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Schumpeter on democracy
1. The “classical doctrine” of democracy: there is a public good and voters make sure politicians do it.
2. Alternative: democracy is a system in which governments emerge from a competitive struggle for the people’s vote.
3. The inference (which Schumpeter never quite says): socialism, lacking competition, can’t have democracy either
Typology of goods
Rival Non-rival
Excludable Private goods Knowledge
Non-excludable Parking spaces Classic public goods
Public Goods: Definition
• Non-rival. One person’s enjoyment does not preclude another persons.
• Non-excludable. Once it’s available, no one (in a particular group, e.g., those residing in a given territory) can be prevented from using it.
Public Goods: Examples
• National defense
• Clean air / Global climate
• Church bells
• Anything else?
Public Goods: Controversial
• Roads and streets• Public parkland• Public safety / crime prevention• Education• Basic science and classic literature• Stable currency• Coast guard• Army Corps of Engineers• Language
Wolf on the functions of the state
• Security of property• Sound money• Infrastructure• Basic research• Dealing with externalities• Merit goods, e.g. health, education: this involves an
ethical commitment• Regulatory and competition policy• Taxation• Redistribution
Wolf on characteristics of good governance
• Credibility, predictability, transparency, and consistency
• Policy should shape individual incentives to match objectives
• Remediability: govt. should act only when benefits exceed costs
Wolf: problems in advanced democracies
• Voters are rationally ignorant• Those who are knowledgeable about an issue are
generally:– Experts, e.g., journalists and academics– People whose livelihoods depend on the policy in question– Concerned citizens
• These groups tend to be:– Cynical– Self-interested– Fanatical
• All may have a bias towards state rather than market solutions
Wolf: catastrophes of bad governments
• Kleptocracy• Fiscal mismanagement (e.g., debt defaults)• Inflation• Corruption, including
– Administrative corruption– State capture by private interests
• Bad government is a major cause of intl. inequality
Public Goods vs. Natural Monopolies
• Electricity, water, gas, and other utilities are:– Rival. If I use this cup of water, you can’t.– Excludable. You can be prevented from accessing
water and gas pipes, electric lines.
• These are not public goods in the economic sense
• They are provided publicly because we are not content to leave them to private monopolies
Median Voter Theorem (Downs, 1956)
• Assumptions: – Two parties– One-dimensional issue spectrum– Parties maximize votes– All voters vote– Voters vote for the party closest to their preferences:
• Result: Parties move to the center
Left RightParties locate in the center
Cycling (Kenneth Arrow)
• An example of cycling:– Alice and Caroline prefer
Acapulco to Boston– Betty and Alice prefer
Boston to the Cayman Islands
– Caroline and Betty prefer the Cayman Islands to Acapulco
• Under majority voting, Alice, Betty, and Caroline could cycle forever
Alice Betty Caroline
#1 pref
Aca-pulco
Boston Cayman Islands
#2 pref
Boston Cayman Islands
Aca-pulco
#3 pref
Cayman Islands
Aca-pulco
Boston
Cycling
• Any point in ABC can be defeated by a majority coalition
• In particular, middle point D can be defeated by E, F, or G
A
B C
D
EF
G
Rent-Seeking• Suppose that the state grants a
monopoly to a firm. What are the costs?– Region B represents a “Harberger
triangle” of deadweight loss because the monopolist underprodces
– Region A is traditionally interpreted as “monopoly profit,” which consumers lose but the monopolist gains
– However, Region A can also be interpreted as a “Tullock rectangle” of social loss if private persons and firms expend valuable resources competing to get monopoly privileges
• Rent-seeking: someone seeks to grow, not the pie, but their share of it
P
Q
DMC
PM
A B
Rent-Seeking: Examples
• Lobbying for trade protection, state-sanctioned monopoly
• Queueing in stores, for rock concert tickets
• Picking up $1 bills from the street• Claiming tax refunds• Gold mining (in a gold standard world)• War• Education?
Interest Groups: The Logic of Collective Action (Olson, 1971)
• Suppose law L benefits group G1 to the tune of $X, and harms group G2 to the tune of $Y– Will the law pass?– How much will the two sides spend on rent-seeking?
• This depends not only on whether X>Y, but on the ability of the groups to organize
• Small groups can organize more easily• Mancur Olson concludes: policies with
“concentrated benefits, diffuse costs” are more likely to pass
• Does this contradict the Median Voter Theorem?
The Paradox of Voting
• Why you shouldn’t vote:– Gains to you if your candidate wins: $10,000?
$20,000?– Chances that your vote will decide the election: 1 in 1
million?– Expected gain from voting: 1¢– Cost of voting: $10 worth of gas, time?– Conclusion: It’s not worth anyone’s while to vote
• Why does anyone bother to vote, let alone 60% of eligible voters? (the “paradox”)
Rational Ignorance
• Theories about why people vote:– Very low costs are ignored– Expressive utility from voting– Tiny amounts of altruism
• With tiny incentives to make the right choice, voters will not invest in getting informed and thinking through things
• Bryan Caplan argues that systematic voter ‘irrationality’ harms democratic governance
Redistribution
1. The assumption of diminishing marginal utility implies that rich-to-poor redistribution should raise total welfare (though this is not Pareto-improvement)
2. But rich-to-poor redistribution reduces the incentive to create wealth
3. The trade-off: equity vs. equality
Ferguson
• The insurance principle: diversifying risk• Origins of insurance:
– Mathematicians– Webster, Wallace, and Scottish widows
• The welfare state: economies of scale– Origins: Bismarck’s Germany– Japan, the ‘welfare superpower’– Problems with the welfare state– Milton Friedman in Chile
• Aging populations• Hedging and derivatives