Travelling North

Article – Democracy and Markets


Democracy and markets

There are some areas of our lives where we find it difficult to separate the ideal based on theory from the reality found in practice.  We have an image of the way things could be, and then assume that the world around conforms to that set of ideas.  Alas, practice often turns to be very different from the way we though things might be.  Indeed, sometimes that divergence is so great that it is worth asking the question as to whether or not it is worth pursuing an ideal that clearly cannot be achieved in reality.  Often we still pursue the ideal, and we reassure ourselves by clinging to the belief it is surely worth the effort.  After all, it was Richard Tawney back in 1952 who trenchantly argued for the importance of pursuing worthwhile outcomes, even if they could not be fully realised in practice when he observed “It is like using the impossibility of absolute cleanliness as a pretext for rolling in a manure heap, or denying the importance of honesty because no one can be wholly honest” (at the end of Chapter 1 of his major study, Equality).

However, while cleanliness or honesty seem relatively clear objectives, it all becomes much harder when we turn to contentious – or at least contested – ideals like democracy or the free market.  In promoting democracy as the way in which countries should be run, it is worth remembering another commentator, in this case Winston Churchill, who famously observed that “Democracy is the worst form of government, except for all those other forms that have been tried from time to time” (speaking in the UK House of Commons on November 11th, 1947).  Perhaps Tawney and Churchill were not so far apart.  Both believed in aspiring to make things as good as they could be, and both were sensitive to the complexities and limitations of those aspirations.

It might be worth starting with democracy.  The dictionary definition of democracy (in the Oxford English Dictionary) is “a system of government by the whole population or all the eligible members of a state, typically through elected representatives”.  It’s a helpful start.  There are two key points here.  First, in order to participate in a democracy, you have to be eligible.  Today, in those countries with universal suffrage, that seems to include all adults, usually with the additional requirement that the right to participate is restricted to citizens of the country.  Further, in most democratic systems the principal exercise of eligibility is to vote for someone to represent you:  some countries do have occasional referendums or plebiscites; a few, with Switzerland claimed as the most notable example, allow more than just this, discussing issues in local forums before the resulting views are transmitted up to government agencies or a parliament.

In practice, this means that an individual has virtually no influence over policy or the behaviour of the national government.  I vote when there is an election, and I may well find that I was not in the majority in my electorate and my representative does not hold views to which I subscribed.  Even if I am in the majority, there is no mechanism that ties my representative back to consulting me once elected.  Often elected representatives go on to do things that I had never contemplated, or even decide to take a stance that no longer represents the platform of views they promoted when seeking election.  Moreover, within the government itself, and the parliamentary system that underpins it, decision making is far from merely based on the views of the electorate.  Those in the majority, and who form the government, get on and do what they think is right.  Their choices are often constrained by practical limitations, by the influence of pressure groups, by departmental public servants giving advice and offering preferences, and by the continuing fear among elected representatives that they should avoid taking decisions or arguing for approaches that would lessen their chances of being re-elected in the future.

In practice, this means that the notion of democracy is subverted in various ways.  First, by and large the majority rules, and this often leads to decisions that relegate the minority to a group to be ignored, unable to benefit from changes, and sometimes oppressed.  The tyranny of the majority was a concern hundreds of years ago, and remains so today.

Second, pressure groups and alliances can have a major impact on shaping policy and legislation.  Perversely, given the first of the ways in which democracy is subverted, such pressure groups may represent minorities:  however, in this case the minority is often powerful, rich, and quite willing to pursue its self-interest at the cost of all others.

A third and less well recognised issue is information asymmetry:  governments rely on data to assist them in their deliberations, and data is supplied through the public service, people who have a clear vested interest in the outcomes of new legislation.  Politicians may know and understand what they are told; they are unlikely to know or to understand what they are not told.

There are many other limitations on the democratic process.  Democracy in the sense of “government of the people, for the people, by the people” as Lincoln described it 150 years ago at Gettysburg (The Gettysburg Address, November 19, 1863) is an impossibility, especially in the modern era.  How could 300m people in the USA directly engage in determining all of the issues that modern government has to address?  Given this, the choice is between Tawney and Churchill:  do we say that we must keep on striving to create a real democracy, despite the challenges that exist, or do we accept the inherent limits and imperfections and get on with adopting what appears to be the best among all the bad alternatives?

I thought of democracy when I was examining the limitations of markets.  I had been rereading Milton Friedman in his book on Capitalism and Freedom.  There he argues, among other things, that freedom is not possible without the existence of the free market.  The capitalist free market system is a necessary condition for the appearance of true democracy:  however, it appears the idea of the free market is as troublesome as that of democracy.  The theory is impeccable:  given voluntary, free exchange in the context of perfect information, the market is clearly the most efficient way to allocate resources (well, we haven’t thought of a more efficient way so far).  However, the market, like democracy, is subverted in practice.

Some of the problems are analogous with those that limit democracy.  First, even though anyone can offer something in the market, and anyone can chose to buy or not, in practice majority tastes and preferences dominate, as they quickly gain cost advantage.  Despite having a preference for what you want to buy, your choice may be limited by what a seller is willing to offer, and every seller will be motivated to produce that which is likely to be profitable, often those products that have the greater appeal.  Similarly, the market is constrained by pressure groups and alliances:  for the foreseeable future, there will continue to be stories about the deliberate formation of cartels, or the appearance of unintended cartel-like behaviour.  Finally, as in democracy, and perhaps of greatest importance is the lack of information transparency.  This ranges from unintentional withholding of key information by buyer or seller right through to deliberate opacity to hide the side effects of products or dangers of goods.

There is more, or course.  Suppliers seek to achieve a monopoly in the marketplace, and once they do so, they are freed from the limitations of market pricing.  That problem is particularly acute for government goods and services.  Another massive problem comes from externalities, those factors that are involved in the production of goods and services, but are not accounted for in costs: non-accountability for pollution, use of uncharged resources such as air, and so on, distort the market and the price paid by consumers.

There is also the strange factor usually described as ‘fashion’ (although herd behaviour might be more accurate).  People will rush to buy a particular good (an Apple iPhone, for example) at a premium price, even though equally good alternatives exist at a much lower price.  More tellingly, people will invest in property as its value has been steadily improving in the belief that it will continue to do so (the source of past and, inevitably, future property bubbles).

Can free and open markets exist in reality?  Even if they were able to do so when the world was much smaller, and the parties to exchange knew each other, (the time when Adam Smith wrote those fateful words about the “invisible hand”), they are surely impossible in the current world of impersonal commerce in countries with millions of buyers.  So we come back to the question we first explored when discussing democracy.  Are we on Tawney’s side, arguing the free and open market is the goal, and keep trying to make it closer and closer to everyday practice?  Or are we like Churchill, and argue that is far from something that is “ideal” (in another sense of that word), and see it as the least bad way to allocate resources, and try to manage its inevitable imperfections?

There are two other concerns about the free market that must make us pause, however.  First, it is inherent in the operations of the market that some will be winners, and some will be losers.  If you are capable, determined and supported, you can become rich.  If you are poor, lacking capability and denied opportunities, you may stay in poverty.  Into today’s very commercial world, some become rich at the expense of others, and the market facilitates such outcomes.  There is an excellent example of the process of creating winners and losers right now:  this is illustrated by the current debate over the push to increase the minimum wage.  Those who are running corporations would love to be able to pay people according to what they see as best for their corporation – and in many cases this would include paying below the minimum wage if there are people willing to work for even less.  Nor do they want their profits cut by government levies to pay for food stamps and other forms of income support.  In a free market, that is how things work – it is really quite clear:  if you want to avoid poverty, just get out there and work!

Second, in freeing the market we are subscribing to the view that business is ‘independent’ of society, rather than an integral part.  There is a view that “the business of business is business” but it is one that is hard to accept. The actions of a business are not independent of the society in which it operates, but deeply involved with it.  For most of us, once you become an adult a substantial part of life in spent working:  this is a major part of social life.  Moreover, companies are deeply tied in to society, through taxes, laws and their everyday actions.  To cut all that away, and pretend that business resides “over there’ and separately from the rest of society is clearly a nonsense.

There is a paradox to be found in this.  Today, some of the same people who argue that business is independent of society are quite happy to suggest that, on controversial topics, the best thing to do is to ‘let the free market decide’.  Recent examples of this can be found in the controversy over the views expressed in an interview by Phil Robertson, an actor in Duck Dynasty, or in the heated discussions and accusations that have erupted over whether or not to proceed with the proposed Kenosha Casino in Wisconsin.

In the first of these, when being interviewed on television, Phil Robertson attacked gays (implying their behaviour was bestial), and claimed African Americans were happy during the Jim Crow era.  His remarks were clearly discriminatory and defamatory.  In expressing them, he appeared not to have noticed that he is not just an individual exercising his constitutional right to freedom of speech, but he is a public figure and an opinion leader, a direct consequence of being a television star.  Did he forget that his views and behaviour can influence many people?   Just because a large number of people might share his views, that does not mean he has right to express them in a public forum.

Initially the television station decided he should be taken off air, correctly I would suggest.  However, there was an outcry, especially from his fans, and there was a strong argument made that the market should decide – that he should continue in his role on television, and people would choose to watch Duck Dynasty or not.  If few did so, then his views would have been tested in the market, and not supported.  To suggest the market should decide was a bizarre piece of logic.  At one level, that of numbers, it will almost certainly be the case that more will watch the show than usual:  any publicity is good publicity, it is said; in this case it is also likely that those who do not share his views will want to find out more both him and the program in which he appears.  At another level, determining laws to regulate how how we deal with people by popularity rather than by principles is a frightening attack on what makes contemporary society work.  Today we rely on impersonal rules and processes to ensure justice and fairness: any other approach would certainly take us down the steps towards anarchy, or at least social disintegration.

The debate over a second casino in Wisconsin is similarly discouraging.  State Governor Scott Walker must wonder why he ran for office there 2010, particularly after the recall he had to fight in 2012.  However, his current headache is an application for a casino in Kenosha.  The issue is complicated.  There is a casino in Milwaukee, run by the Forest County Potawatomi, and they are fighting the proposal to open a second casino in the state, an application made by the Menominee tribe.  Much of the argument has to do with two issues.  The first is jobs: will the proposal will create new jobs, or at the least lead to job losses in Milwaukee?  The second has to do with gambling itself:  will this lead to an increase in gambling?

The solution being advocated by some is to “let the market decide”.  Build the second casino, and people will either come, or not; jobs will be created, and some lost, but the market will decide the balance; gambling will increase or not, and the market will sort that out as well.  In effect, the argument is being mounted that public policy should be determined by market forces, rather than debating the issues and coming to a reasoned approach.  We can all see where this leads:  as an example, why don’t we determine whether or not we need to offer food stamps for those in poverty by seeing the market demand.  If the demand is small, the need is marginal, why then – we can cancel the program!

Let the market decide?  The real market, the one characterised by information asymmetry, by winners and losers, by cartels and alliances, pressure groups and cronyism, and by ignoring externalities.  Let the market decide?  I guess it is clear that, on this topic, I am with Churchill.  Like democracy, allocating resources through the market might appear to be a good idea, but the evidence is that the market is far from desirable, even in its perfect form.  Fraught with unpleasant consequences, it is the least undesirable of the alternatives to allocating resources, but its undesirable elements require that it is carefully managed and controlled.

January 2014

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