Rational politicians, irrational voters

7 August, 2011

This short paper (Smart Taxes: An Open Invitation to Join the Pigou Club) is worth reading for its discussion of Pigovian taxes, of gasoline taxes (in a USA context), and generally of “topics about which there is a large gap between the beliefs of economists and those of the general public”. It’s written by an economist whom I have mentioned previously, Gregory Mankiw.

As the financial world goes into meltdown mode, the following extract from Mankiw’s paper struck me as an encapsulation of where it all went  wrong for free-market democracies in most of the western world.

In a democracy, of course, economic policy is set not by economists but by the general public. One of my favorite books of recent years is Bryan Caplan’s treatise The Myth of the Rational Voter, subtitled Why Democracies Choose Bad Policies. The answer Caplan offers is that voters are worse than ignorant about basic economic principles of good policy. Ignorance, at least, would have the virtue of being random and so perhaps would average out to zero in a large population. Instead of being merely ignorant, voters hold onto systematically mistaken beliefs. And politicians, whose main job is to get elected, mold those mistaken beliefs into bad public policy. To quote Caplan, “What happens if fully rational politicians compete for the support of irrational voters–specifically, voters with irrational beliefs about the effects of various policies? It is a recipe for mendacity.”

Of course, while admitting that free-market democracies are having it tough, it must also be emphasised that alternative systems work even less well, at least in anything other than the short term – as the USSR found out, and as China undoubtedly will in the near future.  That’s why it’s distressing to find commentators wobbling in their support for free-market solutions.  See, for instance, the Telegraph’s Charles  Moore who wrote a recent article* headlined “I’m starting to think that the Left might actually be right”.  Just the bathwater, please, not the baby too.

Not surprisingly, there’s no easy solution to this crisis of economics and politics. But any long-term fix must include a much more rigorous teaching of the basic principles of economics to all citizens. We allow all those of a certain age to vote for whatever government they want, yet we fail to educate those voters properly about the economic consequences of so doing. We should not then be surprised when (as Caplan noted) rational politicians compete for the support of irrational voters with ultimately calamitous policies.

*Although one is tempted to have some sympathy with Moore’s views on banks: “…. when the banks that look after our money take it away, lose it and then, because of government guarantee, are not punished themselves, something much worse happens. It turns out – as the Left always claims – that a system purporting to advance the many has been perverted in order to enrich the few. The global banking system is an adventure playground for the participants,  complete with spongy, health-and-safety approved flooring so that they bounce when they fall off. The role of the rest of us is simply to pay.”

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