Clarifying the Efficient Political Market
Jude Wanniski
February 23, 2001


To: Students of Supply-Side University
From: Jude Wanniski
Re: Clarifying the Efficient Political Market

In last week’s lesson, I presented the hypothesis that “the political market is as efficient as the economic marketplace. That is, just as the free market for goods and services is driven by consumer demand, so is the market for political ideas and the political leaders who represent those ideas." I asked for questions and got the following from one of my closest political friends, Larry Hunter, who has a doctorate in economics and a high appreciation of the efficiency of the economic markets but less appreciation for the efficiency for political markets. He argued that my hypothesis is “demonstrably untrue. Why do you refuse to inform yourself on some 30-years' worth of profound discoveries by the Public Choice School of Economics?” He continued:

Indeed, the truth of the inefficiency of political markets goes all the way back to the 18th century and [Marquis de] Condercet. I don't know how many different ways to say it: Economic markets are efficient because they are based on unanimity. That is the reason markets clear without leaving any excess on the trading table ("rents") to be misallocated by "political" decisions, i.e. collective decisions made possible by decision rules (namely any collective choice rule less than unanimity) that allow a majority to exploit a minority.

This was the concern that motivated our Founding Fathers -- it is the insight that was woven into the very fabric of the American Republic. [James] Madison was obsessed with a fear of majority tyranny. We have also learned to our consternation over the course of 200 years that coalitions of minorities can also exploit less-than-unanimous decision rules through time by stitching together log-rolling coalitions to exploit whatever sorry minority happens to be left out in the cold at the time -- today it happens to be middle-aged white males. In my opinion, today it is much more the coalition-of-minorities phenomenon, rather than a persistent majority faction, that drives the welfare state onward and upward. As all minorities catch on to the game, you get an extended series of log-rolling exercises overtime with shifting coalitions of minorities. In fact, it was Jim Buchanan's great hope that this log-rolling process would provide an efficient political market with vote trading to mimic the trading that went on in real markets -- that is what the Calculus of Consent was all about.

Alas, he and [Gordon] Tullock were wrong. Just as there is a deep paradox of voting, there is also an even deeper paradox of log rolling. There are some beautiful and profound theorems (beginning with Kenneth Arrow's) that demonstrate the inefficiency of any social choice process employing a decision rule less than unanimity. Your notion that Aristotle's collective wisdom metaphor applies to political markets is fundamentally flawed because the collective wisdom of the polity, unlike the collective wisdom of market participants, is not translated through unanimity into collective choices. Majority-rule decision making is fundamentally flawed and leads to rent-seeking and intransitive collective choices. In other words, the outcome of less-than-unanimous decision rules is irrationality and exploitation.

I know you resist reading Charles Adam's book When In The Course Of Human Events, but you should because you would see in it a perfect example of a persistent majority faction of economic interests driving the country into a disaster -- not because the Founders' design failed (in 1860 the Republic was still structured close enough to its original design that it required virtual unanimity for major public choices to be made at the federal level) -- but rather because [Abraham] Lincoln assumed the mantle of a dictator and overrode the system by shear defiance and force of arms, and in the process destroyed the old republic. The process he chose to free one minority from the bondage of private ownership set in motion a process by which everyone would become gradually enslaved to the state. Not to mention you would also find a supply-side explanation of the Civil War. You seem to be willing to entertain a supply-side explanation for every other war in the history of mankind; why not the Civil War?

The supply-side paradigm must become informed by the public choice paradigm or it will always founder on the sentimental view that politics can effectively express the true desires and aspirations of the nation. Along that path eventually lies tyranny.

This is serious stuff and I am indebted to Larry for challenging me on my hypothesis. I’ve decided to make it the core of this week’s lesson, but only after I responded briefly and quickly in this manner and decided I had short-changed him: “An uninformed electorate is a mob. An informed electorate will process the available information efficiently. When two political parties debate on a narrow, agreed-upon set of issues, Candidate A will defeat Candidate B. If they expand the issues open to debate, and do so on issues of critical importance, Candidate B could defeat candidate A. I will never say a mob is efficient, which is what you seem to think I am saying. The history of civilization has evolved toward more efficient systems by which informed electorates can express themselves. I think, for example, a national initiative and referendum process would add to, not subtract from, this process.”

What I had in mind here was the most recent presidential campaign, with Governor George W. Bush vs. Vice President Al Gore. In our political system, the voters only are able to make their choices from the available candidates put forward by the two major political parties and the third-party candidates who appear on the ballot. During the campaign, I noted that both Bush and Gore were “triangulating,” to use the term coined by Dick Morris, the political consultant who has advised both Democrats and Republicans. That is, both candidates had the same focus groups and pollsters who were equally competent in measuring the temperature of the voters. Each decided to be just like the other, only a little less so. Bush would try to be as compassionate as Gore, but a teeny bit less, to please his conservative base. Gore would try to be as macho as Bush, but just a little bit less, so he would please his liberal base. As a result, they limited their campaign agendas to a centrist appeal, purposely leaving out a national discussion on topics that should have been discussed. I’ve mentioned before that at the extreme, Bush was pledging a national missile defense shield that would cost a zillion dollars and Gore was saying he would think about it. On the other extreme, Gore wanted to commit the nation to a “Global Warming Pact” that would also cost a zillion dollars in lost output. Bush said he would think about it. In the same way, the central issues of monetary and fiscal policy and economic growth were pushed aside in favor of a useless discussion about the aggregate size of tax reduction over a ten-year projection.

The idea that the voters are to blame for all this is one I reject completely. The national electorate is not a mob, as you would suggest. How could it then vote in 1978 in California to pass Proposition 13, by a two-thirds majority? When every newspaper in the state begged the voters to vote down the populist prohibition against higher tax rates over a much-reduced level. Every liberal and conservative statist in the nation -- except Ronald Reagan -- urged the voters to choose higher taxes or observe a collapse of the state economy. Isn’t it clear that when given that kind of public choice, the electorate acts wisely?

How could I possibly distrust the voters when they responded so magnificently to the Reagan campaigns of 1980 and 1984? Sure there were rent-seekers and minorities looking for more government handouts, but Reagan was promising a rising tide that would lift all boats. There would be no zero-sum policies that would put more money in the pockets of the rich at the expense of the poor. Reagan would not have been elected, though, if he were not wise enough to handle his campaign in a way that persuaded the national electorate that he was serious. He was surrounded by advisors who were scared to death that he would make a fool of himself unless he was carefully scripted. His paid media ads reflected this caution, which saw him through the summer of 1980 drop steadily in the polls against President Jimmy Carter. History will record that it was James Baker III, who had been the George Bush Sr. campaign advisor, who decided to let “Reagan be Reagan” and debate Jimmy Carter, a debate that Reagan won decisively.

When I think of an informed electorate, I think of the First Amendment, which was first on the list of the Bill of Rights because it was and is the most important of all, in protecting free speech and the rights of assembly. If the “raw electorate” were simply a mob of a hundred-million potential voters, there would be little hope for the survival of our republic if not for the First Amendment. Whenever I have a chance to talk to officials of the Chinese government in Beijing, I make that point again and again. The job of the ruling class is to figure out what it is the masses would like to do -- and then do it. If there is no protection of free speech and free press, the masses only can act on the rumor mill, which may mean a mob-like action.

This is an important topic and we will return to it in the weeks ahead. Perhaps I will in the future add a course entirely devoted to communications! But let me close here with an anecdote that I describe in the more recent editions of The Way the World Works. Soon after the book was published in April 1978, I was getting wonderful reviews in the conservative press. William F. Buckley of the National Review, one of the great men of the century, called and invited me to dinner. He had recently run for Mayor of New York City and lost bigtime. So it was that he read Chapter I of my book, which says the best man always wins, given the information available to the voters. Buckley did not appreciate the hypothesis any more than Larry Hunter does today. We went to dinner at an Italian restaurant of his choice on the upper east side and soon fell into discussion about the wisdom of the electorate.

I ask him to consider that if we took out his brain and strung out all the brain cells on a line, they would extend for miles and miles. And if we put a microscope to each brain cell, we would find that it was DUMB. That’s the shock word I used, quickly going on to note that when all those brain cells were assembled into an integrated network, the end result was his BRILLIANCE. In the same way, I said, if he went out on the street corner -- 92nd and 2nd avenue, as I recall -- and began quizzing 100,000 passers-by to determine their opinion on matters of importance, he would find that EACH ONE OF THEM WAS DUMB. But, I said over our spaghetti dinners, IF HE ASSEMBLED THOSE 100,000 IN THE LOS ANGELES COLISEUM AND GAVE THEM A SYSTEM FOR ANSWERING QUESTIONS, THEY WOULD DEFEAT HIS GENIUS OVER AND OVER AGAIN. In other words, if he were sitting at a table on the field with a microphone and the 100,000 dummies had a way of talking to each other about the best answer to one question or another, their collective intelligence would swamp his genius.

It was then that I sprung on Buckley his famous remark that he would rather be ruled by the first 50 people in the Boston telephone directory than by the faculty at Harvard. That’s what my lesson last week was about, I think. Perhaps Larry Hunter will agree to be a guest lecturer in this semester. I’d like to come back to him on his discussion about Abe Lincoln’s conduct of social and economic policy at the time of the Civil War. I remain totally awed that Lincoln could manage the incredible clash of social, cultural and economic forces bearing down upon us at the time, when we had such a rag-tag democracy. At the time, Karl Marx said he thought capitalism would fail unless there were active, universal suffrage. In 1860, the franchise was limited to a small number of adult white males of the kind that Larry Hunter celebrates for their wisdom. Things have gotten much better, Marx and I would submit, since the franchise was broadened.

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Students: I again recommend you buy a copy of the 4th edition of The Way the World Works. A paperback is available at a small price at this link. Here, for example, is the opening outline of Chapter 1, "The Political Model," which covers much more of the ground that we dealt with in this lesson today:

The political model holds that the electorate is wiser than any of its component parts. Civilization progresses in a political dimension through the ability of politicians to read the desires of the electorate. Neither the press corps nor ‘opinion leaders' influence the electorate, except in the sense of broadcasting the political menu. Their influence instead bears on the politicians, who look to opinion leaders for help in ascertaining the wishes of the electorate. The decline of a nation state or political unit is a sign of repeated failure of the political class to read the wishes of the electorate. Emigration is a sure sign of relative political failure. At the extreme, the electorate resorts to revolution, thereby adjusting the political framework and raising to power a new political class better able to read the desires of the electorate. Modern nation states have built into their political frameworks various safety valves that can bring about urgent corrections in the avoidance of violent revolution or war.