is difficult.

Economists have argued that markets are moral, but they almost always do so by pointing to the desirable, but unintended, outcomes that result from people pursuing their private interests. Economists are rightly impressed with the ability of markets to motivate self-interested individuals to unintentionally serve the interests of a multitude of others they don’t know, much less care about. The result is a truly impressive pattern of individual freedom, social cooperation, and prosperity. But people are emotionally programmed to judge morality on the motivations that produce outcomes rather than on the outcomes themselves. If people make personal sacrifices with the intention of benefiting others, their actions are seen as moral. When the effort is directed toward identifiable people, this sense of morality is intensified. The outcome of the effort carries less moral significance than the intention motivating it and the personal sacrifice involved.

For example, if a man risks his life by jumping into a rapidly flowing river to save a child from drowning, his action would be credited as moral whether he is able to save the child or not. On the other hand, he would receive little if any moral credit if he saves the life of the child by accidently providing him something to hold on to as he steers his boat to shore.

Not only are the benefits of markets the unintended byproducts of people motivated primarily by self-interest, but they are widely dispersed over the public (or no one in particular) and generated by an indirect process of market coordination that obscures the connection between the benefits created and the actions that make them possible. Such a process is unlikely to be seen as moral; many see it as immoral and are unaware of the benefits it provides. Even those who recognize the beneficial outcomes of markets commonly consider them contaminated by a morally tainted process. In other words, they don’t believe the desirable ends justify the market means.

In contrast to the market process it is easy for people to see morality as an inherent feature of the political process. Political rhetoric emphasizes the intention of doing good, not for personal advantage but because it is the right thing to do. The good is directed toward deserving groups whom we should care for, such as the poor, the elderly, the sick, and operators of family farms. And the political process allows us to care for these groups in direct and easily understood ways, such as mandating a minimum wage, providing a pension program, subsidizing medical care, and creating price supports for agricultural products. Also, the means by which most people make political decisions—voting—encourages them to be responsive to moral claims for government programs and to reject evidence that those programs often do more harm than good.

It is useful to consider an important difference between “voting” in the market with dollars and voting at the polls with ballots. When you “vote” for something in the market you get what you “vote” for, and you get it and pay for it only because you “vote” for it. This is very unlikely when you vote at the polls. At the ballot box you often get, and have to pay for, what you vote against. And except in elections with only a few voters, you almost never get what you vote for because you vote for it. This feature of voting is often interpreted to mean that your vote doesn’t count. Wrong. Your vote will be counted. If you vote in Chicago it might be counted several times. The important characteristic of an individual’s vote, as just described, is that it is almost never decisive.

The probability that any one vote will decide the outcome in a state or national election is far too small to take seriously. Indeed, it is much smaller than the probability of winning millions of dollars in a state lottery or being killed by a shark. A few people win millions in lotteries every year, and in an average year there are 16 people attacked by sharks in the United States, with one fatality every two years. But I am not aware of any state or national election that was decided by one vote, with one exception—but it is the exception that proves the rule. I’m referring to the 2000 presidential election between George W. Bush and Al Gore. That election came down to a 5–4 U.S. Supreme Court decision to end the vote recounting in Florida, with Bush 327 votes ahead. So in that instance one vote did decide the election, but it was a vote with only nine voters.

The minuscule probability that an election will be decided by one vote explains why people are more influenced by moral considerations when voting in an election than when making purchases in markets. Consider a voter who is convinced that an increase in government transfers would help the poor escape poverty, but because she is in a high tax bracket, she knows that if the transfer policy is enacted it will increase her lifetime tax burden by $10,000 in present value. Furthermore, the only benefit she will receive from voting for the transfer is the moral satisfaction from intentionally making a sacrifice to provide what she believes will be direct government help to an identifiable and deserving group. Will she vote for the transfer?

The answer obviously depends on a comparison of the perceived cost and benefit of voting yes. The common response is that she has to receive at least $10,000 worth of moral satisfaction to vote in favor of the transfer. But this response is incorrect because even though it will cost our voter $10,000 if the transfer policy passes, it will cost her almost nothing to vote yes. The cost of voting yes is an expected cost and it equals $10,000 times the probability that her vote will decide whether or not the policy passes. Even if we assume a one-in-a-million probability her vote will be decisive (which is very much on the high side for most state and federal elections), the expected cost of voting yes is one penny. If the moral satisfaction she receives from voting yes is worth only the price of a designer cupcake, her yes vote is a bargain. Voting provides her with the opportunity to enjoy a sense of moral virtue at virtually no cost.

Benefiting from cheap virtue in the polling booth depends on more than the low cost of voting for expensive government policies that are claimed to achieve noble objectives. First, the voter has to believe that her vote contributes to passing the policy she favors, and that it represents her willingness to make a personal sacrifice. It is difficult to feel particularly virtuous for doing something that costs and accomplishes almost nothing. The voter also has to believe the policy she votes for really will do all the wonderful things claimed. It is difficult to feel virtuous supporting a policy if you believe it will harm those you want to help. Therefore, it is not surprising that so many people are aggravated when economists point out that their vote has a meaningless effect on the outcome of most elections, and therefore casting their vote for an expensive government program represents a trivial sacrifice.

Also, expect those who get a sense of moral superiority by voting for a policy to be hostile to evidence casting doubt on the policy’s ability to achieve the noble objectives claimed for it. Even when it is irrefutable that a policy causes great harm, many who voted for it will defend their vote by arguing that the policy is motivated by good intentions. The ends may be unfortunate, but because the political means are seen to be motivated by moral intentions, those ends should be overlooked, or euphemistically dismissed. For example, those who defended what they believed were the noble goals of Soviet communism initially rejected the evidence that millions of people were being killed in the name of achieving those goals. When the evidence was overwhelming, the euphemism for killing millions of people was that “you’ve got to crack a few eggs to make an omelet.” Those who find it morally comforting to trust in the good intentions of government have been willing to condone outrageous immorality to maintain that comfort.

If those who vote to give government more power to do good things were as virtuous as they fancy themselves, they would do more than cast a vote and proudly walk out of the ballot booth wearing an “I Voted” sticker. They would realize that even if a policy is potentially desirable, voting for it (or for a politician who claims to favor it) is but the first step in realizing its potential. Good political outcomes depend on more effort and virtue than voting requires.

To make sensible decisions at the polls, voters would need to become well informed on a wide range of issues and consider alternatives to government for addressing particular problems. They would need to follow up their votes by paying attention to the type of legislation that the two branches of Congress passed and find out what came out of the reconciliation process. This follow-up would need to continue when legislation goes to government agencies to be supplemented with thousands of pages of detail and then enforced with bureaucratic discretion. Finally, voters would also write letters, make calls, and work with genuinely public-spirited groups to pressure politicians and agencies to keep the legislation consistent with the lofty goals they voted for. Obviously, few voters can be expected to incur the cost of doing much if any of these tasks. And we would not want them to, given the productive opportunities they would have to sacrifice in their occupational specialties. It can be hoped, however, that more voters would recognize that there are some who are making the political effort just described but with less elevated objectives than voters want to believe they are achieving with their votes.

Members of groups organized around particular interests and their hired lobbyists will work to influence legislation that directly affects those interests. In many cases they are actively involved in writing the legislation for congressional committees. They will follow the legislation as it goes through both the House and Senate and is turned over to the bureaucracy for fine-tuning, interpretation, and enforcement. It should surprise no one that the political efforts of special interests are invariably directed at serving their narrow objectives at the expense of the noble objectives voters had in mind when casting their ballots. Of course special interest groups and their lobbyists will use the rhetoric of moral concerns and the public interest in support of the legislation they favor. Their primary interest in high-minded objectives, however, is in determining which arguments for the legislation they favor are most likely to convince voters that supporting it at the ballot box is the moral thing to do.

Teachers’ unions calculate that expressing concern for our children is the most effective way to motivate public opposition to policies that would improve education by subjecting government schools to competition. Similarly, corn farmers and agricultural firms calculate that expressing concern for the environment is the most effective ploy for securing government tax advantages for ethanol. And industries facing competition from imports calculate that expressing their desire to save American jobs is the best way to get public support for import restrictions that will increase consumer prices and reduce job creation in other industries. Most of the benefits from farm subsidies and agricultural price supports go to wealthy owners of large farms rather than small family farmers, while (in the case of price supports) increasing the prices the poor pay for food. Numerous interest groups seize the widespread public concern for the poor to create support for government transfers that are designed and implemented to benefit those very interest groups more than the poor who were supposedly the primary beneficiaries.

Voters are being enticed by the pretense of morality to vote to give government more money and power that will be captured largely by the politically influential for their personal gain, with government doing little to achieve the noble goals voters expected, and commonly undermining the achievements being made without government. Government is a poor agent for those who hope to do good through the morality of good intentions and personal sacrifice.

The reality is that political behavior is no less motivated by self-interest than is market behavior. Voters are motivated by the desire for a low-cost sense of moral virtue to vote for noble-sounding policies while remaining oblivious to the morally appalling outcomes those policies often generate. Organized interest groups use the rhetoric of morality, supplemented by backroom deals, to manipulate the political process and capture privileges and protections at public expense. And incumbent politicians secure the support of naive voters and campaign contributions from self-serving voting blocs. Where is the morality here?

Any realistic moral comparison of markets and government obliterates the fiction that political behavior is more moral than market behavior and compares politics and markets in terms of the desirability of their outcomes. Political self-interest is not nearly as productive as the self-interest pursued in markets. People serve the interests of others more effectively when they are spending their own money, subject to the information provided and the discipline imposed by markets, than they do when casting votes to spend other peoples’ money and lobbying for political favors paid for by others. Markets encourage a fundamental morality in terms of taking responsibility for the consequences of one’s actions, being responsive to the concerns of others, and reciprocating value in return for value. This market morality is nowhere to be found in the political process when one looks behind the smokescreen that characterizes so much current political rhetoric.

Truly moral political behavior is voting against most proposals put forth by politicians. The most noble of all political objectives is limiting government’s ability to erode our freedoms and reduce our prosperity under the pretense of noble-sounding objectives.

  • Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.