Usher Political Economy (Blackwell, 2003)

of this book, for democratic government. We protect property not though the heavens fall, but because the heavens will fall if we do not. Justification of wide disparities of income with reference to an absolute right of property may be persuasive to the wealthy. It is less likely to be persuasive to the poor. More in keeping with the spirit of economic analysis is the pragmatic justification from need. Property is theft in so far as some great fortunes do originate in plunder. We accept property rights as we find them because that is what we need to make society work.

The law recognizes a principle of adverse possession according to which a person who has been in possession of property for a long time is deemed to own it, regardless of how the property was first acquired. If I occupy a piece of land, if I build a fence around it, and if my occupation is unchallenged for a certain number of years, that land becomes mine, though it may have belonged to somebody else when I first occupied it. My house inherited from my father and grandfather is mine, even if grandpa acquired it by trickery or by theft. The logic of adverse possession is that the community as a whole is better off with secure title than if each person’s property could be taken from him on the basis of some obscure transaction long ago.

So too, with all property. We respect property rights, not because of any abstract right, not because all property is discovered, created, or purchased by its owner and, not because inheritance per se is sacrosanct, but because we need them. Having established an apportionment among people of society’s resources, we can maintain a market economy with the virtues listed at the end of chapter 3 and with the additional virtue, to be examined in the next three chapters, that a degree of private property is a requirement for personal liberty and a prerequisite of democratic government. Without private property, the community must allocate the national income politically. Each person’s income would have to be determined individually by a central authority. Political allocation of the entire national income leaves no private sphere to serve as a check on the ruling class. Justification for disparities of income flows not from the rights or virtues of the occupants of the wealthier ranks of society, but rather from society’s need for some non-political allocation of property and income in an economy where industry and innovation are rewarded. Unjustifiable in themselves, property rights can be seen as part of the overhead capital of the nation.

A country with a recognized allocation of property is fortunate. A country with no recognized allocation of property is unfortunate, destined to waste resources in conflict over the apportionment of income among citizens, as in the Soviet Union after the breakdown of communism where the resources of the nation were stolen or extracted through political manipulation by the former officials of the old Communist Party and the old industrial administration. With luck, the children and grandchildren of today’s crooks and swindlers will become respected businessmen tomorrow, just as children and grandchildren of crooks and swindlers occupy many honorable positions in Europe and North America today.

Even as a reward for industry and invention, property rights are what they are on the strength of society’s rules, some rules supplying property rights, other rules delimiting those rights, prohibiting certain uses of property as anti-social, obliging propertyholders to pay tax and imposing whatever redistribution of income – increasing the net income of the poor and, correspondingly, reducing the net income of the rich – is deemed appropriate by the government of the day. The real justification of disparities of

income and wealth is to be found not in the rights or virtues of the wealthy themselves, but in the belief that disparities of wealth are an inescapable by-product of rules deemed best in the long run for society as a whole. The virtues of the market justify the present distribution of wealth, but only in so far as disparities of wealth are really required for the virtues of the market to be realized.

REASSESSING MARKETS

This chapter is a transition from the study of markets to the study of government on the premise that the proper role of government in the economy depends on what the market can be expected to do. A list of the virtues of the market was presented at the end of chapter 3. To that list may now be added a list of vices that have come to light in the last four chapters. The list of virtues identified at the end of chapter 3 is recapitulated as follows:

•The competitive market creates “order without orders.” Self-interested and uncoordinated actions by a great flock of decision-makers fit together as though by design, as though organized by a single will or a planning commission that arranged everything. Instead, there emerges a market-clearing price (the relative price of one good in terms of the other when there are only two goods) or prices (when there are many goods) at which whatever one wants to sell finds a buyer and whatever one wants to buy finds a seller. That much of the world’s work can be done without direction by any central authority is of great political significance, establishing markets as a requirement for the maintenance of democratic government.

•The competitive market is efficient. The prices generated by a competitive market induce efficient production and allocation. The outcome of the market is efficient in that there is nothing wasted. No planning commission – however knowledgeable, however extensive its capacity to deploy the resources of the economy as it sees fit, and however benevolent – can rearrange production and reallocate goods to people to make everybody better off at once or to make anybody better off without at the same time making somebody else worse off.

•The competitive market economizes on knowledge. Market prices tell producers and consumers what they need to know about the technology and the tastes of other people throughout the world, allowing specialists in each line of production to slot their activities appropriately into the world economy without detailed information about what other people are doing. Prices lead markets to replicate the ideal planning commission in possession of more information about the economy than any actual planning commission could ever process or comprehend.

•The competitive market circumvents bargaining. As long as markets are large enough that nobody imagines himself to exert an independent influence on the price, people are enabled to trade with the market rather than with one another and there need be no wastage of resources in negotiation, trading and the abandonment of profitable deals because folks cannot agree on the sharing of the surplus.

The chapters on taste, technology, and associations yielded a comparable list of vices:

•The market requires the protection of the state. In chapter 2, the protection of property was the defense of fishermen against pirates. In chapter 5, land was possessed securely, and with no explanation within the model of how security of property was maintained. In chapter 8, the definition of property and the task of protecting property were broadened considerably. Protection of property came to include the enforcement of private contracts, with the inevitable requirement for the society to interpret the language of contracts in the resolution of disputes and to decide which contracts are to be enforceable and which not. The virtues of the market cannot be realized without public enforcement of private contracts, but the weight of government cannot be brought to bear on behalf of any and every private arrangement. The definition of property itself tends to blur at the edges, leaving some question of what exactly it is the task of government to protect.

•The competitive market will not supply public goods. The proof that a competitive equilibrium exists and is efficient depended critically on the assumption that all goods are “private” like bread and cheese. As shown in chapter 5, the proof breaks down completely for “public” goods like the army and the police because people want to be free riders on society’s provision of public goods. Benefiting as much from your contribution to the financing of the army as from my own, I choose not to contribute at all and rely instead on the contribution of others. When everyone behaves that way, nothing is provided, and we are all worse off than if we compelled one another to contribute. The odd exception is television where advertising fulfills the role of taxation.

•The competitive economy takes no account of externalities, of public benefits or harms that are somehow linked to the provision of private goods. The example in chapter 5 was of smoking and smoke, looked upon as a paradigm of pollution of all sorts associated with the production of private goods. The principal remedy is taxation to bring private and social values into line.

•The competitive economy may subject people to risks that cannot be entirely insured away but that can be reduced or pooled by public action. The risk of being born unhealthy or incompetent cannot be pooled privately because too much is known about people when an insurance contract is signed. Nor can the market insure against unemployment or poverty because such insurance is only likely to be valuable to the insured when everybody is obliged to participate. The extent to which public insurance can fill the gap has for decades been the subject of considerable debate.

One extra vice and one extra virtue have emerged in this chapter and will play a large role in the chapters to come. The extra vice is that the distribution in a competitive economy may turn out to be very unequal. Care must be taken in drawing out the political implications of this vice of competitive markets. In principle, a government can arrange for a more equal distribution of income than what appears spontaneously in the market. In practice, the distribution on income can be, and is, equalized to some extent. Nevertheless, there is always some risk that a government empowered

to redistribute income from rich to poor will in the end redistribute income from the ordinary citizen to the administrative classes or to favored social classes, corporations, or individuals.

The extra virtue of the competitive market is its compatibility with democratic government. It is no accident that virtually all reasonably democratic societies have economies based on the private ownership of the means of production. There is a technical, or mechanical, connection between the two. Capitalism is a prerequisite to democracy, not in the extreme sense that any modification of thoroughgoing, all-encompassing, capitalism spells the death of democracy, but in the sense that a somewhat ill-defined core of the economy has to be entrusted to the market if democracy is to be preserved. This proposition will be discussed under the general heading of voting in the next chapter.

Political Economy

Dan Usher

Copyright © 2003 by Dan Usher

C h a p t e r N i n e

VOTING

. . . a pure democracy, by which I mean a society consisting of a small group of citizens, who assemble and administer the government in person, can admit of no cure from the mischiefs of faction. A common passion or interest will, in almost every case, be felt by the majority of the whole; a communication and concert results from the form of government itself; and there is nothing to check the inducements to sacrifice the weaker party or an obnoxious individual. Hence it is, that such democracies have ever been spectacles of turbulence and contention; have been ever found incompatible with personal security, or the rights of property; and have, in general, been as short in their lives, as they have been violent in their deaths.

James Madison, The Federalist Papers, 1787

So deep is the respect for democratic government, and so manifest is the evidence that democratic countries provide freer and more prosperous lives for their citizens, that democracy itself is now seen as almost self-evidently desirable. Everybody is in favour of democracy; so much so that the word has found its way into the names of some of the ugliest and most undemocratic, in the ordinary sense of the word, regimes on earth, notably the Democratic Republic of Kampuchea and the now dissolved German Democratic Republic. Democracy is a complex term with many meanings and many more connotations, but at its core is majority-rule voting about the choice of leaders and the passage of bills in the legislature. Democracy may be more than just voting, but government without voting is not democracy. We are all brought up to think of majority-rule voting as unreservedly good.

That has not always been so. Until the eighteenth century, it was firmly believed by most thoughtful and well-intentioned people that democracy, interpreted as public decision-making by majority-rule voting, is a system of government which, whatever its virtues “in theory,” simply does not work. Like the ancient Israelites, most people took it for granted that countries required a king with extensive powers over ordinary people. On that view, government by majority rule is destined to self-destruct because

it contains no equilibrium comparable to the equilibrium prices in a competitive economy with well-specified property rights. On that view, democracy is inevitably a step on the road to despotism or to anarchy, to autocracy or to chaos. In Madison’s words in the quotation at the beginning of this chapter, “democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security, or the rights of property; and have, in general, been as short in their lives as they have been violent in their deaths.” The context of the quotation is extraordinary. Madison was one of the designers, some say the principal designer, of the constitution of the United States. The quotation itself is from The Federalist Papers, a series of tracts intended to persuade American voters to accept the constitution, replacing a loose confederation of semi-sovereign ex-colonies by a considerably tighter federal system of government. Madison accepts the anti-democratic argument as it applies to “a pure democracy” with “a small group of citizens” but he goes on to argue in defense of the new United States where factions might be expected to neutralize one another in a larger “compound republic.” The argument retains some validity today not as a prediction of the demise of democracy or as reason for rejecting democratic government altogether, but as a vehicle for identifying weakness in democratic government and designing rules and subsidiary institutions by which democratic government can be sustained. The main task of this chapter is to study the mechanics of voting as a doctor studies diseases in the attempt to keep people well. The old view that voting cannot work carries within it lessons about what can be determined by voting and what cannot.

HOW WE VOTE AND WHAT WE VOTE ABOUT

Our society maintains two systems of rights: property rights which are intrinsically unequal, and voting rights which are intrinsically equal. Property rights are, in practice, unequal, for people hold different amounts of property. Property should be understood in this context to include human capital in skills (such as the ability to practice medicine or to run an efficient business) enabling their possessors to earn high incomes, as well as physical capital in the ownership of land and other resources. Voting rights are intrinsically equal, for each person has one and only one vote. In speaking here about rights, I am not suggesting that the rights are God-given or established in the sky independently of human interests or human will. I am merely asserting that many societies maintain both systems of rights simultaneously, despite the inevitable conflict at the edges. We maintain these rights because we believe them to be useful in the broadest sense of the term. We maintain these rights because we believe a society where both of these rights are not protected would be a dreadful place to live.

Each system of rights has a core domain of application, with a disputed boundary in between. Politics is to a large extent about the boundaries between rights. Consider medical care. Medical care could be entirely within the domain of property, as it was in Canada until well after the Second World War. People could be left to buy as much or as little medical care as they choose, just as they buy bread and cheese. Alternatively, medical care could be entirely within the domain of voting, as it is for the most part in Canada today, where the amount and composition of medical care are determined

by the legislature in the first instance with extensive delegation to the administration. Provision of drugs remains partly within the domain of property.

To vote is to choose among laws, policies, or leaders in accordance with the preferences of the majority in the community. Consider a simple variant of an example that will be developed later in this chapter. A class of students is ordering sandwiches for lunch. The only choice is between ham sandwiches and tuna sandwiches. The cafeteria can supply only one type of sandwich, either ham or tuna, for everybody. To vote is to ask those who want ham rather than tuna sandwiches to raise their hands. If more than half the class do so, the choice is for ham. Otherwise the choice is for tuna. With only two options to choose from, the preference of the majority is identified unambiguously, and is invariably selected. With more than two options to choose from, the outcome of voting is, as we shall see, not entirely determinate.

Three contexts of voting may be usefully distinguished: the choice among candidates for office, the choice of bills in the legislature, and the passage of laws by referendum. For the choice among candidates for office, it is the practice in Canada to divide the territory into constituencies with equal numbers of people, to allow as many candidates as wish to run in any constituency, and to declare as winner in each constituency the candidate who is first-past-the-post with the largest number of votes, regardless of whether he obtains a majority (more than 50 percent) or just a plurality (more than any other candidate) of the votes. First-past-the-post voting is used for electing Members of Parliament in Canada and for electing Senators, Congressmen and the President in the United States. With ten candidates, the winner might have as little as 11 percent of the votes, and one of the losing candidates might have beaten the winner by as much as 89 to 11 if no candidates other than these two had entered the race. One fanatic could beat out 9 moderates if the moderate candidates split the moderate vote. Of course, for this to happen, the moderate candidates and their supporters would have to be very stubborn or very stupid; otherwise they would arrange for some (perhaps as many as 8) of the moderate candidates to drop out of the race.

To avoid this outcome, other countries have adopted different electoral rules. Under pure proportional representation, there need be no subdivision of the country into constituencies. Political parties order their candidates on lists, people vote for parties rather than candidates, seats in the legislature are assigned to parties in accordance with their votes, and parties assign seats to candidates in accordance with their lists. For example, under proportional representation and with 600 seats in Parliament, if the Liberals get two-thirds of the votes and Conservatives get one third, then the first 400 candidates on the Liberal list and the first 200 candidates on the Conservative list become the Members of Parliament.

Alternatively, elections may be designed to take cognizance of voters’ orders of preference among all candidates, so that, for example, a candidate who is every voter’s second choice may win over a candidate who is ranked first by a small plurality of voters but who is detested by the rest. One such voting mechanism is the Borda method. Each voter orders all candidates, the candidates are awarded points accordingly, and the candidate with the most votes wins. With three candidates, a first place would be worth two points, a second place would be worth two points and a third place would be worth nothing. Another way of accounting for voters’ orders of preference is the single transferrable vote. Each voter orders all candidates. Then, in single-candidate

constituencies, any candidate with over 50 percent of first-place votes is declared the winner. If there is no such candidate, the candidate with the lowest number of firstplace votes is dropped, and his votes are reassigned among the remaining candidates in accordance with his supporters’ second preferences. If the first preference of voter A is dropped, then voter A’s second preference is elevated to a first preference, his third to a second, and so on. The process is repeated as many times as is necessary for a candidate to emerge with 50 percent of the total vote. The single transferable vote is designed to avoid the situation described above where a small percentage of the vote (11 percent in our example) is sufficient to procure a victory because voters opposing the winning candidate are split among many similar candidates. Members of Parliament in New Zealand are chosen in a single transferrable vote.

A different set of problems arises in voting on bills within the legislature. On any given issue, the legislature must choose among many possible courses of action, and the legislators would normally differ in their rankings of the available options. Suppose there is a general consensus that the old age pension is becoming too expensive. Some legislators may favor raising the retirement age from 65 to, say, 67. Others may prefer an even higher retirement age. Others may prefer to lower the dollar value of the old age pension. Others may prefer the pension to become contingent on income. Others may prefer to leave the current program untouched. Somehow, one policy, or combination of policies, must be chosen. With a clear majority in Parliament and with adequate party discipline, the party in power could presumably do as it pleased, constrained only by the possibility of a revolt of its backbenchers if its actions were too unpopular, and by concern about the next election. With no clear majority for any course of action or with some degree of independence on the part of the legislators (as in the Congress of the United States), the situation becomes more complex.

A bill is proposed, perhaps by the party in office, perhaps by an individual legislator. Then an amendment is proposed. Then a second amendment is proposed. Then a third, or perhaps an amendment to an amendment, and so on. With only two mutually exclusive amendments, the legislature would be confronted with four options – reject the bill, pass the bill unamended, pass the bill with the first amendment and pass the bill with the second amendment – options from which one must be selected. The selection procedure could, in principle, be comparable to first-past-the-post in the choice of Members of Parliament. All options might be voted simultaneously on the understanding that the option with the most votes wins. To the best of my knowledge, this procedure has never been adopted in any country, presumably because it is too readily open to manipulation to ensure that any innovation – a bill with or without amendments – is preferred by a majority of the legislators to the status quo.

Instead, parliamentary procedure is based upon sequential voting in which all votes are between pairs of options (never more than two) with new options introduced one by one against the survivor of the preceding vote. Sequential voting requires a subsidiary rule for the ordering of votes. In parliamentary procedure, the sequence of options is in reverse order of their appearance in the legislature. In our four-option example, the first vote would be between the two amendments, the second would be between the winner of the first vote (the bill as amended by the winner of the first vote) and the bill unamended, and the third vote would be between the winner of

the second vote and the status quo. The decision of the legislature would then be the winner of the final vote.

Sequential voting is somewhat strategy-proof but does not block strategy altogether. It is strategy-proof to the extent that any option commanding more than 50 percent of the votes in a pair-wise contest with any other option must necessarily triumph regardless of the ordering of the votes in the sequence. However, where there is no such commanding option, options introduced later on in the sequence have an edge over options introduced earlier. An option can be knocked out early in the sequence even though it would have won in a pair-wise vote against the option that is ultimately victorious. This cannot happen to the status quo under parliamentary procedure because the status quo is always placed at the end of the sequence of votes. Parliamentary procedure gives the edge to the status quo by placing it at the end of the voting chain, guaranteeing that no bill, however amended, can become law unless preferred to the status quo by a majority of the Members of Parliament. Nor does sequential voting block log rolling in which two bills that would otherwise be rejected are both passed because you agree to vote for my bill and I, in return, agree to vote for yours. It does not block strategic amendments. Suppose a bill to build a road in district A would win on a straight up-or-down vote. Those who oppose the bill might attempt to defeat it with a strategic amendment to build a road in district B as well. The strategic amendment works as intended if the amendment is passed and then the bill as amended is defeated because some legislators, who would be willing to fund a road in district A only, are unwilling to fund two roads in districts A and B. The ploy may work when some legislators vote sincerely at each stage, while other legislators do not.

Our final context is the referendum. Normally, citizens vote for legislators, and legislators vote for laws. A referendum breaks this pattern, allowing citizens to vote for laws or policies directly. In California, a referendum is initiated by a petition with the appropriate number of signatures, and the outcome of a referendum is binding on the legislature. Some years ago, the people of California voted by referendum to limit the rate of the property tax. Recently, California voted by referendum to eliminate reverse discrimination, changing dramatically the racial composition of college students in the state. In Canada, where mere citizens have less control over their governments, a referendum can only be initiated by the government and the outcome of a referendum is not binding. Quebec held a referendum on separation in 1995. Newfoundland has held two referendums on transferring control of education from religious groups to the provincial government, though the actual transfer could only be effected by a constitutional amendment requiring approval by the Legislature of Newfoundland and the Parliament of Canada.

THE DISEASES OF DEMOCRACY

It is not within the scope of this book to describe democratic politics in detail. Our object is instead to identify common difficulties in all democratic government, to show how these difficulties may be confronted, and, especially, to identify connections between the organization of the economy and the stability of democratic government.

Several diseases of democracy can be identified, some relatively mild, others potentially fatal. Among the diseases of democracy are its failure to reflect intensity of preference, its capriciousness, the paradox of voting, the threat to private property, and the exploitation problem. These will be discussed in turn.

Intensity of preference

Consider once again the students’ choice between ham sandwiches and cheese sandwiches, but now suppose some students are kosher. Suppose the 80 percent of the students who are not kosher prefer ham to tuna, and the 20 percent of the students who are kosher prefer tuna to ham. Obviously, ham wins four-to-one in a straight vote. Suppose also that the non-kosher students, though they prefer ham to tuna, do not care very much about the matter and would be content to eat tuna if only tuna were available, while the kosher students would forgo lunch altogether rather than eat ham. Were that so, the common good as described in chapter 8 might be best served by the choice of tuna sandwiches, even though the vote is for ham. Consider a person “behind the veil of ignorance” not knowing whether he is kosher but expecting a one-in-five chance of turning out to be kosher when the veil is lifted and his place in the world is finally revealed. That person may choose tuna sandwiches, notwithstanding the four-to-five chance that he will eventually prefer ham. Alternatively, adopting a utilitarian criterion and treating each person’s utility as dependent on the type of sandwich, it may turn out that the sum of everybody’s utility is higher when tuna is served than when ham is served.

The general problem exemplified here is that voting takes no account of intensity of preference. Voting recognizes whether one prefers this to that, but not by how much, if indeed “how much” can be specified at all. Within the strict confines of this example, ham wins and the kosher students are out of luck. On the other hand, it is hard to see how intensity of preference could be measured or compared objectively. If you prefer ham and I prefer tuna, it is easy enough for me to claim that my preference is more intense than yours, but it is rarely possible for me to prove that claim or for you to disprove it. Sometimes one can produce evidence of religious conviction or medical allergy, but more often one’s intensity of preference is unobservable.

A crude substitute for evidence on intensity of preference might emerge in voting about several matters at once. Tuna may prevail over ham as part of a menu or platform. Suppose students vote on two matters, the choice of sandwiches and the choice of dessert, where the choice of sandwiches is between tuna and ham and the choice of dessert is between apple pie and cherry pie. Once again, everybody’s lunch must be the same: all tuna or all ham, all apple pie or all cherry pie. If the non-kosher students are evenly split between apple pie and cherry pie, there may be room for a deal in which kosher students vote for one or the other dessert in return for a vote for tuna over ham. Voting deals may or may not be socially advantageous. The deal about sandwiches and dessert seems harmless enough. Other deals are less innocuous. In practice, deals are struck among legislators and in the formation of platforms of political parties. More will be said about this matter below.