Tuesday, December 29, 2009

Democracy is the Worst Possible System...

...except for all the others. Here's a blub from AG's summary & review:
(1) It is rational for people to vote and to make their preferences based on their views of what is best for the country as a whole, not necessarily what they think will be best for themselves individually.
(2) The feedback between voting, policy, and economic outcomes is weak enough that there is no reason to suppose that voters will be motivated to have "correct" views on the economy (in the sense of agreeing with the economics profession).
(3) As a result, democracy can lead to suboptimal outcomes--foolish policies resulting from foolish preferences of voters.
(4) In comparison, people have more motivation to be rational in their conomic decisions (when acting as consumers, producers, employers, etc). Thus it would be better to reduce the role of democracy and increase the role of the market in economic decision-making.

In other words, people mean well when they vote, but elections do not improve policy, democracy doesn't pick the best policy, and political behavior is not always rational. The wrong impression that comes from this, in my view, is that economists somehow don't know this, or that they don't try to take it into account. Informational constraints (so-called "impressionable voters") are not new to the political economy literature. The imperfect feedback mechanism is easily explained by special interest models. And, the fact that democracy leads to suboptimal outcomes is well-known in models using rational expectations. See Ken Arrow's Impossibility Theorem, or Amartya Sen's extension of it, the Liberal (read: classical liberal) Paradox for examples.

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