Economists have spent a lot of time discussing market failures. The implicit assumption is that we should get the government involved to fix the problem. Free markets got their revenge with classical public choice theory. It applies an economic analysis to the government and finds that "government failure" is widespread. Don't assume that governments will do a better job - it may do a much worse job. Compare the incentives of consumers to that of voters. Consumers who do their homework can usually get a better quality product at a lower price. By contrast, voters do not have an incentive to do their homework because their one vote is unlikely to change the election. They will get the same government regardless of whether or not they do their homework. Thus voters suffer from "rational ignorance." The outcome is bad government.
The scoreboard so far: liberals 0, libertarians 1.
Clearly the stakes of public choice theory are very high. Enter Donald Wittman who launched a powerful challenge that turned the tables. Do you remember
The Wisdom of Crowds
? (If not then buy it now. Do not pass go, do not collect $200). He opens with the story of a contest at a county fair. The goal is to guess the weight of an ox after it had been slaughtered and dressed. The crowd all entered their guesses. After the contest was over the statistician Francis Galton took the entries and calculated the average guess. Galton was a eugenicist who expected that the average guess would be very poor. After all, you couldn't expect a bunch of commoners to do as well as learned, educated men. But it turned out that the average guess of the crowd was 1723 and the weight of the ox was 1722. The collective wisdom of the crowd was only off by one pound! The reason is simple: as long as errors are random then they will generally cancel out. As you get more and more people in the crowd the average guess will get closer and closer to the real value.
Wittman uses the wisdom of crowds effect to defend democracy. Suppose A and B are running for a political office and A is the better candidate. If voters are fully informed then A would get 100% of the vote. If voters have are completely ignorant - if they have no information at all - then they will be forced to pick at random. They would pick the winning candidate 50% of the time, as often as flipping a coin. Now, we know that voters are ignorant but they do have some information. Voters aren't 100% ignorant. Suppose they only have a small amount of information which lets them pick the superior candidate 51% of time. Then A will win the election with 51% of the vote. The wisdom of crowds refutes classical public choice theory.
The scoreboard at this point: liberals 2, libertarians 1.
That is where Bryan Caplan enters the picture. He picks up Wittman's guantlet. As Surowiecki points out, the wisdom of crowds effect only works if the errors are random - if people are just as likely to guess a weight that is too high as too low. It does not work if voters make systematic errors. E.g. suppose that a highly respected cattleman were to loudly claim that he believed that the weight was about 2000 pounds. This would cause the crowd to systematically err to the high side. Caplan musters empirical evidence to show that voters are systematically irrational. He identifies four main areas: (1) voters do not appreciate the vital role of profits and prices, particularly when they are high, (2) voters do not appreciate the benefits of free trade, (3) voters incorrectly put jobs ahead of productivity, and (4) voters are overly pessimistic.
With the empirical data settled Caplan's task is to explain why voters make systematic mistakes. His explanation of "rational irrationality" basically draws from
Sick Societies: Challenging the Myth of Primitive Harmony
by Robert Edgerton. Edgerton is an anthropologist who is critical of the myth the noble savage - that primitive societies are happy and harmonious. He conclusively shows that they are quite often ugly, violent, and irrational (actually Lawrence Keely was the first to take down the myth of the noble savage). But there is a crucial point. Very few primitive societies have irrational beliefs about how to hunt. But they do often have irrational beliefs about the weather, magic, and medicine. The lesson could be put this way: the needs of day-to-day survival are harsh. Irrational beliefs are punished swiftly and harshly. An irrational belief about hunting will lead to an empty belly and that will provide a powerful reason to change it. Thus people will not harbor irrational beliefs when there is immediate feedback. But what about irrational beliefs that do not provide immediate feedback? Those are beliefs that people can hang onto.
That takes us in the same direction as rational ignorance: democracies do not punish irrational beliefs because one vote is unlikely to change the election. A consumer with an irrational belief is punished by buying an inferior product. That gives him an incentive to get change his belief. Voters are never punished for having irrational beliefs. If you are a liberal you can blame the problems in society on corporate greed. If you are a libertarian you can blame the problems in society on big government. One of those beliefs is wrong and one is right, but you will never be punished for having the wrong belief because your vote will not change society. Thus voters are systematically irrational and bad government is the outcome.
Final scoreboard: liberals 2, libertarians 3
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