The Madness of Crowds
The topic of democracy has been batted around by several of us over the past couple of weeks, and with the “Occupy ____” movement building momentum (There was even an “Occupy Auckland” protest here in New Zealand today, with more protests planned), it seems that the popular politics is going to have a higher profile for a while at least. So I thought it might be a good time to go over the book that most strongly affects my perceptions of democracy – The Myth of the Rational Voter: Why Democracies Choose Bad Policies by George Mason economist Bryan Caplan. Plus, wardsmith was curious and I just got my copy of the book back from a colleague who was borrowing it.
The most interesting thing about Caplan’s book (at least interesting to incorrigible econ nerds like me) is that it is the first attempt to marry Public Choice Theory (the theory of why political systems choose bad policies) with Behavioural Economics (the branch of economics that tries to account for the myriad ways in which people are irrational in their decision-making). Most applications of Behavioural Econ (such as Thaler and Sunstein’s Nudge) have suggested that irrational consumers justify wider government intervention, after all if people can’t always be trusted to decide well for themselves, surely that suggests a role for the government to help people help themselves? Caplan makes a persuasive argument that it’s not quite that simple.
Caplan starts by looking at the conventional Public Choice Theory explanation for bad democratic policy-making: special interests. The logic goes that a bad policy (take import barriers, a classic example) gets voted in because while society as a whole loses out from it being implemented, the losses are thinly distributed across the whole population so no one has an incentive to spend any effort fighting them. By contrast the gains are concentrated, so the beneficiaries have every incentive to fight for the bad policy. This is a plausible-sounding argument, but it doesn’t explain why bad policies are often very popular: Public Choice Theory predicts that the public should be basically indifferent to tariffs, but instead they are often enthusiastic supporters.
Caplan starts from a different premise – that voters are interested in voting for policies they perceive as good for the economy, and that democracies are pretty responsive to public sentiment (he delivers some empirical support for this). In Caplan’s theory the fault lies not in our stars, but in ourselves – it is the voting public that demands bad policies mistakenly thinking them good. When the government obliges we get bad outcomes, all nice and democratic.
Caplan’s methodology for supporting this with evidence was to compare the views of economists with those of the general public when it came to economic questions (he focuses on economics, not because he thinks voters are especially irrational about economics, but because he felt unqualified to address expert opinion in other domains of knowledge). As it happens there’s a survey of economic questions that separately samples PhD economists and the general public. The questions are neither abstruse theory, nor normative questions like BDP vs. environmental quality. Instead the questions are about whether a range of possible causes (such as too many immigrants or too much offshoring of jobs by corporations) are a major impedance to economic growth, a minor one or not at all. The survey also collected a range of control data about each respondent (including age, education, ethnicity, income, education and stated ideology), so Caplan could construct an “enlightened public” estimate, basically how the general public would answer if they had the economics knowledge of an Econ PhD. The reason for doing this is to check how much of the difference between economists and the general public is due to superior knowledge and how much is due to economists being richer, or having more secure jobs, or being ideologically biased. It turns out a full 80% of the difference is due to the economist’s knowledge.
By itself an ignorant public is not a problem. In large samples errors tend to cancel out, this is the principle underlying the Wisdom of Crowds. Unfortunately the public doesn’t display random errors, instead Caplan identified 4 ways in which the public was biased relative to economists:
- Antimarket Bias – a tendency to underestimate the economic benefits of the market mechanism.
- Antiforeign Bias – a tendency to underestimate the economic benefits of interacting with foreigners.
- Make-Work Bias – a tendency to underestimate the economic benefits of conserving labour.
- Pessimistic Bias – a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present and future performance of the economy.
Caplan explains this bias with a concept paradoxically named “rational irrationality”. The theory goes that thinking is hard work, and none of us do more of it than necessary except when it’s something we are interested in. The effect any one voter has on the outcome of an election is negligible, so as a practical matter there’s little point in collecting a lot of information and thinking carefully about the outcome of your vote. This means that people fall back on whatever feels good to them, whether that’s tribal affiliation, picking a candidate with good hair or just falling back on “common sense” to decide what policies are best. By contrast when making a decision in the market you bear to costs of a bad decision, and the benefits of a good one, so while people will still be less than perfectly rational they will probably do a better job (most of the time) of making decisions in the marketplace than in the polling booth. This means that the fact people are irrational may justify less government intervention, and not more.
And that’s why I’m not optimistic about “Occupy _____”. I’m not denying that there are real problems driving these folks onto the streets, but I have no confidence that popular sentiment will permit the sober analysis of what is going on that we really need. Instead I expect to hear a lot of complaints about jobs being “shipped overseas”, and exploitation-based narratives when I strongly suspect the reality is a lot more complicated than that.
I hope I’m wrong, but I have a bad feeling about this.