Markets and Electorates

Perusing the internets today (it was a long and slow day in the office), I came across the page of Bryan Caplan, an economics professor at GMU (a hotbed of Austrian free-market folks on the US scene). It appears that Prof Caplan has a new book out called The Myth of the Rational Voter, in which his central thesis seems to be the idea that the average member of the electorate not only is ill-informed in regards to economic policy, but actually makes irrational voting decisions even based on the information s/he has. He bases this on a survey of average voters as compared to economists and highly educated non-economists. The results show that economists would be more likely to vote for stronger free-market outcomes than average voters, a boon for the Libertarian Caplan, and that economic policy may be best left in the hands of the “experts” as average voters affected by certain biases actually skew policy instead of reaching the best possible outcome through the “miracle of aggregation.” (Note, please, that I have not read Prof Caplan’s book and am certain I am doing neither his argument nor his research justice.)

This started me thinking (and be forewarned, this is mere musing not backed by any evidence beyond the anecdotal and likely not properly reasoned) democratic principles at work in politics versus those at work in a market, and the shortfalls of both. Markets serve a number of purposes, but two above all else. The first is the setting of an agreeable (not equitable, not rational, but agreeable) price at which a commodity might be passed from one actor to another. Markets are unquestionably efficient and successful at this task, and are also self regulating by virtue of the fact that the commodity simply will not change hands if the price is not agreeable to both parties. Markets are also conveyors of information through the act of price setting. The manager of the steel mill knows how much to produce for all of the various buyers by virtue of the price. If prices are rising s/he knows to produce more as there is greater demand. If prices are falling, there is a surplus on the market and the manager should hold back production. This can change day to day across millions of markets for billions of commodities, more than any person or computer can track efficiently, yet markets are able to make these on-the-fly corrections because they convey the knowledge of the person-on-the-street through interactions of supply and demand. Towards these two ends, price and information, markets are unmatchable, but notice that I say that markets set agreeable prices, not equitable or rational prices.

Markets, I think, don’t account for the greater good. Their outcomes are geared towards creating exchanges at prices agreed upon by buyers and sellers, but these buyers and sellers are, as Caplan says the electorate is, both ignorant of their true needs/desires and acting irrationally. Perception of needs and desires are skewed by greed, among other factors. The lust for money (i.e. profit seeking, in econ-speak) has created an entire multi-billion dollar industry around manipulating buyers’ desires. How has the market reached a equitable outcome when you can drive past a dilapidated home in need of numerous repairs with a Lincoln SUV with rims worth a few grand sitting in front of it? How has the market reached a equitable outcome when the upper echelon of society sees it’s income growing exponentially while the middle-class and impoverished fall further behind? These are clear examples of ignorance, by the market, or the greater good. But what of rationality in decision making? Even actors acting on incorrect information about their own needs are not acting rationally. For evidence, just look to the stock market bouncing to and fro on the whims of investors. Fear, arrogance, and caprice, not rationality, are market driving forces.

So maybe Caplan is onto something, that economists, not the electorate, should determine economic policy, but at least the electorate wears its ignorance and its irrationality on its sleeve, and doesn’t hide it behind fanciful explanations like the market does. Democracy doesn’t bring about the best of all possible outcomes, but like the free-market, it brings about an agreeable one.