Robert Lucas   I learned that Bob had read the paper (Sargent, 1977) when he called me on the phone to tell me that the Boston Federal Reserve Bank research department director had invited him to write for the Bank’s annual Martha Vineyard Conference––a paper that would explain in ‘plain English’ what rational expectations macroeconomics was really about, unencumbered by equations. Bob proposed that we join forces and write a joint paper for the conference, so we wrote After Keynesian economics (Lucas & Sargent, 1979) and we both traveled to Martha’s Vineyard in June to attend the conference. I presented our paper at Bob’s request. Ben Friedman discussed it. Ben wanted the audience to know that he really disliked the line of research described in the paper. He disliked it so much that he announced to the audience that when he quoted or paraphrased us, he would put on a black hat and that when he said what he himself thought he would wear a white hat. So, Ben switched hats on and off provoking laughter from the audience each time he switched hats. The audience liked that. Bob was not amused, nor was I. But actually, the hat switching was the best part of Ben’s discussion. Ben did not have much of value to say other than that he did not like what we were up to. This is from Thomas J. Sargent, “Learning from Lucas.” It’s his reminiscences of how he learned from Robert E. Lucas. It gets pretty technical. The reason I’m quoting the above is that it depicts a mindset that a number of establishment left-of-center economists had then and that many of their counterparts have now. As you can see from the quote above, Tom Sargent’s conclusion was that Ben Friedman substituted ridicule for analysis. Here’s my bio of Sargent in David R. Henderson, ed., The Concise Encyclopedia of Economics. (0 COMMENTS)

In the last few posts in this series, I’ve described different key ideas Randall Holcombe outlines in his book Following Their Leaders: Political Preferences and Public Policy. Here, I want to bring all these ideas together and describe the challenge they present to common assumptions about and arguments in favor of democracy. To do this, let’s go back to the beginning. In the first post, I reviewed how Holcombe presents the common depiction of democracy. In the common view, voters have specific outcomes they want achieved. They cast their votes to convey these preferences, and the votes are aggregated into an overall social choice. Policymakers then use the information conveyed by this social choice to craft policies reflecting and carrying out the will of the people. This system, we are often told, has several useful features, including that it allows citizens to peacefully solve disputes among themselves through negotiation and voting, as well as making leaders both responsive and accountable to the people. But this story has several flaws, Holcombe says. One flaw is the difference between expressive and instrumental preferences, as described in the second post in this series. What we prefer to express isn’t always the same as the outcome we would actually choose. In markets, we get what we order, so we will behave instrumentally. In politics, we get the same outcome regardless of the vote we individually cast, so we will behave expressively. This means that voters may use their votes to express support for policies they wouldn’t actually choose to enact if they were making an instrumental choice. And since voting systems aggregate expressive preferences, not instrumental preferences, the results of an election can’t be used to validly reach conclusions about the outcomes voters prefer. Another flaw, outlined in the third post, comes from the idea that voters have anchor and derivative preferences. Walter Lippmann, in his book Public Opinion, was troubled by the fact that individual citizens could hold strong beliefs on a multitude of highly complex topics with high levels of certainty, writing “There are few big issues in public life where cause and effect are obvious at once. They are not obvious to scholars who have devoted years, let us say, to studying business cycles, or price and wage movements, or the migration and assimilation of peoples, or the diplomatic purpose of foreign powers. Yet somehow we are all supposed to have opinions on these matters.” Holcombe suggests people will anchor onto a key point – maybe a political identity, maybe a specific policy, maybe a particular leader. Voters then adopt their other political preferences from this anchor. As an example, consider someone who is passionately in favor of stricter gun control laws. This will lead them to anchor onto the Democratic party, due to that party’s greater support for gun control. This voter will then tend to adopt the rest of the Democratic platform, despite those issues being unrelated to gun control. This leads to unrelated views clustering together. There is no intrinsic connection between how strict gun control laws should be and whether the tax code should be more or less progressive. Yet, if you know someone’s position on one of these issues, you can predict with very high certainty what they will think about the other issue as well. Finally, as outlined in the most recent post, democracy does not facilitate citizens solving social problems through mutual negotiation and compromise among equals. Because of transaction costs, the vast majority of citizens will not and cannot meaningfully participate in designing social policy. Policy negotiations and design will necessarily take place among a small group of elites, who face low transaction costs in crafting deals due to being part of a small, well-connected group. Because of this, public policy will not be formed either as a result of citizens compromising with each other, but neither will it come about as a result of elites taking input from citizens: The political elite do not interact with the masses when they negotiate to produce public policy. They interact with the economic elite and their lobbyists, who are well connected because they face low transaction costs so are able to bargain for specific public policies. In practice, this means selling public policies to the highest bidder. Additionally, the use of elections to solve social problems does not lead to greater peaceful cooperation among citizens as some models of democracy suggest, but instead encourages ever more polarization as more and more issues are “solved” politically – that is to say, as more and more issues become politicized: Unlike voting models in which voters have preferences and candidates adopt their platforms to correspond with voter preferences, candidates and parties offer platforms and voters adopt those platforms as their anchors, with preferences on most policies being derivative of their anchors. Platforms often do not converge on some median preference, but remain separated (polarized), and the single dimension of citizen political preferences runs from one platform to the other. This tendency towards greater polarization with the use of elections is also exacerbated by the fact that politics, unlike markets, is a zero-sum, winner-takes-all game. Markets are very good at providing for even very niche preferences, so almost everyone can get exactly what they are looking for even when they have tastes that are not widely shared. This isn’t the case in politics: In markets, entrepreneurs have an incentive to entice customers to transact with them. In politics, people have an incentive to defeat rivals. In the market for soft drinks, there is room for both Coke and Pepsi to succeed. In the market for automobiles, there is room for both General Motors and Toyota to succeed. In electoral politics, one side wins and the other loses. But most importantly, the traditional story of democracy gets things backwards. Voters do not bring their preferences to the polls, leading elites to form policies as the voters direct. Elites form bundles of policies as a result of negotiation and planning with other elites, and voters are given a choice of bundles reflecting the preferences of the elite. Because voters act expressively rather than instrumentally, and because most voter preferences are derivative, voters will express a preference for entire bundles of policies they had no voice in forming. Elites, not voters, are in the driver’s seat in a democracy: The preceding analysis questions the degree to which democratic governments carry out the will of the people, and the degree to which democratic governments are accountable to their citizens. More than just being poorly informed, citizens and voters tend to adopt their policy preferences from the political elite, so it would be more accurate to say that democratic government carries out the will of the elite than the will of the people. This also undermines the idea that elections make the elites accountable to the citizens: If the masses acquire their public policy preferences from the elite to whom they anchor, it is the elite who design public policy, and the masses follow their leaders. Democratic government is not accountable to its citizens, and is not constrained to act in their interest, if the political preferences expressed by the masses are derived from those of the elite. Of course, it’s still very much in the interest of the elites to advertise the standard view of democracy. Those who advocate for the use of elections on the grounds that elections allow citizens to peacefully coordinate solutions among themselves, or on the grounds that elections make leaders accountable to the public, provide the elites with exactly the kind of intellectual cover that most benefits them: The romantic notion of democracy as a system in which the political elite are accountable to the masses works to the advantage of the elite, because it presents the appearance of a government constrained to act in the public interest. This brings my summary of Holcombe’s book to a close. In the next post, I’ll give my thoughts on what I see as the strengths and weaknesses of his argument. (0 COMMENTS)

A recent post of mine on “the intriguing twentieth century” focused on John Maynard Keynes’ prediction of an eightfold multiplication of GDP per capita in the century following 1930. Part of the comments and conversation dealt with a related prediction of Keynes—that leisure would increase up to the point where people would work only 15 hours a week. More should be said on why this last forecast failed. Mark Brady of San Jose State University brought our attention to the book of Lorenzo Pecchi and Gustavo Piga (Eds.), Revisiting Keynes “Economic Possibilities for our Grandchildren” (MIT Press, 2008). It contains an interesting chapter by Harvard University’s Richard Freeman, titled “Why Do We Work More Than Keynes Expected?” (pp. 135-142). The crucial technical passage regarding leisure is the following: [Keynes] missed the boat by failing to appreciate the power of economic incentives to induce people, even those with high standards of living, to work long and hard. He did not expect that the increased cost of leisure due to rising wages would dominate the income effect that induces people to take more leisure. … Textbooks often displayed backward-bending labor supply curves to illustrate the point. But the race between the substitution and income effects turned out to be more of a fair race than the sure-fire guaranteed winner that your local tout predicted. An especially interesting chapter is that of Gary Becker (the famous Nobel economist) and Luis Rayo, “Why Keynes Underestimated Consumption and Overestimated Leisure for the Long Run” (pp. 179-184). Their analysis also makes much use of the distinction between the income and the substitution effects, combined with a very Beckerian human-capital analysis: Keynes assumed that higher incomes would lead to increased demand for leisure through what is now called the “income” effect. But in the same year as Keynes published this article, Lionel Robbins published a classic article showing that higher hourly earnings have conflicting effects on hours worked. … Keynes was misled in his predictions concerning the effect of higher income on hours worked by the behavior of gentlemen in Britain—who Keynes believed provided a window onto future behavior as everyone’s income rose. Their behavior gave a distorted picture of what to expect because these gentlemen had sizable wealth in the form of physical and financial assets, but not high human capital or earnings. So economic theory would predict that these gentlemen would take more leisure than would equally wealthy persons in the future who in fact would be holding the vast majority of their assets in human capital rather than land and other assets. English gentlemen indeed had mainly just an income effect, while those who would have to work would also have powerful substitution effects. The reference to Robbins is interesting in itself because it betrays the kinship between the Austrian-influenced economist of the London School of Economics, and Becker, the quintessential neoclassical economist at Chicago. In my Regulation review of Robbins famous 1932 book An Essay on the Nature and Significance of Economic Science, I wrote: The Essay defined economics as the science that studies human behavior in allocating scarce means among competing ends, a definition that has become standard. We get a glimpse at this definition’s influence when we realize that it was adopted by Gary Becker, the standard bearer of mathematical and empirical economics, which is the polar opposite of the Austrian school. “Polar opposite” is too strong (I should have written “appears to be”) as Robbins and Becker themselves demonstrated. Robbins’s book and my review survey these important ideas. (0 COMMENTS)

In this episode, EconTalk host Russ Roberts welcomed Roger Noll, a distinguished American economist and emeritus professor of economics at Stanford University. One of Noll’s many research interests is the economics of sports and entertainment. Roberts and Noll discuss the economics of all things sports, ranging from the financial output of football, baseball, and basketball arenas, the labor market of free agency in Major League Baseball (MLB), and finally, to the heightened intensity of youth sports. The episode questions the structure of both new and traditional values in sports while Noll and Roberts shed light on the incentives which dictate the action of various parties involved in the world of sports. We hope you’ll use the prompts below to share your thoughts in the comments. or start you own conversation offline:     1- Roberts and Noll agree that some parents have an end in mind which is built on the hope that their kids will advance to higher levels and economic gains as they promote their children’s involvement in sports. The odds of moving beyond high school sports to a potential payout are stacked against children, but I do agree with Noll that the level of organization and seriousness in youth sports has intensified. Do parents have a rational motivation or hope that their children will reach a scholarship or professional level in their sport? How common is this sentiment, and how can Noll’s point on the anomaly of Jeremy Lin be applied to the case?   2- Baseball has an interesting dynamic between several reputable statistics determining value and the unpredictability inherent in the game’s difficulty. Roberts and Noll discuss the always evolving strategy of general managers, and how small market teams can compete even when the odds are in favor of franchises with a much higher expenditure. How does the measurability of expected value paired with random outcomes in baseball play a role in management decision making and competitive balance in the MLB?   3- Economists would predict that the introduction of a normal labor market (free agency in the MLB) would lead to competitive imbalance within the sport, but Roberts and Noll agree that free agency has increased competitive balance. MLB owners must hope for savvy general managers who gamble more successfully than not, but many teams, like the Mets, with more spending power than others, still underperform. Even with a predictive database of statistical measurables, there is a knowledge problem along with other independent variables for managers in drafting, signing, or trading players. What is the ideal strategy for general managers to have in running an MLB franchise, and how should spending power influence strategy?   4- Roberts and Noll point to the improbabilities of sports which contribute to their immense popularity. This season, Major League Baseball has more buzz. Rule changes, like the pitch-clock and bigger bases, are each producing more action, removing stagnant periods which may have lessened the entertainment value of the sport for some fans in the past. How have rule changes increased baseball’s popularity and its ‘it’ factor as an unpredictable spectacle showcasing the highest level of athletic competition?   5- Noll argues for more player influence on Major League Baseball’s performance-enhancing drug policies, where the chief influencer of policymaking considers the prisoner’s dilemma: which drugs will be used to get ahead and leave other players in the dust? Following Noll and Roberts’ discussion of Barry Bonds’ impending Hall of Fame induction, how could the player’s point of view be more rational in enacting a fair drug program in the MLB?   Brennan Beausir is a student at Wabash College studying Philosophy, Politics, and Economics and is a 2023 Summer Scholar at Liberty Fund. (0 COMMENTS)

As we near June 1, the date at which Treasury Secretary Janet Yellen claims that the federal government will default on the federal debt if the debt ceiling is not raised, there’s a lot of discussion about the debt, as well there should be. Republican House Speaker Kevin McCarthy has managed to corral enough votes in the House of Representatives to pass a bill that would allow an increase in the federal debt limit and roll back discretionary spending to the 2022 level and then allow it to rise by 1 percent annually for the next ten years. What that means, since inflation is likely to average over 1 percent, is that discretionary spending would fall slowly in real terms. So far, President Biden has refused to negotiate any cuts in the rate of growth of discretionary spending. But even if he goes along with Speaker McCarthy, the slower growth in discretionary spending will be only a small down payment on a huge and growing problem: the massive and growing federal debt. If the federal debt continues to grow at the rate predicted by the Congressional Budget Office, then, to avoid default in the 2030s, Congress will have to pass a package of spending cuts and tax increases. On the tax side, though, Congress is constrained by one of the few constants that we ever see in macroeconomics: the size of federal tax revenues as a percent of gross domestic product. If that constant holds up in the future, the only choices would be large spending cuts or a default on the federal debt. These are the opening paragraphs of David R. Henderson, “Slouching Toward Debt,” Defining Ideas, May 17, 2023. And: But the really big deal is the projected spending, deficits, and debt beyond 2033. In its Table 4, the CBO projects that from 2034 to 2043, federal spending will average 26.3 percent of GDP and, from 2044 to 2053, 29.0 percent of GDP. Deficits are projected to average 8.0 percent of GDP from 2034 to 2043, and a stunning 10.2 percent of GDP from 2044 to 2053. By 2043, the CBO predicts, federal debt held by the public will be 152 percent of GDP and, by 2053, 195 percent. Budget cuts would work: The bad news is that there appears to be zero appetite among congressional Democrats and only a slight appetite among congressional Republicans for large cuts in the growth of spending. The good news is that if they ever decided to take spending cuts seriously, they could see a major US example after World War II and more recent experiences in Canada and the United States in which spending actually fell in real terms (post–World War II United States) or spending as a percent of GDP fell substantially (Canada and the United States) with apparently few bad effects and some major good effects. And finally: In response to economists Lawrence Summers and Jason Furman, who minimized the danger of large budget deficits, I wrote two articles on this site: “Who’s Afraid of Budget Deficits? I Am,” February 20, 2019, and “Furman, Summers, and Taxes,” May 1, 2019. I wonder what they think of federal budget deficits and debt now. Of course, they could argue that no one expected the gush of federal spending that came with COVID-19 and lockdowns under both Presidents Trump and Biden. But that suggests yet another reason not to be so calm about deficits and debt: we need to keep our powder dry. My guess is that Summers and Furman are at least a little more worried than they were. Read the whole thing. (0 COMMENTS)

The US government spends a great deal of time bullying smaller countries into becoming more financially transparent, in order to reduce tax evasion and money laundering. According to a recent Freakonomics podcast, however, the US has a double standard: The world’s foremost anti-money-laundering organization is called the Financial Action Task Force. It has 39 members, including the U.S. Its mission is to “[set] international standards to ensure national authorities can effectively go after illicit funds linked to … serious crimes.” NIELSON: These are the Financial Action Task Force recommendations. They’re not laws. They’re what we call in international relations “soft law.” So there’s no enforcement mechanism, right? It’s not like there’s some global police that can bust you and put you in handcuffs and take you away to global jail — that doesn’t happen. But what they do have is the ability to set expectations. And there’s lots of international standards — they’re voluminous. One of the main ones we focus on is that you need to know who controls the companies that move that money. Who is ultimately in charge of that company and that bank account? This is called the beneficial owner. And in order to make sure you can track that person, international standards require that you get photo I.D. of the beneficial owner. And so we just started with that. Just, like, to what degree is this practice being followed?  Nielsen, along with fellow researchers Michael Findley and Jason Sharman, conducted a massive experiment to learn where this recommendation was and was not being followed. NIELSON: We thought it best way to learn is just to ask directly. We just created a bunch of false names from all around the world asking for shell companies, saying that confidentiality is important. I think it was, like, 7,500 emails that we sent. We kind of gave them a hint — if we can get away with something here, we want to. We said, “What’s required? What documents do you need from us?” And then they told us whether or not they required photo I.D. Nielsen and his co-authors compiled their findings in a 2014 book called Global Shell Games. NIELSON: We reported that the United States was the easiest place in the world to get an anonymous shell company, and the easiest place in the United States was Delaware. They replicated the experiment in 2019, and the results suggest it’s still pretty easy to get a shell company in the U.S. Nielsen is not the only researcher to find a result like this. In 2022, the U.K.-based Tax Justice Network released a financial secrecy index, which ranked the U.S. no. 1 in the world, as, quote, “[the] most complicit in helping individuals to hide their finances from the rule of law.”  Note:  The non-italicized statements are by Stephen Dubner.  The italicized portion is Daniel Nielson.  The podcast focuses on Delaware, which allows people to create corporations with no verifiable information on ownership.  Most of America’s Fortune 500 companies are incorporated in this tiny state.  The entire podcast is worth reading (or listening to). And it’s not just Delaware; the US also has a double standard in banking: In essence, FATCA turns foreign banks and other financial institutions into enforcement arms of America’s Internal Revenue Service (IRS). They must choose between turning over information on clients who are “US persons” or handing 30% of all payments they receive from America to Uncle Sam. . . .  As more countries are pushed to share tax information systematically, the focus will turn to America’s willingness (or lack of it) to reciprocate. Latin Americans, for instance, are big users of banks in Florida, but America remains choosy about which governments it will share data with, and how much.  I don’t have any great objection to the Delaware system, rather I wish the US government would allow other countries to behave as we do. (0 COMMENTS)

I love numeracy, which is literacy with numbers. That’s why I love the second line in “Taxman.” If the taxman is getting 19 pounds and the person taxed is keeping 1 pound, that implies a marginal tax rate of 95 percent, which is the actual rate they paid on their “unearned” income. I put “unearned” in quotation marks because, of course, it was earned—the Beatles earned it on their investments. George Harrison also knew on whom to blame these high tax rates: Britain’s politicians. That’s why in the background, you can hear the singer castigating greedy, grasping Mr. Wilson and Mr. Heath. Harold Wilson, of the Labor Party, was prime minister from 1964 to 1970, when Harrison wrote the song. Ted Heath led the Conservative Party from 1965 to 1975. He was prime minister from 1970 to 1974, but that was well after the song was written. Fortunately, Margaret Thatcher became prime minister in 1979. At the time the top rate on both earned income and “unearned” income (you can tell that I hate that term) was a hefty 83 percent. That same year, as well as cutting rates at lower income levels, she cut the top rate to 60 percent and in the late 1980s cut it again to 40 percent. This is from David R. Henderson, “We Need Another George Harrison,” TaxBytes, Institute for Policy Innovation, May 17, 2023. Read the whole thing, which isn’t long. (0 COMMENTS)

Monetary policy has important effects on both prices and employment. Thus it makes sense that the Fed’s Congressional mandate would include both of those variables. Now former VP Mike Pence has proposed replacing the Fed’s so-called “dual mandate” with a single mandate for price stability. Here’s Bloomberg: Former Vice President Mike Pence is calling for an end to the Federal Reserve’s dual mandate, saying the central bank should focus solely on fighting inflation and leave creating jobs to Congress and the president. I don’t believe that’s a good idea. When there is a negative supply shock such as the Ukraine War, it make sense to allow modestly higher prices for a period of time, rather than depress non-oil prices sharply enough to stabilize the overall price level. That’s why I favor targeting NGDP rather than inflation.If Congress wishes to give the Fed a single mandate, it should not be inflation.  Rather, it should be the thing that impacts both inflation and employment. That thing is sometimes called “aggregate demand”. But aggregate demand is too poorly defined as a concept to be included in a Congressional mandate. (Although I suppose you could say the same about inflation.) Instead, a single mandate might use a real world proxy for aggregate demand, such as national income. Here’s a possible Fed mandate: The Federal Reserve shall insure a stable path for total national income at a growth rate that is consistent with a relatively low inflation rate over time. If Congress insists on a specific figure for the average inflation rate, that’s fine. But I doubt whether Congress could agree on such a figure.With my proposed mandate, the Fed would be effectively targeting NGDP. In that case, there would be no need for specific inflation and employment mandates, as NGDP is the thing that influences both inflation and employment. (0 COMMENTS)

So far in this exploration of Randall Holcombe’s Following Their Leaders: Political Preferences and Public Policy, we’ve looked at how Holcombe views the interaction of voters and the democratic process. To briefly recap, Holcombe argues that voters have both instrumental preferences, which are about the outcomes they prefer, and expressive preferences, which are about what voters prefer to express. But expressive preferences and instrumental preferences are not always the same. Since casting a vote does not create an outcome, voters will tend to act expressively, not instrumentally, when casting their vote. Because elections aggregate expressive preferences, not instrumental preferences, we cannot make valid inferences about the outcomes voters actually prefer by referencing election results. Additionally, voter preferences tend to be anchored on a key point – a single issue, a political identity, party loyalty, a particular leader – and the vast majority of a given voter’s preference on political issues will be derived from that anchor. Someone may anchor on the identity of being a patriotic American, decide that the Republican party values patriotism more, and will then tend to adopt whatever the Republican party line is for most political issues – and if the official party line changes, they will change their opinion right along with it. But this analysis so far focuses on the typical voter. There is another group of people in democratic political systems, who face different incentives and form their preferences in different ways. These are the elites – such as politicians, policymakers, bureaucrats, and lobbyists. Unlike the typical voter, the political preferences of the elites will tend to be instrumental rather than expressive, because elites actually do influence outcomes in a way voters don’t: For reasons already discussed, their political preferences are expressive. This applies to most citizens and voters. However, an elite few individuals make public policy and can affect outcomes, so those individuals – members of the political elite – will have instrumental preferences. Holcombe argues that a relatively small group of elites are the ones who actually craft policies and influence political outcomes, with the vast majority of the population closed out from this process. He does not present this as some sort of nefarious, deliberate conspiracy among the elites to keep the masses disenfranchised. Instead, he argues, this is an inevitable part of any system of public policy, due to transaction costs: The factor that separates the political elite from the masses is transaction costs. A transaction cost is anything that stands in the way of a mutually beneficial exchange. When transaction costs are low, people are able to bargain with each other for their mutual advantage. When transaction costs are high, they prevent people from bargaining with each other even when there are exchanges that would benefit them in the absence of transaction costs. However, transaction costs are not evenly distributed for all exchanges – some groups will face higher transaction costs than others. Groups facing low transaction costs can profitably participate in a system while groups facing high transaction costs will be unable to benefit. Pollution created by a steel mill provides a good outline of how this process works: Markets make it easy for those who want to buy steel to do so from those who want to sell steel. They face low transaction costs and can maximize the value of resources to themselves. The tens of thousands of residents in the vicinity of the mills might be willing to bargain with steel mills to reduce their pollution if it were possible, but fashioning a bargain that would require tens of thousands of people to participate would be difficult. Transactions costs are high enough to prevent a bargain from being struck. As a result, the surrounding residents bear the external costs of breathing polluted air. The value of resources is maximized for those who face low transaction costs – the steel mills and automobile producers – but not for those who face high transaction costs – the people who breath polluted air. This uneven distribution of transaction costs exists in political systems as well. Well connected political insiders face low transaction costs in bargaining with each other over public policy. Meaningful negotiation over policy being carried out by tens or hundreds of millions of individual citizens simply isn’t feasible. But though markets and politics can both have unequal distributions of transaction costs, this issue tends to be more severe in political systems by their very nature: The decentralized nature of markets makes transaction costs low for most people. Anyone can enter a Walmart, or a Toyota dealership, and make mutually advantageous exchanges that benefit the buyer and seller. The centralized nature of political decision-making creates high transaction costs for most people. Thousands of people cannot simultaneously participate in designing public policy, so by necessity public policies will be designed by a few individuals who face low transaction costs and can bargain with each other…People in the high transaction cost group are unable to enter the negotiating process. This concentration of influence among a small group of elites is often protested by populists on the left and the right. However, Holcombe argues that because this situation exists due to unavoidable transaction costs, attempts to ouster the elites through populist takeovers are almost intrinsically self-defeating: The populist message argues against elite control of government, but ultimately elites must design public policy because, if for no other reason, large numbers of people cannot all have a meaningful voice in policy design. Transaction costs are too high. So, while populist policy does not say so, it argues for replacing one set of elites with another. When populists control government, they become the political elite, almost by definition. They are the ones who design public policy. However, this does not mean that there is no division between instrumental and expressive preferences among elites. The division, however, operates differently among elites than it does with voters. While voters may show expressive preferences through voting for policies they wouldn’t actually choose if making an instrumental choice, elites will outwardly express policy ideas that don’t reflect the policies they pick when making instrumental choices: While the elite want to be cautious about expressing specific policy preferences, they have good reason to be informed about policy alternatives and the expected consequences of implementing public policies. The elite determine public policy, so their preferences are instrumental. The preferences they express are vague and oriented toward appealing to citizen feelings and emotions, but the preferences they act on are specific and well informed. The fact that voters have extremely low levels of political information has been well documented for decades. Huge swaths of voters will passionately support the Republican or Democratic political tickets yet, when questioned or tested, be utterly incapable of explaining the specific mechanisms by which their party’s policies will create desirable outcomes, or even telling which policies are associated with which party. Knowing that voters often “have only the vaguest idea about what they are supporting”, elites are deliberately vague about their intentions: Recognizing that the demand for accurate and detailed information on the part of citizens is low, parties and candidates provide very little information of this type. Platforms are deliberately vague to broaden their appeal. Citizens will find little to disagree with in a vague platform. Meanwhile, because citizens adopt political preferences that make them feel good, parties and candidates try to deliver feel-good messages. In the next post in this series, we will look at how this difference between the preferences of the elites and the preferences of voters come together to form Holcombe’s overall picture of the democratic process. (0 COMMENTS)

A sample of one proves nothing, but it can at least fail to disprove some theory and new raise questions. A fascinating but terrible Wall Street Journal report tells the story of Daniel Swift, a Navy SEAL who had deserted and died fighting in Ukraine earlier this year (“‘War Is Fun’: The Navy SEAL Who Went to Ukraine Because He Couldn’t Stop Fighting,” May 12, 2023). After deployments in Afthanistan, Irak, and Yemen, Swift was not not able to adapt to ordinary social life. “War is fun,” said a US Army veteran. In many ways, the story of Mr. Swift is consistent with the economic way of looking at individual choices including those involving violence. UCLA economist Jack Hirshleifer reminded us that there are two broad options in life: peaceful cooperation or violence. Swift’s life story confirms that some individuals have a comparative advantage in violence, whether it is biologically innate or acquired or a combination of both. A comparative advantage describes what one can do comparatively better than some others and thus specialize in. Adam Smith believed that comparative advantage was acquired: “The difference between the most dissimilar characters, between a philosopher and a common street porter,” Smith wrote in The Wealth of Nations, “seems to arise not so much from nature, as from habit, custom, and education.” One problem is how, in a free and civilized society, some accommodation can be reached with violence-prone people. One way is to punish them when they are found guilty of unjustified violence. Another one is to bribe them with consumption opportunities if they stay peaceful. Whether Mr. Swift was attracted to the special forces because he already had a comparative advantage in violence or whether he mainly acquired it there, I do not know. Regarding the other army veteran already quoted on the fun of war, the Wall Street Journal also reports: Civilian life, he added, didn’t offer the same camaraderie or sense of purpose: “War is easy in many ways. Your mission is crystal clear. You’re here to take the enemy out.” But what did people like him and Mr. Swift learn in school? Didn’t they learn in some way that life is more complicated than camaraderie in ordered missions? Looking at the memoirs Swift self-published under a pseudonym after his desertion (and available on Amazon), it’s not clear that he learned anything else than sports and wrestling in high-school—although his book is engaging. The dysfunctional families in which he and many of his childhood friends lived certainly did not help. He wants to have us believe that his wife did not either, but it’s easy to understand that long deployments are difficult for everybody in the family. After Swift came back from his last deployment, he faced what psychologists call “adjustment disorder.” He was arrested for domestic violence and charged with false imprisonment, children endangerment, and domestic battery. His wife obtained a protective order and was awarded a large part of his salary. He could not see his four children, which he seemed to love, although perhaps gauchely. In his book, he denies the charges of violence. A felony conviction would have ended his military career, which is the only thing he knew. He deserted before his trial. Another reflection is in order, which is often neglected in pacifist circles. Men who have some comparative advantage in violence are useful to protect others against unjust violence. Unjust violence will always exist. Protecting even imperfect liberty has a value. And, of course, soldiers are not all, and should not be, violent brutes (“killing machines,” as Trump proudly said of “our boys” from the depth of his wisdom). But even when a (defensive) war and its methods are just, it remains a difficult challenge in a free (or more or less free) society. (1 COMMENTS)