The Economics of Democracy
Apr 4, 2011

The Economics of Democracy

How one spends their money and how one votes are, as previously discussed, two proxies for measuring the subjective valuations and preferences people have. The two social structures that result from these two proxies are markets and democracy respectively. Given how both stem from a similar idea of an expression of preferences we can expect the influences and relevant factors to be similar in both social structures.  As it turns out, many economic concepts can directly translate over into a study of democracy which aids our insight and intuition.

At the most general level we can view markets as a form of democracy and democracy as a form of market. The concepts are intricately related. A market is a social structure where one votes with dollars to represent ones preferences and receives in return benefits in the form of products and services corresponding to the way one votes. Likewise, a democratic election can be thought of as a form of market where the currency is casting votes which can freely occur in exchange for politicians who enact policies that coincide with your preferences. Thus we have a clear correspondence in terminology at the most general level.

For this comparison to be any good, it must minimally be able to translate the basic laws from one discipline to another. Take the central economic issue of supply and demand and let us see how well it corresponds in the hypothetical market of democracy. Supply and demand works such that prices increase with increasing demand and prices decrease with increasing supply.

In democracy, the analogy of price is the nominal amount of votes a particular candidate or party gets. As demand for a particular policy increases, candidates advocating for that policy increase the number of votes they get. When this occurs, other politicians will work to also represent such a policy to take advantage of the demand, hence increasing the supply of politicians representing such a policy. When the supply of politicians advocating for a policy increases in a race, the demand for it is less of a differentiating factor between politicians and hence other priorities dominate who one votes for. That is, increasing the supply of politicians advocating for a policy lowers the ability of that policy position to acquire a large number of votes. Successful politicians are ones that do a good job of supplying the policies that are demanded and will hence fetch a larger number of votes. Successful companies are ones that do a good job supplying products that are demanded and hence their products fetch a high a price. As expected, this market concept translates over to democracy nearly perfectly.

One superficial difference is that casting a vote costs the voter nothing while buying a product does. However, this difference is actually very small. When we buy a product, the loss of money means we can not acquire other products we have a subjective valuation for somewhat less than whatever we are buying now. Likewise, when we vote for person A we are restricting our ability to vote for person B. This is the so called "rivalrous" property. It turns out that market pricing mechanisms work equally well with either rivalrous or excludable products and democracy is a form of rivalrous product. Since neither votes or money have intrinsic value to us and are only as useful as their purchasing power for products or government policies, the parallel remains close for spending or voting as an action whose cost is in displacing the ability to spend or vote on other products or politicians.

In economics there is the concept of arbitrage where one takes advantage of differences in prices by buying at the lower price and selling at the higher one. This concept is what leads to price convergence in markets so similar or identical products like gas or gold have equilibrium prices across the diverse market (up to transportation and storage costs and the like). This phenomenon exists, as alluded to earlier, in democracy as well which I shall term 'political arbitrage' and mean by this the tendency of successful politicians to adopt policies with a high demand and reject policies with low demand. This exists both in the shifts in policies supported by a specific politician as well as the shift in which of the various politicians are popular and elected much the way a company will adjust to consumer demand or be replaced by new companies that meet it better.

This political arbitrage leads itself in the same manner to a convergence of political positions. Positions that are highly successful at attracting votes get emulated and positions that are unsuccessful get dropped out until there are few differences between political positions advocated for and an equilibrium solution exists. This is precisely what we observe where the difference between, say, Democrats and Republicans is very small in the larger spectrum of history much in the same sense that the difference between a PC and a Mac is very small compared to the difference between a slide ruler and a computer. This blog frequently discusses how the political spectrum as defined by established parties is narrow and converges on far more issues than it is disagrees on - often to our detriment - despite the rhetoric implying some enormous divide. Nonetheless, much as markets have multiple successful products, there are multiple successful political positions that appeal to people which manifests itself as the left-right political divide with significant convergence within each party to a core set of positions on each side. These various equilibrium positions we imprecisely term "mainstream" Democrats or Republicans.

A natural 'macrodemocratic' indicator, if you will accept my abuse of language, is voter engagement which can be easily quantified by the percentage of eligible citizens who actually vote. This number is a reflection, among other factors, of the perception that positive change occurs through voting. For people who think the outcomes of elections are independent  of the votes there is little reason to vote as is so tragically demonstrated in some third world countries which hold elections widely understood by the people to be a sham and have appalling voter turnout rates. When there is a convergence of political positions, as the previous paragraph suggests is to be expected, the outcome will be the equilibrium position and hence there may be little value to voting. That many stable western societies have low voter turnouts despite ostensibly free elections - much lower than many of the new and dynamic emerging democracies - is thus a measure of the political convergence.

It is often though that markets and democratic governments are fundamentally different. While there certainly are important differences significant enough to favor one or the other in different circumstances, there is nonetheless striking similarity in many ways when realized as stemming from the same basic idea of being a measurement of the preferences of people. The robust understanding of concepts in economics can, as we have seen, translate in many ways to parallel concepts in democracy.  

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