Friday, June 10, 2016

The Economic Wisdom of Collective Ignorance

Review of Bryan Caplan's Myth of the Rational Voter

Among social scientists, economists hold a relatively high opinion of man's capacities.  They believe him to be resourceful, efficient, and clear-sighted.   He is thought to be prudent, and his judgments reasonable. So, what are economists to make of a situation where most people, as voters, seemingly reject the most highly reasoned recommendations that their profession has produced?

George Mason University economist Bryan Caplan attempts to answer this question in his discussion of The Myth of the Rational Voter .  In particular, he attempts to explain: Why do voters seek to obstruct the import of cheaper goods from abroad?  Why do they disfavor corporate downsizing that increases economic productivity?   And why does the electorate treasure costly entitlement programs while fretting about the negligible fiscal consequences of foreign aid?

In line with Nietzsche's claim that "he who has a why to live can endure any how," Caplan views man's appetite for arbitrary absolutes as congenital, asserting that "worldviews are more a mental security blanket than a serious effort to understand the world."   Although, as a good economist, Caplan grants that such beliefs are susceptible to incentives, he argues that such incentives are negligible in the political realm, since individuals have little chance of directly determining the outcome of elections in an electorate of millions.   A vote does not guarantee a political outcome the way an individual purchase of an economic good does.  As a result, voters have little reason to sufficiently inform themselves of the true consequences from proposed policies, and are therefore free to hold mistaken worldviews, regardless of the costs these may inflict on society.

Using survey data that compares voters' policy opinions with their knowledge of objective political facts, Caplan finds that most voters are poorly-informed and hold systematically skewed beliefs.   Voters, he claims, have failed to incorporate Adam Smith's central economic teaching: that man, "by pursuing his own interest… frequently promotes that of the society more effectually than when he really intends to promote it."   Caplan argues that this is "because Smith's thesis was counterintuitive to his contemporaries, and remains counterintuitive today."  As a result, policy is subject to four fundamental flaws, which he labels anti-market bias, anti-foreign bias, make-work bias, and pessimistic bias – all of which stand stubbornly against the forces of reason, and at every step serve to obstruct the rational organization of economic resources.  

Yet, given that democratic economies significantly outperform those of non-democracies, Caplan's argument is rather unconvincing.   In reality, the economic virtues of democracy (that the costs and benefits of public policies are accounted for within the political process, regardless of who bears them) counteract the vices that Caplan diagnoses.   While there is little evidence in the behavioral economics literature for the systematic cognitive skews he alleges, pervasive self-serving bias is well-documented.   This merely strengthens the alternative hypothesis – that voters are best motivated to identify their own pressing needs, that their votes are valuable to political leaders who compete to supply the savviest defense of their interests in return, and that legislative institutions allow representatives to trade support for whatever policies allow for the most efficient overall allocation of resources.  Yet, before exploring this counter-argument, it is important to consider whether the cognitive biases that Caplan identifies are to blame for voter irrationality, or whether he has merely misinterpreted voter interests.  

The widespread public opposition to the policy of free-trade, which economists overwhelmingly endorse, is Exhibit A in Caplan's argument.   Using survey evidence suggesting that the public blames economic woes on fears that "companies are sending jobs overseas", he attributes this to the chauvinistic pride that people enjoy from "the belief that foreign products are overpriced junk," which survives correction through lack of responsibility for the consequences.   This is indeed a good example of how specific cultures allow biases to persist without scrutiny, but not one which affords Mr Caplan's profession any reason to sneer at the general public.   Indeed, it is quite astonishing that none of the dozens of economists acknowledged in the introduction to the book pointed out the obvious concentration of protectionist sentiment in areas of the country that face the threat of plant closures from foreign competition.   Given regional negative multiplier effects, this is clearly the result of an entirely rational concern for the prosperity of one's own local community.   When a relatively high-wage country removes trade barriers with poorer nations, unskilled labor often becomes a more abundant factor of production, which can reduce the wages of such workers in the relatively prosperous country.   This may create net wealth for a nation as a whole, and effected workers are certainly free to upgrade their skills, but economists should not be surprised when those at risk vote on the basis of trade issues, whereas the rest of the population – who save $5 on a pair of shoes – do not.

But it is not just the creative destruction wrought by foreign entrepreneurs that is subject to popular suspicion.   Caplan argues that the public tends "to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy."  Compared with economists, the general public feels that the cost of living has risen faster than wages, thinks that more jobs are being lost than created, and believes that things will likely only get worse.  Although public perceptions may be skewed by the fact that bad news is always bigger news, this itself is an indication that the economic costs that matter to the public are not always those measured by economists.   While academics measure a dollar of economic expansion and one of economic contraction equally, the burden of downsizing to individuals is much greater, since it often forces people to replace employment-specific (physical or human) capital investments that have been rendered obsolete. As a result, where foreign competition or new technology threatens to lead to the loss of employment, those at risk are often quick to seek political protection.  

Furthermore, the policy preference biases that Caplan proposes are clearly not universal, and are poor predictors of public opinion.   Where the public depends on government programs, such as Social Security or Medicare, and has invested in the existing system and arranged their lives in anticipation of a stream of benefits, it is quick to defend them.   Yet, as Hillary Clinton found with healthcare in 1994, where the public relies on private institutions for services, it is loathe to accept higher charges and jealously guards whatever freedoms it enjoys.   While moments of extraordinary politics where the status quo no longer functions (for instance, during the Great Depression or after Britain's 1979 Winter of Discontent) may provide an opening for radical reform, the public cares more about defending its existing prerogatives, than entertaining the promises of abstract and unproven schemes for improvement.  

As the Athenian argued in Plato's Laws, "most people only ask their legislator to enact the kind of laws that the population in general will accept without obligation.   But just imagine asking your trainer or doctor to give you pleasure when he trains or cures your body!"  While, contrary to Caplan's assertions, such aversion to painful reform may be quite rational, opposition to the elimination of inefficient production arrangements can profoundly impede economic growth.   So, an important question remains: How is a democratic society to escape this 'tyranny of the status quo'?

The answer lies with economic and political entrepreneurs.  Just as market imperfections such as patents allow firms to hold longer time-horizons and capture the gains of innovation in economic markets, so secure terms of office offer politicians incentives to encourage and permit reforms that benefit public and private sectors alike.   Conversely, in fragmented political systems, where coalition governments allow little scope for autonomous leadership, the constant threat of dissolution for failing to satisfy any of a multitude of governing partners (each of which possess an effective veto) ensures that there is often very little scope for the state to allow the status of any established interests to wane.

Since voters are each limited to a maximum of one vote every four years for presidential elections, a ballot is a very scarce and valuable commodity to anyone whose life may be affected by political alternatives.  (In this sense, the incentive to consider options seriously and spend wisely is much greater than it is in economic markets, where if you dislike the DVD you have bought, you can easily and quickly buy another.) As a result, a particular reason for casting a vote comes with high opportunity costs, since voters are forced to trade-off the value that they derive from preferences across different issues.   Working class voters, for example, must often weigh the benefits of higher expenditure on prisons and police pledged by one candidate against the expansion in Medicaid spending which another proposes.  

Political scientists have long noted how the alignment of electoral divisions can shift from one set of issues to another, and it is often argued (against evidence of broad stability) that politicians can tack between issue dimensions at will, to evade electoral scrutiny.   Yet, since most votes are swayed by the primary issues of taxes, entitlements, public services, and crime, which have the most pressing effects on voters' lives, and since policies drawn from public purse are often interlinked and impose deadweight losses that burden the economy as a whole, electoral preferences tend to hold a certain consistency.  

But, Caplan would argue, since a single vote is so insignificant relative to the aggregate electoral outcome, why should individual voters expend the necessary efforts to properly anticipate the consequences of their vote and hold the correct people accountable?

While it may be irrational for many people who are not particularly passionate about politics to vote, the fact that those whose livelihoods depend on political outcomes are limited to only one ballot gives them very strong incentives to do whatever they can to persuade and entice others to turn out.   Indeed, it is imperative for interest groups (whose power is directly tied to how many people they can get to vote), political parties, and candidates to provide strong reasons for people to vote, to construct their policy positions accordingly, and to develop social networks that generate peer pressure and cultural expectations to ensure that people get to the polls.   Given the network externalities associated with voting, voters have the motivation to provide critical information that might persuade non-voters to turn out, since this can strengthen the position of the candidate who promises to benefit them.   As E.E. Schattschneider once noted, "everything about public affairs [is] vastly more newsworthy than business affairs," and bringing an issue into the political realm significantly increases the incentive for all and sundry to disclose and publicize the relevant information that may influence its resolution.   Should some voters fail to support the candidate that best advances their interests, other candidates have good reason to invest substantial amounts to target them.   At the same time, while voters can be expected to accurately respond to significant threats to their own wellbeing, few voters have reason to spend much effort informing themselves of the negligible fiscal consequences of foreign aid, given that this matter does not serve to sway their vote.

Yet, "if voters do not know term limits," Caplan argues, "incumbent politicians will be punished for the sins of their predecessor, and share credit for their achievements with their successor."   In such situations, however, political entrepreneurs can serve to aggregate, organize, and certify the critical information needed for the electorate to render its verdict.   Union leaders are not easily fooled to misperceive their interests, and their members are willing to trust their expertise when they stand to gain.  Similarly, organizations such as the AARP and associated publications can help voters separate sincere from insincere politicians that claim to defend particular interests – even when the issues involved are as abstruse as the proposed progressive indexing of Social Security.   That the cost of organizing concentrates power in the hands of a few privileged interest groups, is an argument to lower the costs of democratic participation and to increase the opportunities for political organization, not one for reducing its scope.  

As Gary Becker has observed, because "the total amount raised from taxes, including hidden taxes like inflation equals the total amount available for subsidies, including the hidden subsidies like restrictions on entry into an industry… policies that raise efficiency are likely to win out in the competition for influence because they produce gains rather than deadweight loss."   In the case of free-trade, since the costs of economic protectionism are greater in aggregate than the stresses from foreign competition that are felt acutely, there is much cause for politicians to accept free trade, and provide compensation to those disadvantaged by the change.   Indeed, this is precisely the basis for the Trade Adjustment Assistance program, and such measures regularly form part of the legislative deals that secure Congressional assent for trade liberalization.   As a result, the United States is able to enjoy benefits from substantial free trade policies.

Similarly, to the extent that the burden of taxation is concentrated on marginal activities undertaken by a minority, adverse incentives on such production are similarly concentrated.   As a result, such taxes generate little revenue relative to the cost they impose by diverting high-skilled labor away from the activities where it produces the most value for society.   Since the incidence of taxation is not isolated to the faction on which it is seemingly imposed, and such disincentives to production threatens to lower all boats, the popular parasitism that Tocqueville and Madison feared from "majority tyranny" has not materialized.   Indeed, as Gordon Tullock once observed, supposedly majoritarian political systems in reality encompass a broader range of interests, since politicians "must continually be seen to be engaging with non-members of the coalition, in order to keep the members in line."  

In a society where the majority of voters have significantly more to lose than their chains, government spending that offers "Something for Nothing" often engenders corruption and concentrates gains among those placed to most ruthlessly exploit the system.   This, unsurprisingly, tends to prove unpopular with a majority that must work hard for its income.  Yet, public opinion often insists that people who are afflicted through no fault of their own should not fall victim to theoretically dogmatic and practically asymmetric laissez-faire, and that the imperfections of existing institutions should not be used as excuses for total neglect.   As Amartya Sen has noted, democracies have never blithely tolerated famines, and similarly have incentives to make up for market imperfections that may lead human potential to go to waste, by investing in the education of those who could not afford to do so themselves.  

This does not mean that democracy will necessarily resolve all structural problems.  For example, when the majority is not afflicted by the consequences of entrenched institutional failures and dysfunctional cultures (such as those stymieing the accumulation of human and social capital by the poor), it often possesses incentives to isolate itself and throw money at such problems, rather than to insist on reform, if the costs of doing so are lower.   Yet, while democratic representatives are capable of delegating authority to civil service experts or allowing markets to resolve social problems, democracy clearly constrains the capacity for social elites to neglect and actively impose burdens on other sections of society, whether by factional interest, misguided intentions, or the imposition of skewed priorities that are blind to the facts on the ground.

Caplan warns of fanatical political movements, foisting their nostrums on the public.  Yet, these gain sway far easier when ambitions for social reform are not tempered by the need to convince a multitude of voters with differing priorities and often contradictory motives, preoccupied with mundane concerns, and under the sway of hard-won experience, habit, and tradition.   In a winner-takes-all electoral system, such as that for most political offices in the United States, it is hard to explain why so very few people choose to vote for ideologically pure third party no-hopers without concluding that most people are pragmatic in their attempts to advance their preferred policies.  

V.O. Key was therefore right when he famously concluded that "voters are not fools", and that "in the large the electorate behaves about as rationally and reasonably as we should expect."   Indeed, there is good reason to believe that, at least in the case of economic policy (which is a positive-sum game), greater constraints on political elites, resulting from a freer and more competitive market for the dissemination of information and for organization in the public political process would lead to more rational outcomes.   Although one might reasonably question the time-horizons offered to legislators in the form of term lengths and other institutional rigidities, the desirability of the ultimate sovereignty of the voter and a multiplicity of inlets for public scrutiny and discipline on economic policy is hard to doubt.

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