Profits and Ballot Boxes

In the comments of this post, commenter Wally and I discuss the business feedback of profit and government feedback of votes.

W. E. Heasley, of The Last Embassy blog, recently posted an excellent short video from Learn Liberty that helps explain why voting isn’t a very effective feedback mechanism:

 

Most of us make purchasing and voting decisions. Sometimes they are a little of both, like when you vote with your family on what’s for dinner.

The following are links to and excerpts from previous posts I’ve made quoting economists Thomas Sowell and Walter Williams, who do an excellent job of explaining why purchase decisions are a more effective feedback mechanism than voting.

1. From this post in 2010, I quoted from Thomas Sowell’s book, Intellectuals and Society.  He explains the difference in these feedbacks well:

The fundamental difference between decision-makers in the market and decision-makers in government is that the former are subject to continuous and consequential feedback which can force them to adjust to what others prefer and are willing to pay for, while those who make decisions in the political arena face no such inescapable feedback to force them to adjust to the reality of other people’s desires and preferences.

A business with red ink on the bottom line knows that this cannot continue indefinitely, and that they have no choice but to change whatever they are doing that produces that red ink, for which there is little tolerance even in the short run, and which will be fatal to the whole enterprise in the long run.  In short, financial losses are not merely informational feedback but consequential feedback which cannot be ignored, dismissed or spun rhetorically through verbal virtuosity.

In the political arena, however, only the most immediate and most attention-getting disasters — so obvious and unmistakable to the voting public that there is no problem of “connecting the dots” — are comparably consequential for the political decision-makers.  But laws and policies whose consequences take time to unfold are by no means as consequential for those who created those laws and policies, especially if the consequences emerge after the next election.  Moreover, there are few things in politics as unmistakable in its implications as red ink on the bottom line is in business.  In politics, no matter how disastrous a policy may turn out to be, if the causes of the disaster are not understood by the voting public, those officials responsible for the disaster may escape accountability, and of course, they have every incentive to deny having made mistakes, since admitting mistakes can jeopardize a whole career.

2. In three paragraphs that I quoted from Thomas Sowell’s book, Applied Economics, he explains the differences in our buying and voting decisions. Here are those three paragraphs:

Politics and the markets are both ways of getting people to respond to other people’s desires.  Consumers deciding which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office.  However the two processes are profoundly different.  Not only do individuals invest very different amounts of time and thought in making economic vs. political decisions, those are inherently different in themselves.  Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc. to purchase.  In short, political decisions tend to be categorical, while economic decisions tend to be incremental.

Incremental decisions can be more fine-tuned than deciding which candidate’s whole package of principles and practices comes closest to meeting your own desires.  Incremental decision-making also means that not every increment of even very desirable things is likewise necessarily desirable, given that there are other things that the money could be spent on after having acquired a given amount of a particular good or service. For example, although it might be worthwhile spending considerable money to live in a nice home, buying a second home in the country may or may not be worth spending money that could be used for sending a child to college or for recreational travel overseas.  One consequence of incremental decision-making is that increments of many desirable things remain unpurchased because they are almost–but not quite–worth the sacrifices required to get them.

From a political standpoint, this means that there are always numerous desirable things that government officials can offer to provide to voters who want them–either free of charge or at reduced, government-subsidized prices–even when the voters do not want these increments enough to sacrifice their own money to pay for them.  The real winners in this process are politicians whose apparent generosity and compassion gain them political support.

3. In his classic column, Conflict or Cooperation, which I linked to in this post, Walter Williams explains how to pit beer drinkers against wine drinkers. Here’s a taste:

Different Americans have different and often intense preferences for all kinds of goods and services. Some of us have strong preferences for beer and distaste for wine while others have the opposite preference — strong preferences for wine and distaste for beer. Some of us hate three-piece suits and love blue jeans while others love three-piece suits and hate blue jeans. When’s the last time you heard of beer drinkers in conflict with wine drinkers, or three-piece suit lovers in conflict with lovers of blue jeans? It seldom if ever happens because beer and blue jean lovers get what they want. Wine and three-piece suit lovers get what they want and they all can live in peace with one another.

It would be easy to create conflict among these people. Instead of free choice and private decision-making, clothing and beverage decisions could be made in the political arena. In other words, have a democratic majority-rule process to decide what drinks and clothing that would be allowed. Then we would see wine lovers organized against beer lovers, and blue jean lovers organized against three-piece suit lovers. Conflict would emerge solely because the decision was made in the political arena. Why? The prime feature of political decision-making is that it’s a zero-sum game. One person’s gain is of necessity another person’s loss. That is if wine lovers won, beer lovers lose.

The differences in political and private decisions has spawned a branch of economics study called public choice economics. Here’s more.

 

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18 thoughts on “Profits and Ballot Boxes

  1. Great post.

    I’m desperately trying to remember the name of a sci-fi show I saw as a kid. I think it was a Doctor Who episode, but I’m not sure.

    Here’s why – because the feedback loop given to the “president” in the episode was an electric shock. The process went like this:

    1. The president would appear on television and say what he was going to do.
    2. The policy would be put in place.
    3. If the voters liked the result, they’d press the “yes” button.
    4. If the voters didn’t like the result, they’d press the “no” button.
    5. If there were more yes votes than no votes, nothing happened.
    6. If there were more no votes than yes votes, the “president” received a heavy electric shock.
    :)

    Granting the ballot box is a poor feedback loop – what’s the alternative? Direct democracy? More frequent elections? A government with no parties? No government?

    • That sounds like a poll, which isn’t all that good either. The problem with that feedback is the same as voting. I may like or dislike a policy whether it works or not. We just end up with politically popular policies, like redistribution.

      What’s the alternative? Great question. Minimize what you shove into the political process. Instead of reflexively thinking about how government can solve a problem, consider how it could be solved without government.

    • Might I suggest that the feedback loop is shortened when we limit decisions that are made far away in Washington (except for our direct representatives, it is doubtful that we will ever meet these people face to face) to those specifically granted in the Constitution to the federal government and instead (as outlined in the 10th amendment) have these decisions made by the States (when provided so by the state constitution) or the People (local governing bodies). The closer the government is to the people – the more likely the politician is to run into you in the street or in a business dealing – the less likely it is he’ll do something you’ll disapprove of and the more responsive he’ll be to feedback.

      If Wally’s clients are upset about the new gym hours or the nasty bathrooms, there’s a far better chance that bitching to Wally will get results quicker than bitching to Greg Glassman. There’s also a much better chance that if we place Wally in charge of making operating decisions in his box, fewer policies will be put into place that piss of clients that if CFHQ is permitted to make those decisions.

      The federal government is there for a purpose, but that purpose isn’t to micromanage things that they weren’t meant to micromanage. As far as Seth’s concerns regarding policies that are popular with the majority, but that infringe or the natural rights – remember, our government was instituted primarily to protect property rights (property includes my person and my physical and intellectual possessions) – while we do have majority rule, this can never (or was supposed to never) permit laws/policies instituted by a majority to infringe upon the rights of any individual. Unfortunately, many in Washington – in their efforts to please the masses and get re-elected – have reneged on their duty to uphold the Constitution (if indeed they have read or understood it).

        • Ceterus Paribus, government should work better in a smaller country. That said, all other things usually aren’t the same, e.g. different type of government, different culture, etc.

          Switzerland might be a good example of a country with a more limited central government and more power in the states (cantons). My Swiss friends indicate that the Swiss are very wary of a strong central power.

        • Small and local, effective and efficient aren’t always the same.

          I don’t know much about Liechtenstein, is your point that does not efficient government?

      • Mike — I agree. I do think that’s another feature good feature of a more local feedback loop. Daniel Hannan has a good discussion of it in his book, “The New Road to Serfdom” and he gives some good country comparisons.

  2. I suppose the next step is figuring out which problems government should solve, which goes back to Mike’s earlier comment – infrastructure, national defense and a justice system.

    What is it about those three areas that make it wise to use a government-style toolbox to solve the problem rather than a business-style toolbox?

    • Another good question. Not sure I have the best answers. But here are some thoughts.

      One argument I find acceptable for government defense and justice systems is that the success-feedback is clear and unmistakable.

      In the case of defense, if we lose and an invader wins — that’s pretty clear. And, it’s pretty clear that hasn’t happened since we remain a sovereign nation.

      If the justice system is unjust, that’s clear as well and folks don’t put up with it for very long.

      Infrastructure, I’m not so convinced about. But, that may be because there is still a healthy amount of local infrastructure, so that keeps the features of quasi-competition and many-trials innovation in place for the infrastructure market.

      The downside to all of these things in government is that there isn’t an effective upside limiter. Defense is a good example. We use our military far beyond the national defense charter and it’s not clear that it’s worth it.

      The justice system is interesting, because my sense is that it doesn’t appear to have had the same upside sprawl (though the drug war may be one example of upside sprawl). I’m not sure why, but one reason may be that a ‘competitor’ to the justice system is individual action. We settle the vast majority of disputes and injustices on our own in things like arbitration and agreements. The justice system acts as more as a backstop to those actions handling mainly the exceptions.

      Infrastructure also doesn’t seem to have an upside limiter. Local competition and many-trials innovation are nice, but there’s a lot of unchecked waste.

      So, one feature that makes these things a little more suitable for government is a clear success-feedback loop. However, a problem is no upside limiter.

    • Wally, there are things that the federal government should either be permitted or mandated to do (and things they should not do). Likewise for state and local governments. There are also things best left to the private sector (as well as some things that cannot be solved in the private sector).

      In regards to infrastructure, as I mentioned, solving the free rider problem immediately springs to mind. Like I said before, it’s easy and tempting for government to overstep its bounds here (see Kelo vs City of New London).

      In regards to our justice system, I’ll have to get back to you after I finish this book:
      http://www.amazon.com/Order-without-Law-Neighbors-Disputes/dp/0674641698

      The founders, being close in time to and students of the development of governments and freedom in Europe, gave careful thought and much debate to strong versus weak central government. For many, I think the feeling is that human nature being what it is, it’s best to give the federal govt only those powers which are absolutely necessary for it to have and to leave the remaining powers with the states.

  3. Why remain attached to what the founders had to say? No doubt they were very smart folks but don’t we have more resources, knowledge and data than they did? Isn’t quoting them kind of a argument by authority fallacy? (Or is there an argument by history fallacy?)

    • Wally – Mike gives a valid reason to, at least, give careful consideration as to why the founders set things up the way they did (“being close in time to and students of the development of governments and freedom in Europe”).

      It’s an argument from authority if you stop there and don’t consider why they may have been right or wrong. Discrediting the founders’ position based on things like resources, knowledge and data is a mild form of ad hominem fallacy — as none of these points even address their positions. If it is true that they were somehow limited in these things, then it should be easy work to disprove their positions.

    • Sorry, my point was that “we” (the majority of our population) are so far removed from the events and debate that formed our government and, in general, have not educated ourselves that we are relatively clueless in regards to why our Constitution was written as it was. I would venture that most citizens don’t care about the kind of discussion we are having, but simply figure that the government will take care of itself……and that’s a big part of how we have gotten where we are. We may have more educational resources than the founders, but be don’t use them (just as we have more knowledge and opportunity for health, but have a nation plagued by obesity……lots of potential, but no results).

      The Constitution is important because it’s a set of ground rules designed to protect individual rights (the bill of rights) while laying down operating principles for our nation, e.g. a business model, that may be modified, but not simply at the drop of a hat. If the rules of the game are not enforced and are subject to change during the game, people are reluctant to stay at the table and give it their best shot.

      My argument is that the set of rules (the Constitution) as originally proposed by our founders was sufficient and that our problems have largely resulted from venturing too far from these rules, i.e. our problems are not due to faults in our rules or in capitalism, but rather that we have strayed too far from these systems.

      That said, I have a significant project that will take much of my time over the next 2-3 weeks and my posts will likely be infrequent and brief. Hopefully, I can re-engage in this discussion when things slow down and perhaps we’ll add some more regular table guests!

  4. Good point. It does come off as a bit of an ad hominem – which was not my intention. They were indeed students of history. My reaction was, no doubt, a reaction to arguments that are often given in the form of “well the founders said” or “the founders intended”. Which means I’m not responding to the current discussion but to ghosts of discussions past. :)

    My (vague) point was an attempt to get at a question that I’ve always struggled with: is it more functional to discuss an ideal state (re-invent the state) or to discuss solving our current problems in a realistic way?

    • Wally, I’m not sure it has to be a choice between those two options. The goal is discuss, inform and get us moving in a better right direction.

  5. Pingback: Constitutionless | Our Dinner Table

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