B.After a full semester of public choice,
we are now in a much better position to step back and compare institutions.
C.Economically literate defenders of
democracy typically focus on government's special ability to supply public
D.After analyzing how democracy actually
works, what can we say about this?
E.If people voted rationally and
instrumentally, this argument makes a great deal of sense.
F.However, since voting is largely
expressive and not instrumental, public goods are supplied only by
1.Ex: National defense may have expressive
as well as instrumental value.
G.But: Expressive voting is likely to lead
to government involvement in a wide array of "feel-good" issues that
have nothing to do with public goods.
1.Care of the old
H.Similarly, whenever voters hold
systematically mistaken beliefs, we are likely to see government wasting
resources or being actively counter-productive.
3.Labor market regulation
I.This adds up to an efficiency case for
limiting the scope of democracy in order to keep "political
pollution" under control.
II.Some Political Economy of Dictatorship
A.In the minds of many, the only
alternative to democracy is dictatorship.
B.Question: What is so bad about
dictatorship anyway? What does the
"comparative institutions approach" say here?
C.Simplest approach: Dictatorship is
equivalent to democracy with a single - and perfectly decisive - voter.
D.All of the usual rules about democracy
that hinge on low probability of decisiveness reverse:
E.Thus, we should expect dictators to be
highly self-interested, but more interested in rationally assessing policies'
F.Complication: Being dictator effectively
makes someone extraordinarily wealthy.
The resources of an entire nation become theirs to command. Due to their extreme wealth, they may
consume a lot of altruism, expressive considerations, and/or irrationality
despite their high price.
G.Most definite disadvantage of
dictatorship: It's a big gamble.
Everything depends on the idiosyncrasies of the Leader.
1.Interesting finding: Average growth of
dictatorships and democracies is the same, but dictatorships have more
III.Constitutional Reform and Endogenous
A.Many people in public choice - most
prominently, James Buchanan - have suggested constitutional reforms to
"help fix democracy."
B.Example: 2/3 rule for spending. Perhaps then, pork barrel projects will
fail, and only genuine public goods will receive funding.
C.Problem: Doesn't public choice apply to
constitutional reform too?
D.In other words, any failure that afflicts
day-to-day democracy presumably afflicts constitutional choice as well. Constitutions are endogenous
institutions. They are a product of the
same forces that generate other social outcomes, and no easier to change.
E.Some proposed Constitutional amendments
have no obvious impact on policy. These
are relatively easy to pass, but what's the point?
F.Other proposed Constitutional amendments
would obviously affect policy. These
are hard to pass because the policies that currently exist tend to be popular.
IV.Are the Functions of the Night-Watchman
State Really Public Goods?
A.If you remain dissatisfied with
democracy, reject constitutional reform as a solution, and abhor dictatorship,
what is left?
B.What about anarchy? A number of economists have explored the
C.Analytical procedure: Start with the
functions of the night-watchman state (dispute resolution, rule formation, and
enforcement) and work backwards.
D.Specifically: What aspects, if any, of
these functions are actually public goods?
V.Dispute Resolution as a Private Good
A.Two people have a contract dispute. The night-watchman state takes it upon
itself to adjudicate. For disputes it
labels “criminal,” the NWS goes further by handling the prosecution.
Where is the public good? Why
couldn’t the parties (or their insurers) simply put an arbitration clause in
their contracts, which the night-watchman state enforces? And why does the NWS have to handle the
C.Hard case for arbitration: complete
strangers. Night-watchman state could
still minimize its role by compelling defendant to choose from an approved set
D.Hard case for private prosecution:
VI.Rule Formation as a Private Good
A.The NWS also takes it upon itself to pass
civil and criminal laws.
Where is the public good?
Private arbitration firms could (and already do to some extent) ex ante
woo customers by offering the most efficient set of rules.
1.Efficient rules give parties incentives
to maximize joint wealth of signatories, factoring in expected cost of
C.Landes and Posner argue that lack of
intellectual property rights in precedents leaves little incentive for rule
D.In practice, though, public courts often
defer to expert judgments of arbitrators.
Intellectual property rights in rules could be strengthened, and
non-patent incentives are often effective.
VII.Enforcement as a Private Good
A.The NWS also tries to monopolize
Where is the public good? Once
an arbitrator makes a decision, why can’t it be enforced by ostracism, bonding,
or private security guards?
C.An unconventional solution to the problem
of indigence and crime: indentured servitude and private prisons.
D.NWS could again mechanically defer to
VIII.Moderate versus Radical Privatization
A.To a surprising extent, markets already
share the supposedly exclusive turf of the NWS.
3.Arbitrators’ codes of rules
B.It would be easy to drastically expand
the role of the market in these areas, while leaving the state as the final
authority. Let us call this moderate
C.But this is hardly an alternative to
democracy, because the state remains.
What about radical privatization - getting rid of the last remnants of
the NWS state?
D.What would this even look like? Standard picture:
1.Individuals subscribe to services of a
2.Defense firms arbitrate their disputes in
3.Private courts issue monetary judgments.
4.Reliable people unable to pay their debts
have their earnings attached.
5.Others, especially criminals, become
indentured servants and work off their debt in private prisons that bid for
IX.Main Objections to Radical Privatization
A.Obviously, free-market anarchism is not a
popular proposal. What are the main objections?
B."It would lead to violent
1.Reply: Why? It is cheaper to negotiate
than to fight, especially since police companies repeatedly interact with each
other. Also, police company employees, unlike conscripts, have to be paid more
for a riskier job.
2.Turnaround: Existence of government leads
to wars, which are far more serious than police agency shoot-outs because
governments control the resources of the whole society.
C.One strong agency would take over and
become the new government." (Alternate version: Agencies would merge until
they had a monopoly).
1.Reply: This would only be possible if
there were a large MES relative to the demand for defense services. In the
current U.S., there are already about 10,000 security guard companies, so there
is little reason to fear the dominance of one strong agency.
2.Turnaround: A much bigger risk from
governments, since their MES scale is much larger than for mere police
D.“Police agencies would build up demand by
defending their clients to the death."
E.Reply: This would create a severe
"adverse selection" problem, just like the one that insurance
companies face. If you announce that you will protect your clients to the
death, you encourage all of the riskiest, lawless people to hire you, raising
your costs enormously.
F.“People would have no incentive to
1.Reply: Monetary restitution provides the
incentive; the ability to impose indentured servitude ensures that almost all
convicted persons will be solvent.
2.Turnaround: This is true today: the only
incentive of victims to cooperate with prosecutors is desire for revenge. E.g.
rape victims often better off staying quiet.
G.“Criminals would be over-punished."
1.Reply: In many ways, profit-making
prisons would be more humane: there is an incentive to protect the safety of
workers; to separate workers by size and strength; and to provide useful job
training. Legal codes could incorporate prisoner protection as well.
2.Turnaround: Numerous non-violent
offenders currently sentenced to harsh prison conditions. At the same time, many serious violent
criminals get light sentences to make room for drug offenders.
X.Cowen, Anarchism, and Collusion
A.Tyler Cowen has a novel objection to
free-market anarchism: Defense is a network industry. Collusion is relatively easy to orchestrate
in such industries due to the threat of expulsion.
1.There might seem to be a lot of firms,
but for practical purposes there will only be one.
B.In such industries, some forms of
collusion (relating to product standardization) are actually beneficial; but
this opens the door to the traditional forms of inefficient collusion (like
C.According to Cowen, this leaves basically
two possible cases:
1.Case 1: Transactions costs are low enough
to make collusion work. Then both the
efficient and inefficient forms of collusion thrive. The public faces a profit-driven monopoly defense firm, a great
example of Hobbes’ Leviathan.
Transactions costs are too high to make collusion work. Then neither the efficient or the
inefficient forms of collusion appear.
The public faces chaos, a great example of Hobbes’ “state of nature.”
D.Stringham and I have a reply to Cowen
forthcoming in the RAE.
Main argument: Cowen conflates coordination problems with prisoners’
E.Product standardization is a
self-enforcing coordination problem.
Once firms expect certain standards to prevail, it pays to conform.
F.Price-fixing, extortion, etc. are
prisoners’ dilemmas. If other firms are
changing high prices and mistreating customers, it pays to stay honest and gain
G.Historically, network industries do not
seem to have been especially able to achieve collusive outcomes, but they have
solved a lot of coordination problems: