In a thought provoking book, The Myth of Rational Voter, economist Bryan Caplan argues that democracies fail because voters are irrational, possessing systematically biased beliefs about economics. (It’s important to note though that the argument he makes is not against democracy, but excessive democracy.)
These systematically biased beliefs can be categorized into four families: anti-market bias, anti-foreign bias, make-work bias and pessimistic bias.
Anti-market bias: A tendency to underestimate the benefits of the free market mechanism. Leaders from pre-independence era (in India) are immediate examples that come to mind. “Profit is a dirty word” said Nehru once, expressing his disbelief in market system and endorsing his socialistic ideals. The motive (i.e. greed) behind business is usually the prime focus (and cause for disapproval), instead of the discipline that those personal motives along with market competition enforce. Any action that is performed to satisfy personal motive/interest is automatically considered bad, or anti-social. We tend to look at profit as a one-way transfer of wealth (often from the poor to the rich). But as Caplan explains:
“Profits are not a handout, but a quid pro quo: If you want to get rich, then you have to do something people will pay for.”
Profit encourages productivity, movement of resources from less-valued to more-valued industries, and innovation to come up with new useful products. There are some possible explanations Caplan comes up with in his book (that I don’t want to get into here in this post) for why the “invisible hand” remains invisible to a common man’s eye.
Anti-foreign bias: A tendency to underestimate the benefits of interaction with foreigners. Alan Blinder’s passage succinctly explains this bias:
“People around the world scapegoat foreigners. When jobs are scarce, the instinct for self preservation is strong, and the temptation to blame foreign competitors is all but irresistible. It was not only in United States that the bunker mentality took hold. That most economists branded the effort to save jobs by protectionism shortsighted and self-defeating was beside the point. Legislators are out to win votes, not intellectual kudos.”
(There’s another beautiful paragraph by Steven Landsburg that I can’t help but mention “There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant the seeds, which are the raw materials from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ship westward into the Pacific Ocean. After a few months, the ship reappears with Toyotas on them.”)
The Law of Comparative Advantage, one of the most fascinating theorems in economics, remains a distant and misunderstood concept for general public.
Make-work bias: A tendency to underestimate the economic benefit of conserving labor. When we think in terms of productivity, higher productivity is intuitively better than lower productivity. But when we include ‘jobs’ into the equation, the intuitive understanding is turned upside down. More jobs with lower productivity is seen as better alternative to fewer jobs with higher productivity. We tend to ignore the fact that the latter situation encourages more work to be done, and enlarge GNP. While the former situation, which garners more public support, implies that prosperity is equated with jobs (instead of productivity). Frederic Bastiat ridiculed this as “Sisyphism“.
Pessimistic bias: A tendency to overestimate the severity of economic problems and underestimate the recent past and present performance. People always tend to glory in the past (the “good old days”) and believe that things have gone worse since then. In spite of increased living standards, we tend to perceive the world as less safer and more “corrupt” than before. (And while we’re on that subject, watch Steven Pinker’s impressive speech on TED: The Myth of Violence. According to him, we are probably living in the most peaceful times in the existence of our species.)
With these strong prejudices, however benign the voters are in their motives, they end up voting for bad policies. In any case, because of the miniscule probability of one individual vote to flip the outcome of an election, the material cost of a wrong decision is insignificant (as compared to the psychological benefits of comfortable beliefs) for a voter. And that makes a strong case for more reliance on markets, doesn’t it?