Ethical Foundation of Capitalism
Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
The essence of Government is power; and power, lodged as
it must be in human hands, will ever be liable to abuse.
[James Madison (1829) Speech at the Virginia Constitutional
Convention. The Writings of James Madison: 1819-1836 (1910),
ed. Galliard Hunt, p. 361. (KL 4548).]
Public choice theory has been the avenue through
which a romantic and illusory set of notions about the
workings of governments and the behavior of persons
who govern has been replaced by a set of notions that
embody more skepticism about what governments can
do and governors will do. ... [P]ublic choice offers a theory
of governmental failure that is fully comparable to the
theory of market failure that emerged from the theoretical
welfare economics of the 1930s and 1940s. [James
Buchanan (1984) “Politics without Romance, in Buchanan,
J. M. and R. D. Tollison (Eds.) The Theory of Public Choice II.
University of Michigan Press.]
I.
Introduction: Can Politics be Ethical?
This chapter explores the role of ethics in governance, especially that
subset of ethical dispositions that support both democratic governance and
commerce. Internalized ethical dispositions affect voter assessments of
policies alternatives and the performance of those holding high offices, as
well as preferences over types of governments. Ethical dispositions partially
determine how policies are implemented and the consequences of those
policies though effects on the behavior of the persons charged with creating
and enforcing those policies and those affected by them. A law is more
1
likely to be implemented as intended by a bureaucracy staffed by dutiful
rule-following persons with a strong work ethic and some practical wisdom.
A service is easier to provide if the persons using them are honest and
respectful of other persons sharing the service. A new regulation is more
likely to bind behavior if persons in the community regard law-abiding
behavior to be virtuous and praiseworthy.
The utilitarian case for government interventions beyond civil law
assumes that internalized ethical dispositions (and bargaining) fail to resolve
externality and public goods problems in the private sector, but do so in the
public sector. In such cases, there are a broad range of externality, public
goods, and coordination problems that can potentially be reduced through
government interventions that alter private incentives. Remedies can make a
commercial society more attractive by reducing both losses and unrealized
gains associated with such problems.
If, however, governmental policy makers are not utilitarians and are not
driven by social or electoral pressures to behave as if they were so, the case
for intervention is weaker. In such cases, government interventions may
reduce rather than increase aggregate utility over that which emerges in a
commercial society under laissez faire with a supportive civil law system.1
That counterproductive policies are possible for authoritarian regimes
seems obvious, but may be less so for democratic regimes. However, in
either case pragmatic policy makers and those who have internalized norms
that tend to undermine commerce often have reasons to adopt polices that
reduce the extent and scope of value-increasing competition and
innovation, and thereby material sources of satisfaction and happiness in
their communities.
This problem is not simply a matter of whether policymakers are ethical
or not. A wide variety of possible formal legal and regulatory systems can
Here I use laissez faire in the sense used by Mill rather than Spencer, as allowing for modest regulations, support for education, and social insurance programs. It is
used to contrast with the broader scope of authority delegated to contemporary mixed and social democratic states. The continuum of the potential delegation of
authority to a government may be usefully divided into three intervals: laissez faire, a state with relatively little authority beyond protecting the rights defined by civil law;
mixed or intermediate: a state with substantial but limited authority to intervene in markets and life in general, and social democratic: a state with essentially
unconstrained authority to intervene as seems useful.
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
undermine commerce and democracy. Many of these have ethical
foundations. For example, Aristotle’s argument against interest on money
loans can be (and have been) incorporated into law. Strict laws against usury
reduce or eliminate the banking and finance industries. The potential
demand for and supply of credit still exists, but only cumbersome legal (and
illegal) workabouts for realizing those gains are possible under such laws.
These increase higher transactions costs and risks for lenders and
borrowers. Such laws reduce commerce beyond the financial sector through
effects on the demand for final goods, intermediate goods, and input
markets. Markets for housing and automobiles and their capital and labor
inputs are all smaller than they would have been without well-functioning
credit markets.2
With respect to political institutions, ethical dispositions may support,
undermine, or rule out democratic governance and equality before the law.
Many absolute ethical principles tend to narrow the scope for dissent
and debate. Tolerance may be deemed evidence of dereliction of duty rather
than intellectual and moral modesty. Openness to alternative ideas may be
regarded as sacrilegious rather than evidence of thoughtful deliberation or
tolerance. Families rather than individuals might be regarded as the proper
center of responsibility and virtue. Privileged rights to participate in
governance may be regarded as proper rewards for a family’s past
contributions to their society, rather than unearned or unjust privileges.
Elections may be regarded to be inferior to and less honorable than expert
governance or rule by elites.
The remainder of the chapter explores the extent to which
well-functioning democracies, like commercial societies, may be said to have
ethical foundations. It demonstrates that without ethical support,
democratic governments are likely to be indecisive, poor, and corrupt. In
such cases, democratic governments are unlikely to remedy the monopoly,
externality, public goods, and income distribution problems of concern to
utilitarians. If governments do not routinely do so, then utilitarian
conclusions about the proper scope for government authority have to be
modified to take government failures into account. Additional caveats have
to be added to Pigou’s analysis of remedies for market failures.
Again, the conclusion that democratic systems of governments require
supporting ethical dispositions is not to suggest that societies without those
dispositions lack ethical theories or are necessarily unethical. It is simply to
point out communities without such supporting ethical and legal systems
are less likely to have well-functioning democratic systems of governance
and so less likely to have democratic governance.
It is interesting to note that both von Mises and Rawls who represent
the right and left ends of the liberal spectrum of the twentieth century
agreed that ethical dispositions are even more important for democratic
politics than for markets.
If elections are accepted as an appropriate means of collective
decisionmaking, conclusions about the ideal breadth of suffrage and
obligations to vote or not clearly vary with ethical theories, as does the
proper line between community authority and individual autonomy within a
given democratic regime.3
The observance of the moral law is in the ultimate
interest of every individual, because everyone benefits
from the preservation of social cooperation; yet it imposes
on everyone a sacrifice, even though only a provisional one
that is more than counterbalanced by a greater gain. To
perceive this, however, requires a certain insight into the
connection between things, and to conform one’s actions
in accordance with this perception demands a certain
2
See Kuran (2010) for an overview of the financial methods of Moslem countries in which charging interest on loans is illegal. See Blitz and Long (1965) for a short
history of usury laws and an economic analysis of their consequences. Glaeser and Scheinkman (1998) argue that moderate usury laws may serve as an indirect vehicle for
social insurance.
3
That a subset of supreme values may undermine democracy is an argument made many times by Bernholz (2001, 2004).
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
strength of will. [Mises, Ludwig von (1927 / 2012-01-02).
Liberalism (p. 34). Ingram Distribution.]
The leading political actors are guided therefore in part
by what they regard as morally permissible’ and since no
system of constitutional checks and balances succeeds in
setting up an invisible hand that can be relied upon to guide
the process to a just outcome, a public sense of justice is to
some degree necessary. [John Rawls (1999) A Theory of
Justice. Harvard University Press. Epub edition, page 430.]
Ethical predispositions are arguably more important for systems of
governance than for systems of commerce, because malfeasance in the
application of the law can undermine both political and economic systems.
Prudent officeholders will deliberate on the choices before them and act in
a manner consistent with moderation, honesty, and temperance. Imprudent
leaders will act on impulse, take needless risks, accept bribes, and be apt to
adopt policies that are neither moderate nor temperate.
The results of policies chosen by virtuous men thus tends to be
better--at least on average--than those chosen by immoral men, other things
being equal. A wise and moral man or woman can be trusted to make good
choices, that is to say policies consistent with the personal ethics of their
supporters.4
for the convenience of the rulemaking group. The dominant group might,
for example, reduce all others in the community to slavery or serfdom. (The
lives of slaves and serfs are normally both rule bound and unpleasant.)
A. Ethics in Authoritarian Regimes
It might seem “obvious” that authoritarian regimes operate without
internalized ethical dispositions, but this is unlikely to be the case. Military
organizations routinely promote virtues such as honor, discipline,
toughness, and bravery through praise, esteem, medals, status, and rank.
The military theory of distributive justice include such platitudes as: “to the
victor go the spoils,” “power grows out of the barrel of a gun,” and “might
makes right.” These are not simply statements of the facts associated with
victory, but a theory of just deserts. The fruits of victory should go to the
clever, strong, and brave.
Chapter 6 implies that a military organization composed of persons
without such internalized norms would be less effective than ones with
them, and so less likely to emerge victorious in military contests. Indeed
Montesquieu argued that particular ethical dispositions ground both
democratic and authoritarian regimes.
II. A Digression on the Role of Ethics in the Emergence of
Government
Insofar as the aim of an authoritarian regime is power and plunder, the
rules imposed on persons outside the organization are likely to differ from
those inside the ruling group. Many will conflict with both utilitarian and
contractarian theories of law and governance and in this sense be unethical,
although they may be consistent with military ethics and advance the goals
of military organizations.
What might be described as pragmatic or authoritarian governments
may emerge from an organization to intimidate persons within “their”
territory with threats of violence. Such groups may organize a military and
use it to impose rules on others. Rules in such systems would be adopted
When slavery is not possible or less profitable than more open systems,
despotic groups may adopt laws that promote economic development,
because such laws ultimately provides them with greater wealth and power
than the alternatives (Tullock 1972). Such “stationary bandits” have what
Olson (2000) terms an encompassing interest in the economic resources of
4
A model of moral voting behavior and evidence of morality-driven policy choices in the United States are developed in Congleton (2007b). See Gotwalt (2002) for
evidence on the effects of religion-based ethics on voting in the United States with respect to state policies on abortion. See Fedderson et. al. (2009) for experimental
evidence of ethical voting.
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B. Ethics and the Emergence of Non-Authoritarian Regimes
their societies. Laws that promote economic development increase
long-term expected revenues from taxation, rent extraction, and extortion.
Nonetheless, one rarely observes well-functioning markets in
dictatorships. This is partly because the tenure of dictators is highly
uncertain.5 The uncertainties of power tends to induce the authoritarian
rulers to live for today rather than plan for the future. It is also partly
because the support necessary to hold on to power is often produced with
laws granting special privileges to persons, families, and towns that support
the central government. Moreover, a ruling group is more likely to retain
power if its opponents are poor rather than well financed.6 Such rules
reduce economic prosperity by reducing competition and blocking
innovation from both unfavored and disfavored individuals and
organizations.
Of course, it is possible that a dictator could be a utilitarian—on
possible version of what Plato scholars term a philosopher king—but such
instances are very rare historically--so rare that they are beyond the scope of
this chapter. That the commercial society emerged from more or less
democratic societies (and vice versa) is a sufficient reason to focus the
remainder of the chapter on the many roles that ethics play in democratic
systems of government.
The emergence of a formal system of laws and law enforcement does
not necessarily begin with a military organization, although they are often
useful. A community government may emerge informally as, for example,
meetings of persons affected by problems gather to discuss and adopt rules
that are informally enforced through agreement, praise, shame, and
internalized ethical dispositions. Such informal rulemaking bodies may
gradually become more formally organized as the groups record their
decisions, adopt written rules for their decision-making procedures, and
create procedures for enforcing their rulings. Decisions about new rules or
interpretations of old laws may be reached via consensus or majority rule at
informal council meetings or assemblies such as the ancient tings of
Scandinavia or grand councils of England. Such decision making bodies
may be regarded as governments when they combine law-choosing
procedures and law-enforcing authority.7
Being consensus based, the rules adopted by such community
governments tend to reflect the preexisting ethical dispositions of
community members. Many of their laws thus simply reinforce the informal
norms already internalized by most members of the community. In such
cases, the law may be said to have a moral character and to be grounded in
ethics, as argued by Aristotle, Locke, Bentham, and Kant among many
others. Through time both the informal and formal laws would be subject
to evolutionary pressures of the variety that Spencer and Hayek discuss.8
5
See Bienen and Van de Walle (1989) for evidence of high turnover among dictators.
6
See Tullock (1972) for a short exposition on this idea or Mesquita, Smith, Silverson and Morrow (2003) for a more thorough development.
7
Many early colonial towns and villages in the New England colonies of North America exhibited such foundings and transitions. A few instances are discussed in
Congleton (2011b).
8
Locke and Kant suggest that even in the case in which a community is grounded in a social compact or universal law, many laws would lack a foundation in ethics.
They may be adopted simply to solve problems of life in a community, such as rules for walking or driving on the right. Bentham argues that there are also ethical rules
that should not be codified in law because the benefits of doing so would be smaller than the costs. In other cases, the laws may conflict with ethical theories.
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Only rules that tend to (or at least appear to) increase prospects for long
term survival tend to be transmitted across the centuries.9
Such emergent governments tend to have moral legitimacy from both
contractarian and utilitarian normative theories, insofar as they advance the
shared interests of their residents. The contractarian theory of the state does
not require a formal constitutional convention and unanimous vote, but
rather the assent of the governed to the core procedures and constraints of
government. Insofar as a government advances shared interests, such an
assent may be presumed. Emergent states can also be consistent with
normative theories that stress voluntary relationships, as with many natural
rights doctrines.10 Indeed, Locke’s political theories were informed by the
experiences of the North American English colonists.
C. Ethics and Governance in the Long Run
After a government is established, a variety of considerations determine
its durability and tendency to evolve in particular directions. In other work,
I have emphasized that marginal constitutional gains to trade are
commonplace, and that most governments therefore are gradually reformed
by those with the authority to do so. Formal and informal reforms are
adopted when mutual advantages from minor reallocations of authority
emerge as circumstances, organizational goals, and the persons holding
positions of authority change. Amendment procedures also tend to
combine written and unwritten aspects, which determine how legitimate
reforms can be adopted.
laws and adopt new laws, and constraints on their policy making authority.
Many of these tend to align the interests of office holders with the laws that
brought them to office. The laws that did so are likely to be considered
good or just in the minds of those rising to high office. In addition to
procedures that determine who holds what offices, however, most
constitutions define at least in a loose way the domain of authority
associated with specific offices. In most democracies, they also require
regular elections and include rules against censorship, against the taking of
private property without compensation, assurances that particular services
will be provided, and so on. The implementing laws for such restrictions are
often complex, although they can often be summarized with a few
sentences or paragraphs.
That ethical dispositions can substitute for formal rules has been
mentioned several times in previous chapters. The same logic applies to
constitutional governance. Indeed, it can be argued that ruleful governance
is especially dependent on the internalized norms and ethical dispositions of
persons with authority. As the Latin expression, Quis custodiet ipsos custodes?
implies, constitutional laws are unlikely to be directly policed even in those
rare cases in which a supreme court exists with authority to do so.
Constitutional law is most likely to be faithfully followed if those most
persons directly subject to it have internalized supportive ethical
dispositions. This is most likely when the selection process tends to favor
persons with particular norms, when those norms are reinforced by those in
authority, and when the constitution is consistent with the ethos of the
community of interest.11
Written constitutions describe the procedures used to select persons for
government office, the procedures that those officials use to refine existing
9
The multiplicity of ethical theories and institutions around the world suggest that a broad range of rules can advance a community’s survival prospects.
That same evidence suggests that only a relatively small subset of those formal and informal rules are supportive of democratic governance or commercial
societies.
10
For example, Nozick (1974, ch.5) discusses how a centralized enforcement authority might emerge from a society that initially used only informal procedures for self
defense, rather than through the imposition of laws by a dominate military organization.
11
For a relatively detailed assessment of governmental institutions from contractarian and utilitarian perspectives, see Buchanan and Tullock (1962). Congleton (2011)
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Changes in norms can thus induce changes in constitutional law. For
example, the decline of royal power in most Western European countries
during the late nineteenth century was at least as much a consequence of
shifting norms as of formal reforms of their written constitutions. For
example, until just a few years ago, all laws in Norway were officially
proclamations of the king, although the king had long internalized the
unwritten rule that he would proclaim only what the Norwegian legislature
“recommended” to him. Unwritten rules are arguably more important than
the written ones, although both clearly matter. A written constitution can be
ignored and elections canceled by rulers who lack internalized dispositions
supportive of democracy and constitutional governance. This has, of
course, been demonstrated numerous times in the past century in Europe,
Africa, and South America.12
Among the civic virtues for legislators are duties to create only laws that
advance the general welfare, to adopt rules that apply to all, to follow the
laws adopted, and to conduct regular and honest elections. As in the case of
other areas of ethics, these unwritten laws are rarely enforced by the courts,
but are reinforced through electoral pressures, praise and shame, and
internalized supporting ethical dispositions. All this is not to say that
written constitutions are unimportant, but it is to say that internalized
ethical dispositions that support those documents are also important.
III. Ethics and the Feasibility of Democratic Governance
Many contemporary theories of democracy assume that governments
grounded in majority rule are always feasible and the results always
desirable, or at least superior to those of authoritarian regimes. There are
several precondition for such conclusions; however, several of which are
more likely to be satisfied when particular ethical or normative dispositions
are internalized by voters and their representatives. Two fundamental
problems are reviewed in this section: the cycling problem and the
redistributive poverty trap. The early public choice literature showed that
majority decision making is not always consistent, which reduces the
stability of democratic regimes. There is also the risk that when choices are
made, the prosperity of a community may be undermined by redistributive
polices that eliminate incentives to work and save.
A. Ethical Dispositions and Majority Cycles
To illustrate why widely shared norms may be a precondition for
democracy, imagine a village located in a territory where roving bandits
exist. The community decides that a defensive wall would solve problems
associated with such raiders. Suppose that the wall will cost 12 lira. Now
consider efforts to divide the cost of the wall among three groups,
shepherds, masons, and merchants. One proposal for financing the wall
would be to simply divide up the costs equally among the three groups.
Such an apportionment may be plausibly justified by the common interests
advanced by the wall. The distribution of the tax burden can be written as
(Tshepherd, Tmason, Tmerchant) which in this case is (4, 4, 4).
A second proposal for funding the wall's construction might be based
on comparative advantage. Perhaps, the wall should be provided by those
best able to provide the needed services, which in this case would be those
already skilled at wall construction. Some might argue that "clearly" the
middle class masons should be public spirited and construct the wall for the
city, ( 2, 8, 2). Another proposal might be developed based on differences in
the ability of the townspeople to pay for the wall. Proponents of that view
might reason that the community should take account of physical or wealth
differences among citizens. After all, some persons can more readily
shoulder the burden than others ( 1, 4, 7).
A fourth proposal might account for the fact that the shepherds could
benefit from learning the craft of masonry, and, moreover, have more free
time available for undertaking the required work. The shepherds thus have
suggests that the fine grained nature of constitutions allows a variety of “constitutional gains to trade” to exist, which allows constitutions to be revised through time
both formally and informally.
12
See Gordon (2009) for an overview of the role of civil culture (civil ethics) in constitutional governance and the durability of political institutions.
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the most to gain and the least to lose by undertaking most of the work.
Indeed, it could be claimed that the merchants were already carrying the
burden of expanding the town's cathedral ( 6, 5, 1). Since all four tax
systems are sufficient to finance the public good of interest here, any will
serve.
Note, that majority rule cannot chose among them. There is a
majoritarian cycle. The first proposal loses to the second, the second by a
vote of two to one. The second similarly loses to the third, the third to the
fourth, and the fourth to the first. Thus, no defensive wall may actually
emerge from democratic deliberations. As a consequence, the town will
continued to be ravaged by the roving bandits or may be annexed by one of
the neighboring dictatorships.
If only one tax system is supported by a community’s dominant
normative theory, the others would be rejected because they yield burdens
that are “improper” or “unfair.” In effect the tax shares of other divisions
are reinforced by a guilt or shame tax, that more than offset the lower tax
payments associated with a less ethical divisions of tax burdens. For at least
one of the two groups that benefit from such immoral or unfair proposals,
the cost of violating their internalized norms must be greater than their
material benefits.
In cases in which community norms do not lead directly to particular
policy outcomes, norms may limit the domain of policy alternatives in a
manner that helps assure stability. For example, a consensus that taxes
should be based on ability to pay limits tax systems to a relatively small
subset of those which can fund the desired services, although it does not
imply a unique distribution of tax burdens.13 Similarly, one could imagine a
customary method of finance existing, and deference to custom can also
reduce cycling problems. Cycles may also be curtailed by procedural norms.
For example, it may be widely regarded as improper, unfair, or
13
14
unsportsmanlike to reintroduce tax schemes that have already been rejected
or to use other than whole numbers in one’s proposals, deliberations might
end with the fourth proposal.14
In this manner, shared norms can provide a super-constitutional
foundation for decisive majoritarian decision making. They can do so at
both the constitutional and day-to-day levels of democratic politics. Such
norms may subsequently be formalized as constitutional law.
B. The Median Voter, Redistribution, and the Poverty Trap
The diversity in the faculties of men, from which the rights
of property originate, is not less an insuperable obstacle to a
uniformity of interests. The protection of these faculties
is the first object of government. From the protection of
different and unequal faculties of acquiring property, the
possession of different degrees and kinds of property
immediately results; and from the influence of these on the
sentiments and views of the respective proprietors, ensues a
division of the society into different interests and parties.
[Hamilton, Alexander; Jay, John; Madison, James (1980 /
1787/2011-06-09). The Federalist Papers (Annotated) (Kindle
Locations 1014-1020). ]
Both utilitarian and contractarian logic support some redistribution of
income by governments; although in each case the extent to which a
democratic government should be given the authority to do so depends on
the expected results. Redistribution, per se, is not a good. It should either
increase aggregate utility or decrease support for the post-constitutional
society.
Usher (1981) demonstrates that tax systems that preserve the pretax rank order of income tend to be more stable under majority rule than those which do not.
This cycle is partly contrived for purposes of illustration. However, such cycles are always associated with “dividing a pie” among pragmatists under majority rule. If
each voter wants a larger slice of the pie (or smaller part of the tax burden to pay for it), there is always another division of the pie that can achieve it and which is
supported by a majority--albeit not simultaneously for all. The four divisions of tax burden used characterize only one of the infinity of possible cycles.
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There are several potential practical problems with majoritarian
redistribution. First, there is the cycling problem noted above. An
unconstrained redistributional authority tends to generate endless cycles.
Either no choices may emerge or a series of radically different patterns of
redistribution, rich to poor, poor to rich, middle to poor and rich, etc.
Second, if one constrains redistributional policies to particular tax and
transfer instruments or assumes that ethical considerations limit the domain
of “acceptable” redistribution so that the cycling problem is avoided, too
much or too little redistribution may occur.
Problems with noncyclic redistributive choices can be illustrated with a
few equations and a diagram.15 Suppose that a demogrant program is
considered. A demogrant program is financed with a uniform tax on
everyone’s income of t percent and the proceeds are used to provide equal
lump sum payment to each person in society. Each voter would have
after-demogrant income of Xi = (1-t)Yi + G, where Yi is voter I’s pretax
income, t is the tax rate, and G is the demogrant. Since G is paid for
through taxes, NG =  tYi which after dividing both sides by N implies
that G = tYA , where YA is average income. If individuals act as pragmatic
income maximizers, they will favor the tax that sets their marginal benefits
from the demogrant equal to their marginal tax cost. However, this equality,
perhaps surprisingly, may never occur.
Figure 11.1 illustrates a median voter’s net benefit maximizing choice
under two scenarios. In the first, taxes do not affect work effort or income
in which case the marginal benefit from the tax is simply tYA and its
marginal cost is simply Yi. If a voter has below average income, Yi < YA,
the optimal tax is 100%. In that case, the marginal benefit from the
demogrant exceeds the marginal cost of the tax over the full 0-100% range.
If a voter has above average income, the reverse holds, and his or her
optimal tax is 0%. If the median voter has below average income, as is
15
16
usually the case, the tax chosen will 100% and the demogrant will cause
every voter’s income to be the average of the community.16
In the second case, work, saving, and investment are all affected by
returns from those activities, thus a tax and redistribute system tends to
reduce effort and average income. This incentive effect tends to change the
median voter’s ideal tax rate. The marginal benefits of higher taxes are
lower because it reduces work effort and income levels. Marginal benefits
are now MB=YA+tYAt withYAt < 0. The marginal cost is now, MC = -Yi
+(1+t)Yit. which is higher than before, because the voter will work less him
or her self and so have lower pretax income.
Figure 11.1 The Transfer Poverty Trap
MB=YA
MB=YA + tYAt
i
MC = Yi + (1-t) Y t
MC = Yi
T*
100
Tax Rates
Given the incentive effect of very high taxes, the median voter’s
preferred tax is likely to be less than a hundred percent even if they have
This demogrant program is a slightly simplified version of that used in Meltzer and Richards (1981).
The analysis assumes that the information problems confronted by voters are solved through aggregation. The Condorcet Jury Theorem implies that if a sufficient
number of voters are diligent policy analysts and gather enough information to cast reasonably intelligent votes (e.g. ones that are likely to advance their pragmatic and
moral interests), competitive electoral outcomes provide unbiased estimates of the policies that most advance the interests of the median voter (Congleton, 2007a).
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below average income. However, the poorer the median voter is relative to
average income, the higher taxes tend to be, and there are cases in which
the median voter will still prefer a hundred percent tax rate. When taxes will
be high, work effort will be low, and average income will also be low. As
taxes approach 100%, personal income levels may approach subsistence
levels and commerce declines to a pittance. Consequently, demogrants also
fall to subsistence levels. (A somewhat more general analysis of such a tax
system is undertaken in the appendix.)
One possible solution to this poverty trap is a series of constitutional
constraints on taxation similar to those analyzed by Brennan and Buchanan
(1980). By restricting tax rates and the tax base, such constitutional
constraints reduce the problem by narrowing the tax base available for
transfer programs and limiting tax rates. However, there are few if any
historical examples of such constraints beyond the “takings” clauses of
most liberal constitutions.
inappropriate types of taxation or transfers. The greater the guilt or loss of
self esteem is at the margin, the lower the optimal tax is for the median
voter, now represented as T**, with T**<T* < 100.
Such norms affect the size and scope of markets indirectly through
effects on government policies, rather through direct effects on market
output. Given such norms, tax and transfer programs may be ruled out
entirely, or only worse case outcomes addressed through social insurance
programs rather than extensive tax and transfer programs. For example,
government income support programs may be targeted at persons
experiencing bad luck (unemployment or ill health), rather than below
average income. 17
Figure 11.2 Escaping the Transfer Poverty Trap
What appears to be more common in democracies with extensive
commercial economies are internalized tax and fairness norms that reduce
the domain of redistribution. For example, it may be widely believed that
market rewards reflect just deserts, that transfers undermine the virtue of
recipients, or that private property is sacred and tax and transfer programs
tantamount to theft. As one violates such internalized norms by increasing
the scope for redistribution, there is a virtue or guilt premium that must be
borne. Excessive tax and transfer systems may also be reigned in through
internalized utilitarian or contractarian norms. If the median voter has
internalized such norms, less redistribution will be tolerated, taxes tend to
be lower, and economic output higher.
Figure 11.2 illustrates the effects of such internalized norms on the
above demogrant program. The norms internalized by moderate voters
increase their personal marginal costs for tax and transfer programs by
amount v(t), which represents the guilt or loss of self esteem associated with
17
i
MC = Yi + (1-t) Y t + v(t)
MB=YA
A
MB=Y + tY
A
t
i
i
MC = Y + (1-t) Y t
MC = Yi
T**
T*
100
Tax Rates
Brennan and Lomaski (1997) argue that voters tend to vote expressively, which implies that their moral theories will tend to have greater weight in the voting booth
than in ordinary life. Although they are most interested in cases in which problems emerge from such voting behavior, insofar as market supporting ethical theories are
applied, the results will be policies that are more supportive of markets than self interest alone would have generated.
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IV. The Median Voter and More Modest Democratic Failures
After the cycling and poverty traps are overcome, democracies may
operate tolerably well, indeed far better than their authoritarian alternatives.
However, this is not to say that majority rule works perfectly from the
vantage point of ethical theories that use indices other than majoritarian
ones to assess the merits of policy choices.
For example, even a well-functioning democracy is unlikely to adopt or
implement the policies recommended by welfare economics. To see this
recall that “middle of the road” voters tend to determine policy choices
under majority rule according to the median voter theorem. Consider the
policy preferences of a pragmatic voter over public service levels. Each
favors the service level that maximizes his or her net benefits given the cost
sharing rule. Because of differences in their marginal benefits from the
service, their ideal points differ. Differences in marginal benefits may reflect
differences in income, tastes, health, or time available for leisure. Figure
11.3 illustrates the ideal service levels of three different persons, Anthony,
Duncan, and Gordon who share the costs of some public good or service.
These three ideal points can be used to illustrate the process of voting
among net-benefit maximizing persons. Voters with linear marginal benefit
and marginal cost curves act as spatial voters, that is to say they will vote for
the alternative that is closest to their own ideal point. As drawn, Anthony’s
ideal point is the highest of the three (A*), followed by Duncan’s (D*).
Gordon prefers 0 over the other possibilities under the assumed equal
cost-sharing arrangement.
Note that in pair-wise elections, D* can defeat any other alternative,
because Duncan is the median voter, the voter whose ideal point is the
median of the distribution of ideal points. Anthony and Duncan will vote
18
for D* over any service level below D* and Gordon and Duncan will voter
for D* over any service level greater than D*. If D* is on the ballot, it will
be the outcome. The same logic can be extended to any odd number of
spatial voters in a one-dimensional choice setting.
The welfare economics used in the previous chapter to evaluate market
Figure 11.3 Selection of a Public Service
Level via Majority Rule
$/Q
MC = SMC
MB-A
SMB
MB-D
MC/3
MB-G
G*
Q**D* A*
Q
outcome can also be used to evaluate median voter outcomes. If the public
service of interest is a pure public good, the social marginal benefit (SMB)
curve is the vertical sum of the individual marginal benefit curves. If the
marginal production cost curve (MC) includes all costs, then it is the social
marginal cost curve. Together these assumptions imply that social net
benefits are maximized at Q**, which in this case is a bit less than the
median voter favors.18
If public production generated negative externalities, that the social marginal cost curve would be higher than that curve, and so the optimal level of the public service
would be lower. The early tests of nuclear weapons, for example, left large tracts of radioactive land and generated significant fallout. Military aggression imposes costs
on persons living in the area under dispute. Highway, metro, and office construction generates noise and congestion. We ignore such nontrivial externalities here to focus
on decisions comparable to those analyzed in chapter 10.
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Note that majority rule may be said to have “failed” in the same sense
that the private provision of public services did. Majority rule fails to
maximize aggregate utility or net benefits. Nonetheless, in this case, the
result is arguably an improvement over the former. More social net benefits
are realized at the median voter’s choice than in the private choice.
Other ethical theories can also be used to judge the outcomes of
majoritarian decision making. For example, from the point of view of
private ethics, some might argue that the effect of this policy on Gordon is
unethical. A natural right-based theory might note that the taking of
revenues from Gordon for use in this project without his consent,
resembles theft. Contractarians might insist that if coercion is wrong among
private parties it is also wrong for governments. Unanimous
decisionmaking, when possible, is superior to majority rule.19 In this case, a
consensus about service levels can be obtained by changing the cost sharing
rule. A Lindahl tax, for example, tends to generate unanimous support for
the social net-benefit maximizing service level.20
V.
Agency Problems: Privileges, Interest Groups, and Rent
Seeking
Problems associated with democracy are not exclusively those
associated with majority rule itself. In large democratic polities, considerable
authority is delegated to elected representatives and appointed bureaucrats.
As in any large organization there are a variety of agency problems that
have to be overcome if large governmental organizations are to be effective
mechanisms for advancing the interest of the residents in the territories
governed. These problems are arguably more severe for governments than
for economic organizations because the productivity of government
employees and agencies is more difficult to assess. There is rarely a balance
sheet that can be used to assess productivity in the same manner that
money profits allow for economic organizations.21
Overcoming the agency problems of governmental organizations are
thus arguably even more dependent on the internalized ethical dispositions
of their employees than are solutions in the private sector. If an agency is
well managed, staffed by hardworking and trustworthy persons, and
advances shared citizen interests “government” can be trusted to adopt and
implement good rules and regulations. If not, it cannot be.
A. Rent Seeking and Rent Seeking Losses
Among the most serious agency problems are ones associated with the
rent seeking activities of narrow interest groups and factions. The right to
assemble and petition government allows groups to form for all manner of
political, social, and economic purposes. Organized groups attempt to affect
policy indirectly through persuasive campaigns The policies favored are
often narrow ones that confer benefits on their members and costs on
persons outside the group in the form of higher prices, increased
transactions costs, or higher taxes. Commercial groups, for example, often
lobby for entry barriers of various kinds to shield their membership from
competition. Examples include explicit grants of monopoly privilege,
protective tariffs, regulations with grandfather clauses (which impose higher
19
James Buchanan often made this point, insisting on what he called “Wicksellian unanimity” as the proper way to choose public policy. A Lindalh tax has marginal tax
rates equal to the marginal benefits of the each voter at the utilitarian ideal service level, hence each tax payer prefers Q** to other service levels in that case. Nonetheless,
there may no be unanimous agreement to provide Q** over that provided with different financing.
20
Under a Lindahl tax system each person pays a tax (marginal cost share) equal to his or her marginal benefits at Q**. With these marginal cost curves, there would be
complete agreement about the optimal service level, namely Q**.
21
In principle, an encompassing ethical system such as utilitarianism or cost-benefit analysis might be used, but both aggregate utility and net benefits are often difficult
to measure.
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costs on new entrants), licensing, and a variety of subsidies. In many of
these cases, there is competition between groups seeking to be the
beneficiary of such privileges. In other cases, groups proposing and
opposing a new program, tax, fee, license etc. expend resources for
opposite purposes.
Arye
Losses from such activities have long been recognized. Models of those
losses, however, were post-world war II phenomena. Analytical models of
interest group activities were developed by Olson in 1965 and of the losses
associated with them by Tullock in 1967. The latter came to be called rent
seeking, a term coined by Anne Krueger in 1974. To an economist, a rent is
an unearned income, rather than an amount paid to use a room or house.
Tullock argued that resources are consumed by the process of seeking
policy reforms that reduce the national dividend or social net benefits, and
that those resources should be regarded as part of the deadweight loss of
market restricting policies.
Table 11.1 illustrates the escalating tendency of lobbying contests and
the effects that competition among interest groups have on their profits
from engaging in such contests. The Nash equilibrium implies relatively
high lobbying efforts and relatively low profits from such contests. In
evenly matched contests of the sort illustrated, each organization would
benefit if each would agree to limit the extent to which resources can be
invested in this process. However no other outcome is stable. Each can
potentially benefit from violating such informal agreements to limit their
efforts, assuming that the others adhered to it.22
Table 11.1: The Rent Seeking Contest
Gordon
1 Lobbyist
10
Lobbyists
50
Lobbyists
1 lobbyist
(A ,G)
(6, 6)
(A, G)
(4,8)
(A , G)
(1, 10)
10 lobbyists
(8, 4)
(5,5)
(2, 6)
50 lobbyists
(10,1)
(6,2)
(3, 3)
When economic interest groups succeed in their efforts to obtain
privileges, those outside the contest are often harmed by the results through
higher prices, higher taxes, or less variety--all of which tend to reduce the
size and scope of commerce. Perhaps surprisingly, the “crony capitalism”
that tends to emerge from rent-seeking contest tends to reduce the extent
of the commercial society.23
B. Ethical Interest Groups
Of courses, not all interest group activity is aimed at increasing profits.
What might be called ethical interest groups advocate policies that they
believe advance virtuous ends. A long series of economic and political
reforms in the nineteenth and twentieth centuries were advocated by such
groups. In the West, these reforms created the legal framework for
commercial societies and democratic governance. Public interest lobbying
may also partially counter the efforts of profit maximizing rent seekers, by
undermining their arguments and pointing out the narrow interests being
advanced.
However, not all ethical groups have goals or use only methods that are
consistent with the aims of welfare economics or utilitarian ethics. Contests
between ethically motivated groups also consumer resources and do not
22
For a mathematical examination of differences between ideological and pragmatic interest groups see Congleton (1991).
23
For an accessible overview of the rent-seeking literature see Congleton and Hillman (2015).
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always benefit others outside the contest. Whether net benefits or losses are
produced depends on the magnitude of the benefits produced for others
and the resources consumed by the rival groups.
The ethical dispositions of individuals in a community often encourage
morally-based lobbying efforts. Participating in such campaigns maybe
considered praiseworthy or virtuous behavior. Internalized ethical
dispositions may also tend to reduce personal incentives to engage in rent
seeking insofar as profiting from government privileges is considered
illegitimate or immoral. Firm owners, for example, might prefer to earn
their money “honestly” rather than as a consequence of a government
privilege or subsidies. Such norms may also discourage politicians and
bureaucrat from adopting laws that create privilege access to markets or
direct subsidies.
Anti-rent-seeking norms are unlikely to eliminate all rent seeking
campaigns. Nonetheless, as dispositions against theft and murder reduce
losses from those crimes, dispositions against rent seeking tend to reduce
losses from such political activities.
Another consequence of norms against rent seeking is that it is often
difficult to determine whether a particular group is a rent-seeking or an
ethical interest group. Moral narratives are nearly always part of the
persuasive campaigns of interest groups. Pragmatic groups often find it
useful (more persuasive) to argue that their preferred policies are public
spirited, rather than part of their strategies for maximizing profits or power.
It is a very rare group that will publicly argue that a particular policy is good
simply because it increases their profits. Moreover, coalitions of ethical and
pragmatic groups often lobby for the same policies.
Normative arguments would not be used, of course, unless it was widely
believed by interest groups that such arguments were persuasive; which is
most likely when the relevant ethical dispositions are commonplace within
the electorates of interest.
C. Ethics, Corruption, and Agency Problems
Of course, any laws adopted have to be implemented by government
employees who normally have some discretion over how a policy is
implemented. For example, employees in law enforcement and judicial
agencies have the authority to arrest persons that appear to have violated
the law, to conduct trials to determine whether or not the accused has
actually done so, and to impose punishments if that is the case. By doing so,
a legal system creates incentives for persons in a community to follow a law,
whether they accept the legitimacy of a particular law or not. At each step in
this chain the law enforcers are supposed to follow formal procedures,
diligently collect evidence, and exercise good judgment.
Officials within both national and local governments normally have
some discretion to determine whether to arrest, prosecute, or punish
individual transgressors. This discretion can be used to reduce losses
associated with laws in the exceptional case. It can also be used to shield
friends, families, and the powerful from the laws others must follow. The
latter, as opposed to the former, undermines the principle of equal
protection of the law. Corruption occurs when illegal methods are used to
obtain privileged exemptions from the law, as when a a policeman, district
attorney, or judge are bribed or threatened, and particular laws left
unenforced.
In general, the further up the chain of responsibility for creating and
enforcing the law one goes, the more difficult it is to punish favoritism and
corruption. This is in part because the methods of bribery and extortion
employed at higher levels tend to be more round about, the trading of
favors, the opening or closing of doors of opportunity, job offers and the
like. The more subtle the means, the more difficult it is to write laws that
block them, and the harder it is to enforce the laws adopted.
It is unlikely that a pragmatic bureaucrat would enforce the laws and
regulations as intended by legislators. Indeed, without internalized norms
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against taking bribes or trading regulatory favors, legislation may well be
adopted with opportunities for rent-extraction and graft in mind.24
Ethical considerations, as with ideas about the good life or good society,
are relevant for each level of normative analysis. The analysis to this point
also implies that the ethical dispositions of persons in the community of
interest partly determine the performance of both markets and political
systems.
VI. Ethics, Politics, and the Proper Scope of Authority for
Government
When particular ethical dispositions are commonplace in the
communities of interest. Majority voting is less likely to cycle and voting is
less likely to produce a poverty trap. The bureaucracy will more diligently
and honestly implements the policies chosen. Anti-rent-seeking and equality
before the law norms, tend to reduce the creation of rents and privileges
that undermine both democratic politics and extensive commercial
networks.
Just as the regimen of the healthy is not suited to the sick,
one must not try to govern a corrupt people by the same
Laws as those that suit a good people. Nothing proves
these maxims better than the long life of the Republic of
Venice, which still retains a simulacrum of existence, solely
because its laws are suited only to wicked men. [Rousseau
(1997/1755) The Social Contract. p. 135]
All the above implies that democratic governments are not necessarily
benevolent instruments for increasing aggregate utility. There are dilemmas
associated with majority rule, there are a variety of agency problems, and
the median voter herself may have interests other than maximizing social
welfare or aggregate utility. Clearly, the consequences of pragmatic and
unethical policy makers should be accounted for when thinking about the
optimal delegation of authority to a democratic regime.
There are at least three levels at which citizens may evaluate their
governments and proposals for reforms: (i) at the level of specific officials
or policies, (ii) at the level of the typical nature of the officials and policies,
and (iii) at the level of constitutional choice. Assessments at each of the
three levels have implications for the others, although those at the
constitutional level are arguably most important. For example, some
unfortunate policies may be deemed acceptable because of conclusions
reached about decision-making procedures. To favor majority rule is to
accept that some policies deemed inferior or immoral by some voters will at
least occasionally be adopted.
24
The remainder of this chapter suggests that the ethical dispositions of
the community of interest also have implications for constitutional design.
That cultural support enhances prospects for democracy has long been
recognized. Montequieu (1748) argued that every type of government has a
specific ethical foundation. Ostrom (1998) provides an overview of how
norms can increase the feasibility and productivity of collective action.
Rousseau (1755) suggests that constitutional designs are also partly
determined by the ethical dispositions of a community. What is new in what
follows is the use of welfare economics to analyze the extent to which
authority should delegated to a democratic regime.
A. A Digression on the Use of Personal Ethics for Assessing
Officials, Policies, and Institutions
Of course, welfare economics is not the only method for evaluating
politics or political institutions. Personal ethics were used to assess both
policy makers and policies. Most internalized codes of conduct allow one to
assess both the virtues of one’s own behavior and also that of as noted by
Smith. In this respect, all personal ethical systems are generalizable. As a
consequence, personal ethics have long been used evaluate governments,
officials, and policy.
See McChesney (1987) for illustrations of such rent-extracting policies in the United States, a relatively well-run and honest government.
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For example, character assessment can be used to assess policy makers.
The terms “noble” and “ignoble” can be used to describe either one’s
family lineage or one’s character. La Court (1662) regarded the nobility of
the Netherlands to be ignoble. They could not generally be trusted to pay
their debts, deal courteously with women, or exercise self-discipline with
respect to drinking or public policy.
Inferior lords usually and without scruple take possession
of their paternal estates without paying any debts; and all
young and healthy lords are violently inclined to women. ...
[I]ndeed two of these having either never married at all, or
not until they were of a considerable age, and could not
have been guilty of so many crimes if they had been
engaged in marriage.
respects to be able, willing and necessitated to bear an
universal slavery, by granting and promising to a child
the future succession of all his father’s offices; and
whether the said prince William the second, who was
continually conversant with foreigners, and other slavish
courtiers, had any better education or conversation with
men than other ordinary monarchs use to have.
To grant authority to a child without knowing how he
will grow up is the height of imprudence, risking both
incompetent leadership and worse. [(1662) la Court, The True
Interest and Political Maxims of the Republic of Holland. (p. 13).]
Dutch policy makers of the mid seventeenth century took risks that a
prudent man would not.
As to the profusion and excess of drinking used in their
court, to the great diminution of its revenues, ’tis a thing so
universally practiced, especially in the Northern parts, that
none of these princes ought to be so much blamed for it.
By the mid nineteenth century, Bastiat was able to use
commerce-supporting norms in his critique of taxation in France.
But when John Q. Citizen gives a hundred sous to a
Government officer, and receives nothing for them
unless it be annoyances, he might as well give them to a
thief.
[In contrast] prince Maurice deserves to be commended
for the frugality and sobriety of his family. [1662] Pieter
de la Court, The True Interest and Political Maxims of the Republic
of Holland.. (P. 10) Liberty Fund
It is nonsense to say that the Government officer will spend
these hundred sous to the great profit of national labor; the
thief would do the same; and so would John Q. Citizen, if
he had not been stopped on the road by the extra-legal
parasite, nor by the lawful sponger. [Bastiat (1850) “That
Which Is Not Seen,” The Bastiat Collection (p. 9).]
Although most nobles in the Netherlands were of poor character, La
Court argues that Prince Maurice was an exception. He was noteworthy
because of the relative frugality of his own lifestyle, and his prudent choices
in clothing and entertainment.
Public policies can often be assessed in more or less the same manner.
Policy choices may be considered unethical because they violate norms
associated with life in a community or with virtuous conduct in general.
Again, quotes from La Court serve as an illustration.
[T]he governors of the United Provinces, who seemed
willing to give up the liberty of their country; and in all
The rhetoric of political and lobbying campaigns still draws heavily on
the internalized personal ethics of voters to critique and support alternative
candidates and public policies. The character and trustworthiness of
potential office holder are often highlighted in the advertising campaigns
and speeches of rivals for high office. Policies involving war and peace or
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environmental quality also tend to be assessed substantially by their moral
appeal.
B. Welfare Economics and the Delegation of Authority to
Democratic Regimes
[I]n general terms, the practical question, where to place
the limit — how to make the fitting adjustment
between individual independence and social control —
is a subject on which nearly everything remains to be done.
All that makes existence valuable to any one, depends on the
enforcement of restraints upon the actions of other people.
Some rules of conduct, therefore, must be imposed, by law
in the first place, and by opinion on many things which are
not fit subjects for the operation of law. What these rules
should be, is the principal question in human affairs.
[Mill, John Stuart (1859/2013). On Liberty from the Complete
Works of John Stuart Mill (Kindle Locations 39783-39787).]
We now return to what Mill argued was the principle question in human
affairs, the extent to which authority should be delegated to a community
government. For both utilitarians and contractarians, the proper domain of
democratic authority varies with the expected outcome. In cases in which
outcomes are likely to be improved via majority rule (aggregate utility
increased), both utilitarians and contractarians will prefer democratic
interventions. In other cases, authority to intervene should be withheld.
There is thus no unique answer to the optimal delegation issue from a
utilitarian perspective, although the factors to be considered are clear.25
A perfect utilitarian government with no administrative costs--the
model of government often used in public economics--should be given the
authority to solve any problem where the potential aggregate benefits are
greater than the costs of the solution. If administrative overhead adds an
25
additional 10 percent to the costs of government action, then only problems
where the benefits are more than 110% of the costs should be delegated to
government. If in addition to administrative costs, agency problems and
rent seeking losses further increase average costs, then the ideal delegation
of authority shrinks further. For example, if administrative, agency, and
rent-seeking costs approximately double the cost of public policies relative
to an idealized utilitarian planner, then only problems were the potential
benefits are at least twice the costs should be authorized. The greater the
expected costs of government action--whether simple overhead, corruption,
or voter biases (as with fiscal illusion)--the smaller the ideal scope of
government is from a utilitarian perspective.
From a contractarian point of view, the issue are similar, although the
argument differs. Given a democratic government and legal system that
supports a commercial society, the line between the authority of
government and the private sector is chosen to obtain unanimous consent
from the individuals in the community of interest, given considerable
uncertainty about the policies that will be adopted and their place in the
society that emerges. If voter are risk neutral, the government will be
delegated responsibilities for goods, services, regulations in those areas in
which average benefits are expected to increase. If voters are risk averse,
authority will be delegated only in the policy areas in which the risk adjusted
average are expected to increase.
In either case, the better governmental systems are anticipated to be, the
broader will be that authority. The worse, the narrower will be the ideal
scope of governmental authority. Particular conclusions about the dividing
line are conditional.
One consideration is the strength and type of internalized ethical
dispositions of fellow community members and persons likely to hold
office. The more ethical and hence trustworthy one’s fellow citizens are, the
greater the ideal delegation of authority to democratic governments tends to
be, other things being equal. When constitutional design improves or
For example, chapter 6 noted that Bentham and Spencer supported laissez faire. Mill also did, but acknowledged the possibility of externality problems. From Pigou
onwards, however, utilitarians supported increasingly broad government authority to intervene in markets.
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constitutional norms evolve in a manner that tends to reduce the risk of
governmental malfeasance, the ideal domain of authority tends to increase,
and vice versa.26
Excellent
Character of
Market
Outcomes Mediocre
C. An Illustration: Utilitarian Choices Among PoliticalEconomy Systems
Poor
At the level of system choices, there is an irreducible element of
uncertainty because both our information and science is far less than
perfect. This uncertainty, as well as true ignorance, implies that a careful
catalogue of every possible area of government authority is not possible.
Instead, only some general rules or constitutional principles may be
possible.
Some light can be shed on such principles by focusing on a few broad
categories of possible government and market failures and possible
delegations. Table 11.2 illustrates some possible utilitarian conclusions
about the proper domain of political authority under different assumptions
about the relative performance of democratic politics and markets. Three
rough categories of market and governmental performance are used and
choices are limited to three political-economy systems are laissez faire
(relatively little intervention in markets beyond enforcement of civil law),
mixed (many interventions, but mostly for large market failures), social
democracy (substantial regulatory and tax interventions and redistribution).
Table 11.2: Market-Politics Tradeoffs
Character of Democratic Policy Decisions
Excellent
Mediocre
Poor
Laissez
Faire
Laissez
Faire
Laissez
Faire
Mixed
Laissez
Faire
Laissez
Faire
Social
Democracy
Mixed
Laissez
Faire
The conclusions are illustrative, rather than closely reasoned. They draw
on the arguments of Von Mises and Rawls, who agree that good
governance is more dependent on ethical dispositions than effective
markets. Thus, when ethical men and woman are equally influential in both
systems, relatively less intervention is called for and laissez faire is
supported. There will be fewer externalities, lower crime rates, and better
quality products, and less need to intervene.
In cases in which governments generally improve on market outcomes,
rather than worsen them, a clear utilitarian case for more extensive
government interventions exists. How much authority for intervention
should be delegated in that case varies with the magnitude of the problems
to be addressed and the average effectiveness of government. In cases in
which market outcomes are always poor (large externalities) and
government policies always excellent, very broad authority should be
delegated to government. In cases, in which market outcomes are poor, but
government policies are imperfect, less authority should be delegated. In
cases in which policies are also poor, either because of random errors,
ignorance, systematic bias, or rent seeking, a watchman state is likely to do
the least damage.
Analysis from a contractarian perspectives tends to reach similar
conclusions. If citizens generally expect government policies to increase
their own net benefits, which in most cases will be correlated with social net
benefits, they will be disposed to delegate more authority to their
26
Evidence of such a tradeoff is provided in the empirical political science and political economy of trust literature. See, for example, Miller (1974) and Blanco (2013).
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community government. If significant agency problems exist or voter
ignorance, governments would be delegated authority only in cases in which
gains appear to be largest and most likely. These would be partly conditional
on the performance of markets and the extent of externality and public
goods problems. In cases in areas in few or no personal net benefits are
anticipated, no delegation would take place. Redistribution would be limited
to various community insurance programs that are likely to advance the
interests of all subscribers.
In cases in which government officials are expected to be less ethical
than their counterparts in the private sector, government failures tend to be
more likely and arguably more severe than market failures. Government
officials may be corrupt, lazy or overbearing and markets relatively
benevolent, but for government intrusions in such cases. Which of these
characterizations best describe particular political-economic systems varies
by time in place. Thus, no unique conclusions can be drawn about the best
system or dividing line between private autonomy and public authority.
Other ethical systems might well reach different conclusions about the
optimal delegation of authority to intervene in markets or lifestyles. Many
egalitarians, for example, would support far greater community control and
far less personal autonomy in order to force equality in opportunities and
outcomes, as in More’s utopia. Not all ethical systems are supportive of
commerce or liberty in private lives or in society.
In the abstract, it may be argued that the natural starting point is one in
which “people are people” and there is little systematic difference among
the employees of public and private sector employees or agencies. Insofar
as consumers and voters favor ethical firms and politicians, both economic
organizations and government agencies have reasons to adopt ethical rules
and higher ethical employees. Nonetheless, in cases in which ethical
dispositions conflict or are weakly held, the choice tends to be among
imperfect systems. And, some areas of life are likely to be better served by
one than the other.
VII. General Conclusions about Ethics, Governance, and
Commerce
Given a constitutional and civil law framework, market and political
competition ultimately determine the precise boundaries between private
autonomy and private authority, although the result may not be ideal from
either utilitarian or contractarian perspectives.
Overall, it is clear that personal ethical dispositions play a role both in
the performance of markets and democratic governments. Personal ethics
also play a role in the assessments of political-economy systems, and
through conclusions reached provide social support for particular
constitutional systems and/or reforms.
If government officials are generally believed to be more ethical than
those in private organizations, market failures may be omnipresent and
governments can be expected to remediate those problems through
thoughtful and effective policies. If there is no essential difference between
the ethics of persons in governmental and private organizations, both
organizations will tend to exhibit similar patterns of organizational success
and failure. There will be governmental externalities as well as private ones.
There will be agency problems within each organizations. In such cases,
governmental externalities and agency problems may generate significant
problems as often as they resolve them.
The analysis of the roles of ethics in this chapter and the previous ones
imply only a subset of ethical dispositions tend to be supportive of
democratic institutions, and only a subset of those ethical dispositions tend
to support the rules and regulations that allow a commercial society to
flourish. Insofar as a community’s prevailing ethos are more durable and
less portable than technology or goods and services, it may be said that the
variation in the internalized norms among communities accounts for much
of the variation in the effectiveness of political-economy systems.
Historically, the ethics that supported open commerce also tended to
supported democratic politics and vice versa. These were largely the ethics
of what nineteenth century politicians and political theorists termed
liberalism. They include the usual virtues of honest, prudence, diligence, the
pursuit of excellence, with civil ethical theories that emphasize tolerance
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Supporting
Democracy
Supporting
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
and equality of opportunity or rights--what Spencer termed the equal
liberties principle. Excellence is most likely when strong internalized
supportive ethics inform the decisions of policy makers, businessmen,
voters and consumers.27
Worse results are anticipated from what are otherwise similar legal and
constitutional systems when supporting norms are less common or weaker.
Policy makers may be mostly pragmatists or have internalized norms that
do not support democratic governance and/or commercial enterprises. In
the former case, rent-seeking rather than democratic processes or civil law
are likely to determine public policies and the scope of commerce in such
cases. In the latter, elections may ultimately determine policy choices. In
both cases the commercial sector will be smaller and the material standard
of life lower as regulations increase risks and transactions costs, and weaken
pecuniary incentives for trade, production, and innovation.
Market supporting ethical dispositions
Democracy supporting ethical dispositions
Universe of ethical dispositions
Universe of all dispositions including ethical and pragmatic ones
and so forth. Both democratic politics and the commercial society are
supported by an overlapping set of ethical beliefs and norms.
Democracy is not a prerequisite for a commercial society, nor do
democracies necessarily support a commercial society. However, the
correlation between relatively democratic societies and commerce is
historically fairly strong. This is likely to reflect the fact that the ethos and
political theories that support democratic governance also tend to support
relatively open commercial systems., and vice versa. For example, an ethos
that induces persons to internalize the rules and duties associated with
employment in large organizations is likely to improve the performance of
both economic and political organizations. Persons who respect the rules of
their organizations are also likely to respect the rules of their community.
Those who value the fruits of their labor will tend to regard the distribution
of income generated by markets to be earned and essentially just, if not
perfect. Similarly, a government staffed by persons elected in competitive
open elections will tend to regard office holders to be legitimate and their
policies, even when distasteful for particular individuals, to be on average as
good as possible. Ethical perspectives that oppose political privileges and
anti-privileges also tend to oppose economic privileges and anti-privileges,
27
See chapters 5 and 6 for a discussion of the ethical theories of protoliberals and liberals. See McCloskey (2010) for a more literary overview of what she terms
bourgeoisie ethics.
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
Buchanan, J. M. and G. Tullock (1962) The Calculus of Consent, Logical
Foundations of Constitutional Democracy. Ann Arbor:
University of Michigan Press.
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
Mathematical Appendix: A Simple Model of Redistribution
with and without Ethical Constraints
Consider the following model of redistribution based on the Melzer and
Richard assumptions. Suppose that people have identical tastes but vary by
income and that a proportional tax is to be imposed and used to fund a
“demogrant,” an equal grant to all persons in society.
Assume initially that tastes are simply a matter of leisure (L) and
material gratification (C), U = u(T-L,C) , and that people simply consume
what they earn after taxes and receive from the demogrant program. This
can be thought of as a lifetime pattern of consumption for simple egoists
with T hours to allocate between leisure and gainful employment in the
commercial society. Consumption is Ci = (1-t)wiLi+ G with G = tYA.
Substituting allows utility to be written as U = u( T-Li, (1-t)wiLi+ G). For a
given tax and demogrant, each voter will choose to work his or her utility
maximizing number of hours, which satisfies:
-UL + UC ( 1-t)wi = 0
If the second derivatives are assumed to be small relative to the first
derivatives, the intuitive results can be obtained. In that case, labor increases
with wage rates (L*w > 0) and decreases with income taxes (L*t < 0). One
convenient special case in which this holds is that in which the utility
function is separable with constant marginal utility. In that case, however,
the derivatives of labor supply with respect to size of the demogrant and
time to be allocated are both zero.
In either case, a voter’s optimization problem with respect to taxes and
demogrants can be written as maximize:
U = u( T-L*, (1-t)wiL*+ tYA*).
The median voter’s receives the median wage rate, wv. Her preferred tax
rate satisifies:
U = u( T-L*, (1-t)wiL*+ tYA*).
-UL(Lt + LG YAt) + UC [( 1-t)wi (Lt + LG YAt) + YA +t(YAt+YAG ] = 0
where subscripts denote partial derivatives. If we take the case in which
second derivatives are zero, this the derivatives with respect to G disappear
and we are left with:
The solution to which can be written as L* = l(w,t,G,T) with partial
derivatives:
-UL(Lt ) + UC [( 1-t)wi (Lt ) + YA + t(YAt)] = 0
L*w = [-ULC ((1-t)Li) + UC ( 1-t) + UCC( 1-t)2 wiLi] / -ULL
These terms can be separated into marginal benefits and marginal costs,
with
L*t = [ULC wiL - UCwi - UCC( 1-t) wi2Li] / -ULL
L*G = [-ULC + UCC( 1-t) wi] / -ULL < 0
MB = -UL(Lt ) +UC YA
L*T = [ULL + ULC( 1-t) wi] / -ULL > 0
The last two partial derivatives can be signed using the conventional
assumptions about utility functions (UL > 0, UC>0, UCL>0, ULL<0, and
UCC<0). The first two are ambiguous, with these assumptiosn alone and
depend upon the relative sizes of the first derivative and second derivative
effects. Demogrants tend to reduce work effort and time available tends to
increase it, but whether after tax wage rates increase or decrease labor varies
with the relative size of the first and second derivatives.
and
MC = UC [( 1-t)wi (Lt ) + t(YAt)]
The marginal benefits come from increased leisure and income from the
demogrant, whereas the marginal costs come from reductions in income
from working and through economy-wide effects on the tax base associated
with similar declines in work effort by everyone in the community of
interest. As noted in the geometric illustrations, there is no assurance that
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Chapter 11: Ethics and the Delegation of Authority to Democratic Regimes: Laissez Faire as a Second Best Policy
an interior solution exists. The ideal tax could easily be one hundred percent
if the labor responses to taxation are small. It could be zero if they are very
large.
In a broad range of cases, taxes may be relatively high and economic
activity lower than optimal from a utilitarian perspective. In such cases,
internalized tax norms or distributive norms can produce better results than
self interest alone. For example, citizens may have internalized norms that
approve of wage based income differences or disapprove of transfer
payments except for those involving extreme need and bad luck.
A completely idealistic voter would simply favor their personal tax ideal,
T , without regard to self interest. A pragmatic voter would not have
personal tax norms, and would simply vote for the norm that maximized his
or her utility, which in this case is approximately the tax system that
maximizes their personal net of tax and transfer income.
N
Poverty traps are, of course, very likely in this last case insofar as
median income is below average income, a point neglected in the original
Meltzer and Richard (1981) analysis of the equilibrium size of a transfer
state.
The influence of such norms can be incorporated into sufficient
number of voters utility function that they are also part of the median
voter’s calculation. (Not all voters need have such internalized norms for
them to affect electoral outcomes.)
U = u( T-L*, (1-t)wiL*+ tYA*, [tN-t]).
The tax norm may be the result of a utilitarian calculation, a fairness
consideration, or other norms. The median voter is not necessarily the
voter with the median ethical disposition towards taxes, but remains the
voter with the median ideal tax rate.
In this case the optimal level of taxation satisfies:
-UL(Lt + LG YAt) + UC [( 1-t)wi (Lt + LG YAt) + YA +t(YAt+YAG - YN] = 0
These terms can again be separated into marginal benefits and marginal
costs, with
MB = -UL(Lt ) +UC YA
and
MC = UC [( 1-t)wi (Lt ) + t(YAt)] - YN
In this case, the tax norm raises the marginal cost of taxation which
tends to reduce taxation and under the assumptions adopted above
increase average income.
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