Moral Hazard in Democratic Voting
Economists have a tendency to name things unclearly. For example, cost disease describes the phenomenon when some jobs get higher wages due to increased productivity, the jobs that didn’t see productivity growth get higher wages too. Good luck guessing that meaning from the names “cost disease” and “Baumol effect”.
Another economic term that you can’t guess the meaning of and must instead memorize the definition of is moral hazard. “Moral hazard” is a fancy academic way of describing “a situation that incentivises rational selfishness at the expense of other people”. Rational selfishness is a good default assumption of how large masses of people will behave.
If the price of a good decreases, then people will buy more of it.
If the price of a good increases, then people will buy less of it.
If the price a good sells for decreases, then businesses will produce less of it.
If the price a good sells for increases, then businesses will produce more of it.
This is all Economics 101. Most people—and therefore most voters—do not know Economics 101. The typical left-wing voter doesn’t consider that taxing billionaires has negative second-order effects on incentive structures. The typical person barely considers incentive structures at all, even in the domain of violent crime—nevermind economics.
The vast majority of voters are economically illiterate. Collectively, voters tend to advocate for economically backwards policies, such as free parking. Voters love government handouts of essential goods, and oppose policies that make the ultra-rich get even richer. Because of this mass ignorance, it is often possible to predict where public sentiment deviates from economically sound policy. In other words, voters advocate for harmful policies, and do so predictably.
You might think that the solution is “The government should educate the public on economics.” But think about what happens when a democracy[1] attempts this. Public school is a arm of government. When public schools touch upon a political topic, they teach a compromise moderate position somewhere amidst the reigning ideologies. And why do the current reigning ideologies reign? Because economically illiterate voters like them. Mass education is how you cement your ideological victory, not how you replace demagoguery with truth—except by accident. In my high school history class, I was taught about the benefits of consumer protection regulations. The negative second-order economic effects were never even mentioned. This is leftist indoctrination at its finest.
It’s easy to attribute this whole problem to human stupidity. And human stupidity is certainly a factor. But socialist leaders tend to be very smart people. Communist dictators aren’t idiots; it took Joseph Stalin an unusual level of intelligence to take over Russia. For this reason, I find it more productive to understand this Voters Advocate Economically Harmful Policies problem as an effect of moral hazard, rather than mere stupidity.
Tragedy of the Commons
A tragedy of the commons is what happens when lots of people can benefit personally by sacrificing a collective good. For example, consider oceanic fish[2]. If we don’t fish at all, then we don’t get any fish. But if we fish too much, then fish populations collapse, and we get only a little fish, which is bad too. There is an optimal amount of fish that humanity should harvest from the oceans. If we harvest more than that, then there is less fish to go around, and humanity ends up at a net loss.
But that only works on a collective level. If you’re an individual fishing company, and you fish more than your fair share, then the benefits of your extra fishing go to you whereas the harms are distributed mostly to other people. The rational selfish strategy is to fish as much as you can. If you don’t fish as much as you can, then a competing company that does will outcompete you. The global result is a coordination failure, which is why global oceanic fish reserves are in a bad state right now.
Democratic voting is a tragedy of the commons.
Everyone benefits from good governance. If you want to vote well, then you need to understand why some policies are good and other policies are bad. If you want to understand why certain policies are good and bad, then you need to learn things like Economics 101, which most people find boring. Voting well is difficult. But if you, personally, put in lots of time and effort into voting well, then you will not personally benefit much from your vote because even if it does affect the government, the benefits are distributed across such a large population that your personal benefit will be negligible.
The Nash equilibrium is mass ignorance, virtue signalling, and a veneer of intellectual legitimacy. This problem isn’t limited to voting. It applies to everything from protesting to Reddit comments. Everywhere that individual people aren’t held individually accountable for their declared policy preferences i.e. everywhere except prediction markets, regular markets and…um…places you have a personal reputation to protect e.g. writing longform content under an established pseudonym here on Less Wrong.
I think economics should be taught to children, not for the reasons you express, but because it seems perverse that I spent time at school learning about Vikings, Oxbow lakes, volcanoes, Shakespeare and Castles, but not about the economic system of resource distribution that surrounds me for the rest of my life. When I was about 9 I remember asking why ‘they’ didn’t just print more money until everyone had enough. I was fortunate to have parents who could give a good answer, not everyone will be.
My favorite answer to “why ‘they’ didn’t just print more money until everyone had enough” is that after the USA left the gold standard in 1971, the US government really did just print more money.
source
Meanwhile, >50% of the federal budget goes to healthcare and pensions. In this way, the US government kind of is just printing money until everyone has enough. In this way, the US government is doing what voters demand.
“Cost disease” is a great name. The relevant aspect is infectiousness, not degeneration.
I’m glad someone likes the name. Our intuitions seem to differ on this one. For me, “infectiousness” implies self-replication. Cost disease is more like cardiovascular disease.
What makes the term “cost disease” unintuitive to me is that calling cost disease a “disease” implies that it’s a bad thing. But wages increasing due to increase productivity of labor is mostly a good thing. I mean, it’s bad for people who want to hire the labor that didn’t increase in productivity (and people who buy from them, etcetera). But it’s good for basically everyone else, especially the people whose wages increased. It’s only bad for non-working owners of capital in stagnant industries. I feel like the term was coined by an aristocrat.
The Nash equilibrium is a solution for non-cooperative games. Politics, almost by definition, is about cooperation. Cooperative games are a superset of non-cooperatives, because in the case of no communication it reduces to one.
The word “signalling” in virtue signalling is a form of communication. Democracy has many forms, the most common is representative democracy. In it, the voter does not choose a policy directly, but chooses a delegate. The job of the delegate is to learn about the world (for example economics), and make a decision based on this information. If the decision is bad for the voters, the they will be replaced in the next election. The moral hazard for delegates happens if for the delegate the cost of losing their job is lower then the cost of making a bad decision.
From the voters perspective it means that a potential delegate should show that they understand the world and make good decisions, a.k.a. they should signal their virtues. If the voter understands the world and capable of making better decisions than current delegates, than they should run for an office. The moral hazard happens, if the cost of running for office is greater than the cost of the current delegates making bad decisions.
Our democracies are not perfect: the cost of a delegate losing their job is quite low, and the cost of running for office is quite high. But the problem does not lie in mass ignorance. You awknowledge that learning about economics has costs. The same can be said about arts, literature, physics, social sciences, or ecology. It is not possible for everyone to learn all these subjects, but it is possible to select a few of our best to learn about them. The tragedy of commons would happen if everyone would need to learn about boring (for them) subjects for years.
Nevertheless, I agree with your conclusion, that in good places you are held indvidually accountable, becase it would clearly show your virtues. Writing longform posts about economics shows that you are capable of understanding the world, and given the post’s contents, you think that you are able to make better decisions than the current political delegates. Have you considered becoming/are you a political activist?
P.S.: Fish reserves might be in a bad state right now, but it’s not all coordination failures. International fishing agreements happen. I recommend this book: “Game Theory and Fisheries Management: Theory and Applications”.
The central thesis of my post is that individual voters are not individually incentivized to vote well. For this reason, bad decisions by politicians do not necessarily result in them getting replaced in subsequent elections. Politicians are removed for violating mass stated preferences, which differ from good policy in predictable directions.
Yes. I used economics in this post because it could perform double-duty, since this post also discusses moral hazard. The principle applies for foreign affairs, law, etc.
I followed the norm of not posting the mind killer on lesswrong and now I have a demented crypto scammer for a president and have to read this drivel on the ai website?
Please be polite or I will block you from commenting on my posts.