The Trouble With Democracy
Caplan, Bryan. 2007. The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Princeton, N.J.: Princeton University Press, 276 pages
A more complete analysis of the Caplan book written by Walter Block will soon be published by the Journal of Libertarian Studies. The present book review is aimed primarily at the layman; in what appears below, all footnotes, references, many qualifications and the entire discussion of several technical issues have been deleted from that longer JLS version of the review of this book.
Caplan’s book is like the little girl with the curl: when it is good, it is very, very good; when it is bad it is horrid. This review is organized around the following headings: in section II we deal with the good, section III is devoted to the bad, and in section IV we deal with the truly horrid. I conclude in section V.
II. The Good
Let us begin on a positive note. This publication has several things going for it, all of them very rare and important.
The thesis of this book is correct, and this alone is no mean feat. Why is it that democracies such as the U.S. widely support such obviously counter-productive policies as minimum wage laws, rent control and tariffs? Caplan rejects as an incomplete explanation the familiar notion that minority concentrated special interest groups are able to trump the public good that would be enjoyed by the majority: the disparate electorate is too unfocussed to vote for their own interests. Instead, he offers the view that voters are irrational; as individuals they lose nothing from indulging in their pet erroneous theories in the ballot box; hence, since there are no negative repercussions from so doing, at least as individuals, this anti-social and anti-economic behavior persists.
No one who has his finger on the pulse of the electorate’s behavior can doubt this. Speaking from my own experience as a college instructor of economics, the preponderance of opinion expressed by my introductory students in economics illustrates and exemplifies the four fallacies uncovered by Caplan: anti-market bias, anti-foreign bias, make-work bias (there are only so many jobs to be done, and if someone hogs up some of them, by working harder and smarter or with better tools than others, there will be just that much less work to be done, and this is the cause of unemployment), and pessimistic bias.
Caplan brings something truly unique to the table. It would be one thing if economists had been silent on this issue of irrational, biased and ideologically intent voters. Worse, virtually all of them have been wrong with regard to it, dead wrong. Caplan speaks no truer words when he says: "If I am right, then a good deal of published research (on this matter) is wrong." Most members of the economics profession have been modeling what the average citizen does in the ballot booth along the lines of how he acts at the check-out counter. But, says Caplan, "the analogy between voting and shopping is false. Democracy is a commons, not a market." Even had this author’s insight that voters indulge their personal biases not been new it would still have been valuable. But this book constitutes a fresh look at the matter, and that makes it even the more precious.
Our author takes a thoroughly deserved pot-shot at the public choice school of thought, a perspective that has been given far too much of a free ride in my opinion. No book that accomplishes this one task, and Myth certainly does this, can be all bad. In the view of Caplan: "Once a few pioneers analogized politics to markets, however, there was an unfortunate bandwagon effect. It is time to jump off the bandwagon." Yes, indeed.
This paragraph alone on the minimum wage law is worth the full price of admission: "… most people reject the view that pushing up wages increases unemployment. When I teach intro econ, linking unemployment and excessive wages frequently elicits not only students’ disbelief, but anger: How could I be so callous? But irrationality about labor demand is selective. What happens when my outraged students reach the u2018Salary Requirements’ line on job applications? They could ask for a million dollars a year, but they don’t. When their future rides on it, students honor the economic truism that labor demand slopes down." I am writing this right before the beginning of the fall semester, 2007. I am dying to pull this one on my next batch of students. Thanks to Caplan, I now can.
This author is a master of the reductio ad absurdum. He employs it to good effect with regard to: Jain nudity, Mosca and Jihad, suttee, Lysenko, betting. In this regard he asks: "How many refrain from buying appliances because it u2018destroys jobs’"? With this single sentence, he beautifully focuses on the essence of Hazlitt’s Economics in One Lesson.
Caplan offers us a magnificent critique of the self-interested voter hypothesis. SIVH is the notion that people vote their pocketbooks, not their ideologies. I confess that I, along with many other people, have been taken in by this. However, did you know that "the elderly are not more in favor of Social Security and Medicare than the rest of the population"? That men are more pro-choice than women? That males vulnerable to the draft support it at normal levels? These insights really blew me away.
All things taken together, The Myth of the Rational Voter is a plus: the positives far outweigh the negatives. I am glad I read it. I learned a lot from it. I underlined, perhaps, one quarter of the sentences in it as being important. I would recommend it, highly, to any other economist. And also, certainly, to the layman.
III. The Bad
With this very positive review so far, the reader may be excused for thinking that I am a big fan of this book. I am not. For, as important as are the positive characteristics of this volume, there are strong negative ones as well. I would be derelict in my duty did I not mention its flaws. These are many and serious.
This publication was written by a neoclassical economist, not an Austrian. It thus comes replete with all sorts of economic fallacies. Also, my previous experience with Caplan was that if he was not a praxeologist, at least he was a libertarian. Sadly, it is difficult to defend this point in the present case. Let us consider some specifics.
Caplan thinks there are "innumerable ways that markets can fail." There are no such things, mainstream economists like Caplan to the contrary notwithstanding.
Caplan is highly problematic on the issue of "market monopoly." Let me assure him, there is and can be no such thing. A monopoly implies a restriction on entry, but this is logically incompatible with a market. To the extent that a true free market exists, there are no legal entry restrictions, and hence it is a logical impossibility for there to be a monopoly. Of course, for neo-classical economists such as Caplan, entry restrictions are only a sufficient condition for monopoly, not a necessary one, as it is for Austrians. For him, if the numbers of corporations are few enough, that alone, hard as this is to believe, constitutes a monopoly. So it is a market failure if entry is unrestricted by law, but there are fewer firms in an industry than Caplan and his cohorts think there should be. For shame.
But acceptance of “market failure” by no means exhausts Caplan’s neoclassical and anti-libertarian mistakes. Let us consider several other difficulties:
He errs by classifying opposition to tradable rights (TERs) as an instance of anti-market bias. Not so. Rather, TERs are akin to tradable rape or murder rights. Pollution is necessarily an invasion or violation of property rights. It constitutes a trespass of smoke and dust particles emanating from the aggressor to the lungs or land of another person. As such, there is not and cannot be a “right” to do so. Just because TERs “get you more pollution abatement for the same cost” does not gainsay this fact. Tradable murder or rape or assault and battery “rights” would undoubtedly function in the same manner, but this does not in any way render them compatible with libertarian theory.
According to Caplan, “Almost all economists recognize the core benefits of the market mechanism; they disagree only at the margin.” It is difficult to square this statement with the fact that more than 600 members of this profession signed a statement to the effect that the minimum wage law would have beneficial effects on unskilled workers. Some of them, appallingly, can only be characterized as leading members of the economics profession. For example: Henry Aaron The Brookings Institution; Kenneth Arrow*+ Stanford University; William Baumol+ Princeton University and New York University; Rebecca Blank University of Michigan; Alan Blinder Princeton University; Peter Diamond+ Massachusetts Institute of Technology; Ronald Ehrenberg, Cornell University; Clive Granger* University of California, San Diego; Lawrence Katz Harvard University (AEA Executive Committee); Lawrence Klein*+ University of Pennsylvania; Frank Levy Massachusetts Institute of Technology; Lawrence Mishel Economic Policy Institute; Alice Rivlin+ The Brookings Institution (former Vice Chair of the Federal Reserve and Director of the Office of Management and Budget); Robert Solow*+ Massachusetts Institute of Technology; Joseph Stiglitz* Columbia University (*Nobel Laureate + Past president, American Economics Association).
Particularly egregious on Caplan’s part is the mention of Stiglitz and Krugman as exemplars of free enterprise, given that the former was one of the more high-profile signatories of this minimum wage petition, and has pushed for socialist nostrums his entire career. As for Krugman, he is widely, appropriately and justly known as the "resident socialist of the New York Times."
Caplan also comes out in support of the North American (so called) Free Trade Agreement. But Nafta is no more than what in an earlier and simpler epoch used to be called a customs union: lowering trade barriers within the arena comprised by the union, but in some sense raising them between the parties involved in the agreement and the outside world. Does this constitute an improvement in economic welfare? Possibly, but it is exceedingly difficult to make this case. But, surely, an economist favoring the Austrian tradition, or even embodying libertarianism, would have strongly distinguished NAFTA-type treaties from full free trade. Perhaps Caplan did not want to be characterized as a “market fundamentalist.” More about this below.
Caplan’s attack on make-work bias is very welcome, but his grasp of the enormity of this very, very basic economic fallacy falls somewhat short. He approvingly cites Blinder to the effect that “The socially beneficial way is to enlarge GNP, so that there will be more useful work to be done.” But this is mistaken. The ideal is to eliminate the need for work in order not to do “more useful work.” Particularly disappointing is that Caplan gets it right, entirely so, on the very next page when he quotes Bastiat: “Wealth … increases proportionately to the increase in the ratio of result to effort. Absolute perfection, whose archetype is God, consists in the widest possible distance between these two terms, that is, a situation in which no effort at all yields infinite results.” Was this a mere typographical error on Caplan’s part? Perhaps every dog deserves one bite? No. This is extremely unlikely, for Caplan, unhappily, repeats this error once again: He says, approvingly, “Technology often creates new jobs.” To be sure, this cannot be denied. But it is to be regretted, not exulted in. Remember, the goal is no jobs, zero jobs, nada jobs and infinite productivity.
Why is downsizing “dirty” work? Yes, Caplan merely cites another writer, Blinder, who offers this opinion, he does not himself say it. But to cite it approvingly (that is, without remonstrating with that author), is in effect to accept and support it.
Caplan denies that taxes are too high and maintains it is but a minor reason for the economy not being “as good as it might be.” This is a more than passing curious opinion for a supposed free market economist to offer. Nor, again, can it be dismissed as a mere slip of the pen, since he repeats it: “locating clear-cut waste … in government functions … is difficult.” Nonsense. Locating clear-cut "waste" [why the scare quotes around the word "waste"?] is easy. For a start, get rid of entire departments of the U.S. federal government. (It seems strange that a Republican candidate for president of the U.S., Ron Paul, can see all sorts of government waste while Caplan cannot.) To say that agriculture and education could be dispensed with holus bolus is a no-brainer. As the number of farmers has decreased, the number of agricultural bureaucrats has increased. We got along with the Department of Education before 1980, and can easily get along without it now. If our troops were but confined to the U.S. and we ceased being the world’s policeman, the department of defense (actually, as presently constituted, the department of offense), could be cut back radically while improving the safety of the US citizenry. And this is just the tip of the iceberg (see here on this). How about, also, privatizing the post office, ridding ourselves of the baleful Bureau of Land Management, army corps of engineers, FEMA, etc., etc. Locating government waste is "difficult," indeed.
Of course the federal budget deficit is too big, way too big, and this seriously keeps the economy from doing better than it is, despite Caplan’s views to the contrary on this matter. For the libertarian at least, the budget deficit should be zero, and the entire government sector not much more than that, if it exists at all. How is the public debt to be repaid? Monetizing it creates inflation. Raising taxes even more will put a spoke in our economic wheel, compared to the situation where this does not obtain. And reneging, a delightful prospect to a libertarian, will place us in the category of a banana republic.
Caplan’s view, "Top executives are paid too much" is highly problematic. Caplan backs the wrong horse: "the salaries of the captains of industry provide incentives to cut costs, create and improve products, and accurately predict consumer demand." But our author reckons as if the entire Michael Milken episode did not occur. I refer here to the market’s way of ensuring that executive pay does not exceed that level needed to insure that business leaders have "incentives to cut costs," etc. But in the absence of the salutary effects of Milken’s "hostile" takeovers, it is unclear that this function is now operating, except in a very attenuated manner. Caplan’s mistake is in thinking that present executive remuneration is roughly equal to market levels. Does he think we are now operating under something very akin to full free enterprise?
Caplan avers: "The public thinks that taxes are too high, and infers that tax cuts are a good thing. My interpretation is that noneconomists, avid pessimists, are convinced that government squanders their money. They therefore naively hope to pay for tax cuts by cutting unpopular programs and u2018waste.’ Economists, contrary to their laissez-faire image, are skeptical. Unpopular programs are only a small fraction of the budget, and u2018waste’ cannot be identified in an uncontroversial way."
Again, Caplan and I are on opposite sides of this matter. To be sure, government waste cannot be defined uncontroversially among all members of the public, but it certainly can be amongst libertarians. This is yet another example of this author distancing himself from the charge of being a "market fundamentalist." But are not libertarians necessarily market fundamentalists? I am an economist, and I am not at all "skeptical" about the claim that taxes are too high, that most if not all governmental expenditures are wasteful, and that this is an important explanation for the fact that the economy is not doing as well as it might otherwise be doing.
In the course of discussing gas prices and taxes Caplan relieves himself of the following howler: "Suppose you want to reduce pollution and congestion. You could do it by command-and-control: emissions regulations, annual inspections, carpool lanes. But economists realize that the market mechanism is a more efficient method. A tax on gas gives people an incentive to reduce pollution and congestion without specifically dictating anyone’s behavior." Yes, you read that correctly: for Caplan, a "tax on gas" is a "market mechanism." This reminds me of that old joke: "Do you know the difference between a bathroom and a living room? No? Well, don’t come to my house, then." In like manner we can ask: "Do you know the difference between a compulsory tax levy and a voluntary market transaction, Caplan? No? Well, don’t get into political economy, for this is the most basic distinction in that entire field." Evidently, however, Caplan is of the opinion that a tax does not "dictat(e) anyone’s behavior" forsooth. Perhaps this George Mason professor has never refused to pay a tax. Let me then offer him some free advice: the government dictates that these monies be paid; beware of not paying them.
One last of the minor problems with this book: It is somewhat of a logical contradiction, okay, okay, there is a tension between, on the one hand calling upon economists to educate the great unwashed, and on the other insisting that they are irrational, and not open to economic analysis, as does Caplan all throughout his book. A further difficulty: our author is calling upon his professional colleagues to instruct the public as to the niceties of the dismal science. But, he is relying on a weak reed indeed. Many, many economists cannot be relied upon to support the free enterprise position even on basic issues such as the minimum wage law or tariffs.
IV. The Horrid
The truly horrid part of this book is Caplan’s totally gratuitous attack on Ludwig von Mises and Murray N. Rothbard in particular and on the Mises Institute in general, on grounds of "market fundamentalism." And of what, pray tell, does this particular sin consist? Caplan offers Kuttner’s definition:
"There is at the core of the celebration of markets a relentless tautology. If we begin, by assumption, with the premise that nearly everything can be understood as a market and that markets optimize outcomes, then everything comes back to the same conclusion — marketize! If, in the event, a particular market doesn’t optimize, there is only one possible inference: it must be insufficiently marketlike."
Caplan is not only at great pains to accept the validity of this concept, but also to defend economists in general against so monstrous a charge. And here, I totally agree with him: most economists, unhappily, are not at all market fundamentalists. Economists, he tells us have not at all had the concept of "market failure" thrust upon them, unwillingly. Rather, yes, they have taken to it like a duck to water. Second, Caplan is adamant in his defense of Milton Friedman in this regard. Again I fully concur. "Friedman … has no quasi-religious need to defend the impeccability of the free market." Caplan writes this as if it is a badge of honor. Hopefully, I may be excused for seeing this in an entirely different light.
Who, then, if not Friedman, does have a "quasi-religious need to defend the impeccability of the free market"? Caplan answers as follows:
"The only plausible candidates are the followers of Ludwig von Mises and especially his student Murray Rothbard. The latter does seem to categorically reject the notion of suboptimal market performance."
In support of this infamous and heinous indictment, Caplan quotes Rothbard:
"Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum."
Let me confess at this point that I too am a "market fundamentalist" as least insofar as support for this contention of Rothbard is concerned. What Rothbard says makes complete sense. How can coercion, the sine qua non of government, help improve economic welfare? Surely, there must be at least one person victimized by the initiation of aggression, and his welfare must necessarily decrease. The difficulty with the claim that the government necessarily reduces economic welfare is that all such interactions make at least one person better off: the statist. In order to reach the conclusion desired by Caplan, that that government necessarily reduces economic welfare, one would have to claim that the gain to the aggressor is less than the loss to the victim, and this cannot be done without resort to interpersonal comparisons of utility. Caplan, as neoclassical economist, is willing to embrace so dubious a claim; he treads where Austrians simply will not go.
Caplan is erroneous is attributing to Mises the appellation of market fundamentalist. Exhibit "A" in this matter is that this leader of Austrian economics was a limited government minarchist, not a laissez faire anarcho-capitalist. Exhibit "B" is that Mises, as does Caplan, misunderstands the Austrian case against the supposed market failure of monopoly. Mises thought it was possible for such an institution to exist in the free marketplace.
Caplan continues his unwarranted attack:
"Both Mises and Rothbard have passed away, but their outlook — including Ph.D.s who subscribe to it — lives on in the Ludwig von Mises Institute. But groups like these have basically given up on mainstream economics; members mostly talk to each other and publish in their own journals. The closest thing to market fundamentalists are not merely outside the mainstream of the economics profession. They are way outside."
There are grave problems here too.
Yes, Austrians have indeed "given up" on the views of mainstream economists. These are rejected as erroneous, when they depart from praxeological insights. But we most certainly have not "given up" on mainstream economists themselves, Caplan specifically included, as he full well knows, as he has been embroiled in a back and forth debate for almost a decade now, where we have been trying to convince him of the error of his ways.
Reading Caplan one would get the impression that Austrianism is some sort of cult that disdains, or eschews, dealing with non-members. Nothing could be further from the truth. If anything, matters are the very opposite: it is the neoclassicals, not the praxeologists, if it is anyone, who refuse to interact with the other; who characterize the other as a cult; who claims there is little benefit to be gained by an interaction between the two. And, as it happens, contrary to Caplan, and despite the disdain with which the mainstream views the Austrian school of economics, there have been numerous interactions between the two, at least in the form of debates, sometimes very explicit, the overwhelming majority of which have been "won" by the latter.
These charges that Caplan launches against the Austrians are very serious; very serious indeed. How is it then that they come accompanied by not a single solitary footnote, reference or citation? Caplan is a very careful researcher. His book contains only 276 pages, and no fewer than 56 of them are devoted to reference, citations and footnotes. Yet, he could not spare even one of them to buttress his wild-eyed accusations against the Austrians. Why is this? Our answer can only be speculative, but a plausible explanation is that Caplan is only venting his own quasi-religious views, which are similar in character to those of which he accuses the great unwashed, the ignorant prejudiced voting public. It is difficult to reject this hypothesis. As good logical positivists, we need an empirical "test" for this contention. Here is the evidence: Caplan is himself guilty of engaging in market fundamentalism himself, throughout his book. (For example, he accepts the concept of "economic truism"; this sounds like "market fundamentalism" to me.) This suggests that he is indeed guilty of harboring motivations of this sort. He is a self-hater, in other words, who benefits from condemning vices he sees in himself.
In the view of Caplan, "A person who said, u2018All the ills of markets can be cured by more markets’ would be lampooned as the worst sort of market fundamentalist." I, myself, would never make such a statement. But this is because I do not see any "ills of markets" in the first place. Did I but, then I would gladly embrace this statement. But are not markets plagued by imperfect information? Not a bit of it. Rather, this is a characteristic of the human condition, not markets. But are not markets plagued by products such as pornography, prostitution, addictive drugs, and other harmful goods and services such as French fries, tobacco, race car driving, alcohol, etc? Not at all. Rather, the existence of these goods and services are eloquent testimony to the efficacy of markets. If blame there is for such items, it must be laid at the proper door: not markets, but the choices of human beings. All "markets" consist of is the concatenation of all voluntary commercial interactions. Market "fundamentalism," then, consists of no more than an appreciation of the fact that free trade promotes economic welfare, and is the only system compatible with economic liberty. If this be "market fundamentalism," let opponents make the most of libertarian support for this system of "capitalist acts between consenting adults."
According to Caplan, "Imagine if an economist dismissed complaints about the free market by snapping: u2018The free market is the worst form of economic organization, except for all the others.’ This is a fine objection to communism, but only a market fundamentalist would buy it as an argument against moderate government intervention." Say what? What is this? "Moderate government intervention"? One wonders how Caplan squares his advocacy of "moderate government intervention" with his well-known support for anarcho-capitalism? It is also difficult to see how he can reconcile his opposition to "market fundamentalism" with this statement of his: "… like all trade, international trade is mutually beneficial…" But that is all that constitutes markets: trade between people on a voluntary basis.
A final point on this topic, and this by far the most astounding. Caplan and Stringham won a $25,000 Templeton Prize. And here is the abstract of their prize-winning paper: "The political economy of Ludwig von Mises and Frdric Bastiat has been largely ignored even by their admirers. We argue that Mises’ and Bastiat’s views in this area were both original and insightful. While traditional public choice generally maintains that democracy fails because voters’ views are rational but ignored, the Mises-Bastiat view is that democracy fails because voters’ views are irrational but heeded. Mises and Bastiat anticipate many of the most effective criticisms of traditional public choice to emerge during the last decade and point to many avenues for future research."
As can be seen by this admission, Caplan’s book, and the entire research program of this author on the drawbacks of democracy, owes a great self-confessed debt to that "market fundamentalist," Ludwig von Mises. How, then, does he come to bite the (intellectual) hand that feeds him? Truly, amazing.
Welcome to the wonderful world of "market fundamentalism," Caplan.
I end not with a problem of commission, but with a, well, perhaps not so curious omission. Caplan’s book is, if it is anything, my previous criticisms to the contrary notwithstanding, a critique of democracy written by a libertarian. As such, it is a glaring omission on Caplan’s part not to even mention, even in passing, a previous book that falls squarely into this category. I refer here to Hoppe’s Democracy — The God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order.
Why would Caplan not even cite this book in his bibliography that stretches on for 30 single spaced pages? Although this can only be speculative, one reason for this might be that Hoppe is a leading Austrian economist, and Caplan has taken on what can only be considered a personal quasi-religious, cultish antipathy toward this school of thought.