David R. Henderson  

Comparative Phooling

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Bad government is itself a product of phishing and phoolishness, for "we are prone to vote for the person who makes us the most comfortable," even when that person's decisions are effectively bought by special interests.
This is a quote from Cass Sunstein's "Why Free Markets Make Phools of Us," his review of Phishing for Phools: The Economics of Manipulation and Deception, by George A. Akerlof and Robert J. Shiller, in the New York Review of Books, October 22, 2015.

I posted last week on Arnold Kling's critical review of the book.

Why do I highlight this passage? Here's why. My Facebook friend Michael Makovi writes:

So basically, Sunstein implies, private individuals acting through markets are likely to make poor, irrational decisions, but voters are just as irrational. It turns out that voters and politicians are subject to all the same cognitive biases as market buyers and sellers.

The difference is that in a market, there are feedback signals, albeit possibly attenuated. If a vendor cheats his customer by holding back information about his product, at least the customer will learn about the product's faults after he purchases it, and he will buy from someone else next time. The consumer may have cognitive biases, but at least he has the opportunity to learn from his mistakes.

By contrast, there are fewer feedback signals in politics and even fewer opportunities to act on that feedback. One vote barely counts, and an individual must vote for a politician with a range of policies instead of voting for a specific policy. In the market, people can split their "dollar votes" and vote only for those specific products they want. In politics, the vote cannot be split, and a person must take or leave everything. So politicians are more free to continue to peddle shoddy products when they know voters have fewer opportunities to learn from their mistakes.

Meanwhile, markets tend to concentrate benefits AND costs on the consumers who use a specific product. This internalization of costs and benefits promotes learning and feedback. In a market people must bear the consequences of their own actions. By contrast, in politics, benefits are concentrated on those whom the politician wishes to favor - such as financial donors and special interests whose attention is narrowly focused - while costs are dispersed among those whose attention is elsewhere, so that they won't notice the burdens being imposed on them. The combination of rationally ignorant voters and informed special interests encourages rent-seeking [DRH note: See "Rent Seeking" in The Concise Encyclopedia of Economics for why I think a better term is privilege-seeking] behavior, whereby special interests obtain protection and bounties, with consumers and ordinary voters footing the bill. Private benefit and social cost diverge as the political process encourages the creation of new externalities. Whereas markets promote internalization, politics encourages externalities, and this means there is less feedback and less correction of mistakes.

In fact, in politics, almost everyone bears the costs of government policies that they had no individual influence on. There is virtually no connection between an individual's actions in the political sector and the costs he or she bears. The public finance is a tragedy of the commons . . .

So yes, consumers are often "irrational" and deceived and make mistakes. But this is true in both politics and markets, as Sunstein himself tells us. The question is, which institutional environment is more likely to promote learning from those mistakes?

Comments and Sharing

COMMENTS (11 to date)
Tom West writes:

In politics, the vote cannot be split, and a person must take or leave everything.

An insightful article, but I would add that I suspect the majority consider this a plus.

I doubt few would thank the person who demanded we supply opinions on the tens of thousands of policy decisions that affect us, even if we could choose specifically those few that we care about.

Much of progress in modern culture is allowing us *not* to have to spend costly cognitive resources worrying about much our life. All we have to do is spend an hour every 4 years.

Inefficient? Sure. Good enough? Most people seem to think so.

Michael Makovi writes:

Tom West, a very interesting point. Hayek makes the exact same argument in "Use of Knowledge in Society", and I completely agree with you.

But I would note that if politics were marketized, a person would still have the option to outsource their decision-making if they thought this lowered their costs. If a ballot presented me with 10,000 policy issues, I could just write, "whatever Ron Paul says" at the top of the ballot and leave things at that.

In other words, the market does not compel a person to make every decision separately if they do not want to; the market offers the option of bundles where this is more convenient. By contrast, politics compels a person to accept a bundle.

Michael Makovi writes:

Actually, in politics, it is even worse than being compelled to select a bundle. If that were all it was, a person would at least still have a choice among bundles. But in fact, politics imposes a bundle more than it offers a choice.

I see several politicians. Each one offers a bundle. I vote for one of the bundles, but in the end, a different politician wins. Not only am I offered nothing but bundles, but I don't even get the bundle I wanted. I get someone else's bundle.

In Freedom and the Law, Bruno Leoni notes that we are all doubly unrepresented by politics: we vote for A but B defeats A in the election. Then, when B is sitting in the legislature, he is outvoted on a bill by C. So in the end, a person is governed by the person (C) who beat the person (B) who beat his preferred choice (A).

Kevin Erdmann writes:

Identity seems important. We see private actors as "them", but we see public actors as a combination of "us" and "them", so private errors need to be punished but public errors just need to be fixed, usually by getting more of "us" into power. Failed private endeavors usually end with an entrepreneur pleading that it would have worked with just one more round of capital. Public endeavors lead many of us to take the position of the entrepreneur, demanding more capital (and blaming our minority business partner for the problems).

This sort of mindset leads many to prefer public solutions for precisely the reason that we should prefer private solutions - that we are less willing to judge public failures.

Nathan W writes:

Michael brings up a very interesting idea. I like the idea of Swiss direct democracy, where all citizens have the role to approve/disapprove of all legislation passed by government.

It would be nice to have the freedom to vote directly if one pleases, but be able to save time if one pleases and as, in his example, say "whatever Ron Paul says".

Moreover, if people had a more direct say and valued their time, perhaps there would be pressure for governments to spend their time making fewer and better laws, rather than passing 10,000 pieces of poorly thought out legislation.

maynardGkeynes writes:

Markets are bundled too. You can only buy what they make, and they only make the things they want to sell you. A whole range of products that address other human needs -- those that can't be packaged, promoted, and pushed on us via advertising never come into existence. You don't get to "vote" for those. It's no different from government.

ThomasH writes:

Why have one meta rule (never regulate, always regulate) for all cases? I prefer a meta rule that says use cost benefit analysis (including the risk regulatory capture or other decision making errors) in each case.

Brian writes:

"Michael brings up a very interesting idea. I like the idea of Swiss direct democracy, where all citizens have the role to approve/disapprove of all legislation passed by government.

It would be nice to have the freedom to vote directly if one pleases, but be able to save time if one pleases and as, in his example, say "whatever Ron Paul says"."

It's worth noting that any constitutional republic, including the U.S., already employs this system. The "do whatever what-his-name says" is the default position when we elect representatives. But we have individual votes whenever a ballot initiative is offered. It's fairly obvious that most voters prefer to bundle since ballot initiatives are relatively rare. Saving time and mental energy is not a minor consideration. It's also not clear that making unbundled voting more common would change much. The current system, with bundled voting, allows the small number of bundlers (i.e. representatives) make various changes between the time the legislation is introduced until when it is voted on. Such changes are probably more likely to improve the legislation than not. Ballot initiatives, without the benefit of being amended in real time, are likely to be less effective or representative of the will of the people.

Swami writes:


You make a good point that markets won't supply all goods and services. It is a partial problem solving network -- other problem solving networks may be needed (science and politics are just two other such systems).

As someone whose job it was to conceive, create, design, build and market new products for consumers (I was the corporate officer in charge of new product development for a large household-name corporation), I will add though that you are thinking about it backwards.

I directed my efforts and that of my team at discovering what it was that consumers wanted to buy (or would want to buy if I built it). Granted there had to be overlap -- it had to be something they wanted to buy and something we wanted to sell. In other words a win/win. Every business -- existing or potential -- thrives on discovering problems which people value more than it costs the company to solve. Markets are solution generation machines for a large class of goods and services people desire.

LD Bottorff writes:

All we have to do is spend an hour every 4 years.

Are you implying that the only important office in our democracy is voted on a four-year basis? Do you not concern yourself with Congress, state legislatures, or state governors? And, I guarantee you that I spend more than an hour trying to figure out which judges to vote for.

Glen writes:

Consumers and voters are far, far from equally irrational.

Sure, consumers make poor decisions. But they usually learn from their mistakes, because the consequences – of both their mistake and their subsequently better-informed decision – are typically direct and profound. The next time, they make a better decision.

Voters have almost no ability to influence elections and even less ability to influence policies. The effects of voters' decisions are so highly attenuated as to be indistinguishable from randomness. So voters make choices based upon amorphous criteria like “Who cares about people like me?” or “What choice makes me feel good about myself?” or “Which candidate would I like to have a beer with?”

Like most academic central planners, Sunstein simply believes he is entitled to rule as a benevolent philosopher king.

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