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DOMINIC HOBSON'S BLOG Aug 25, 2010

Democracy devours itself

BY Dominic Hobson

published in Global Custodian Summer 2010 issue

 

Democracy is the great talisman of this most meretricious of political eras. Presidents, pundits and philosophers hold it in common that there is no political problem insusceptible to resolution by the ballot box. Their world is divided between those countries that are about to be showered with the blessings of democracy, those rejoicing at the advent of democracy, and the established democracies whose sole remaining task is to deepen and extend their commitment to the faith. A book published 20 years ago famously argued that, with the fall of the Berlin Wall, history itself had ended in liberal democracy plus capitalism, and all that remained was for the non-democratic countries to catch up. History has since reasserted itself with sanguinary vengeance, but it has yet to disturb the reverie that democracy is nothing but a force for good. In the Western political mind, democracy, liberty and prosperity are now so closely intertwined that they appear as merely different aspects of a single phenomenon.

This conceit survives even the most elementary evidence to the contrary. The countries that have reduced poverty fastest of late - namely, China and Vietnam - have achieved it through absorption into the global economy, and not through democracy. Afghanistan and Iraq, where the Western powers have sought to impose democracy by force, are now bywords for mayhem, corruption and death. Even in those many developing countries where elections are held more than once, they usually serve only to unleash ethnic and religious tensions, or to legitimize a kleptocracy. Democracy has proved a dangerous remedy in much of the developing world, where it is more often the cause of instability, poverty and violence than a solution to these problems. Yet the economic and political consequences of democracy in the Atlantic world are scarcely less poisonous. The infantilizing imperative of the electoral cycle has retarded the rate of growth of the economy and wrecked the public finances, while fostering wars for democracy abroad, and pogroms against immigrants and bankers at home.

It is increasingly plain that, far from entrenching liberty and prosperity, democracy has become the principal enemy of both. That there were contradictions between democracy and liberty and capitalism was apparent from the outset. The wealth created by capitalism may have helped to enlarge the franchise, and entrench rights of property in law, but democracy also became the chief means of expressing opposition to the inequalities created by the market economy. Indeed, the chief claim to popularity of the totalitarian variants of democracy - fascism and communism - rested on their promise to resolve these contradictions. Once the link between property and the vote was broken, and the universal franchise introduced, democratically elected governments were bound to become the principal arbiters of the distribution of the fruits of capitalism. The African political party which campaigned on the promise of "free things" for its supporters captured the essence of modern democracy exactly. Any government based on the universal franchise is condemned always to trade liberty for equality, and progress for security. This is why modern democracy is such a great engine for the expropriation of liberty and property, not just by taxation, but through compulsory purchase, mandatory insurance, regulation, licensing, tariffs and quotas.

Such measures accumulate, through a succession of victorious democratic coalitions. Their beneficiaries, capital as much as labor, become great interests within the state. Their willingness to trade money and votes for contracts and favors is both cause and effect of rising public expenditure. In every major democracy, public spending now accounts for somewhere between 35-55% of the national income. The misallocation of resources, and rising transaction costs occasioned by the burden of taxation and regulatory compliance, saps the dynamism of market economies. Vote-purchasing subsidies retard the switch from old industries to new and more profitable ones. Remedies for perceived market imperfections create new interest groups, enabling industries and institutions to persist long after they are rendered superfluous by new technology. The penetration of the privately owned and controlled economy by the democratic state disrupts the spontaneous order of the marketplace, by which the countless economic decisions of innumerable, self-interested individuals and firms coordinate the production, distribution and consumption of multitudinous goods and services. The sclerotic economies that result steadily lose their power to adapt, and struggle to grow, leading to a lower standard of living and persistent poverty and unemployment. In every major democracy, rates of economic growth per capita are lower now than they were even in the 1970s.

When growth stops all together, as it has in the current recession, democracy becomes nothing but a zero-sum game in which the winning coalition gains at the expense of the losing coalition. Democracy is effectively devouring itself, for it is only the wealth generated by growing market economies that maintains social peace between taxpayers and tax-eaters. When economies stop growing, the uneasy bargain between those who produce and those who consume breaks down. This can be seen most vividly in Greece today. But much of the rest of Europe is now governed by equally predatory public sector coalitions of government employees, trade unionists and socialist politicians, which prey on their private sector counterparts to the point where substantial tax rebellions are in train already. Even before the current crises, and the accompanying increases in taxation, estimates of the size of the underground economy in Europe ran from 13-16% in the United Kingdom and Germany to 27-30% in Greece and Italy.

The rebels consist mainly of the middling class of property owners, recognized since the time of Aristotle as the natural allies of democracy, because of their interest and belief in political stability, the rule of law, property rights, the virtue of work and the value of education. It was the admission of this class of people to the franchise that made democracy possible in Europe in the 19th century, and in Asia in the 20th century.  By turning them into the milch-cows of the political classes and their public sector clientele, democracy is undermining its strongest foundation. The supposedly greatest virtue of democracy - that it enables conflicts between individuals and groups to be resolved peaceably - is threatened by the insatiable nature of the appetites it conjures up. Indeed, modern democracy in North America and Western Europe is trying something not previously attempted outside the extreme contingencies of total war:  the envelopment of more than half of the economy in a miasma of taxes, laws, regulations and controls that provides democratically elected politicians with such enormous powers and material resources that they are able to build impregnable electoral coalitions that guarantee them office in perpetuity. Though the label of the party in charge may change from time to time, nothing substantive ever changes at all. Democracy is now constitutionally incapable, not only of self-restraint, but of reforming itself.

Nothing illustrates this better than the financial crisis. Its principal cause was the willful misconduct of monetary policy over a prolonged period, in response to the need of elected politicians to maintain consumer spending and asset price booms through successive electoral cycles. Cheap money washed through a financial services industry whose behavior was already distorted by inept regulation and perverse fiscal incentives, of which the securitization of mortgages was the most obvious symptom. When the crisis came, governments failed even to fulfill their sole important duty, and act as lender of last resort. Far from acknowledging these truths, democratically elected politicians have instead traduced the motives and the reputations of innocent people, destroyed the property of shareholders, and are now busy applying to the banking industry inappropriate remedies based on dishonest analysis. The cynics know why. In democratic politics, runs their argument, what is popular is more important than what is true. Bankers are playing the role of scapegoat, not because they are truly to blame for the financial crisis, but because the alternative is to blame the people who really are responsible: politicians, public officials and central bankers. 

Yet what is truly shocking about this episode is not that politicians blame others for their own mistakes, attack people who cannot defend themselves and squander the wealth of nations to keep themselves in office. It is not even that we expect them to do so. There is something much more shocking at work in democracy than the propensity of politicians to lie, and our acceptance of the fact that they do. Even their susceptibility to lobbying by special interest groups cannot explain why political decisions that are so obviously asinine get made, or why governments not only launch policies which are manifestly erroneous, but persist with them long after their damaging consequences are obvious. After all, persistence in error is in the interests of nobody at all. Politicians know this, but are powerless to do anything about it, because they too are victims of a method of government that systematically reinforces and rewards error.

It is increasingly clear that democracy does not just generate counterproductive policies. It actually makes them popular. This is because, while there is a market for votes, there is no market for policies. Voters do not select the best policies on offer from politicians, but merely pool their least rational sentiments - desires, convictions, beliefs, interests and prejudices - with millions of other people. Unlike a market in goods or services, democracy does not test the value or utility of these sentiments. It merely aggregates them with those of millions of other people. Unlike overpaying for a refrigerator, or buying the wrong computer, voting allows people to indulge their least rational beliefs at no personal cost to themselves. They can demand an increased slice of the national income without having to recognize that it will increase their own taxes, or cost them their jobs, or even think about the damage their demand might cause to the life and liberty of others. Democracy institutionalizes stupidity.

The result is stupid policies. Protectionism is the most obvious instance of a popular but counterproductive policy, but there are plenty of others, from reducing carbon emissions through outlawing the use of genetically modified foods to special taxes on banks and bankers. Many of these policies are extremely wasteful, of life as well as wealth. On both sides of the Atlantic, the financial services industry is even now being handicapped with measures which will increase the cost of capital, reduce the supply of credit, raise transaction costs and suppress innovation, but no one can deny their popularity with voters. This is not even democracy as Schadenfreude but as Munchausen syndrome, in which the electorate displays its virtue by harming its own interests. Even if democracy were no better than a system for securing advantages for some people at the expense of others, it would be possible to make out a case for the defense. But where it results in the prosecution of policies that are bad for everyone, the onus is on the supporters of democracy to come up with a more sophisticated assessment of its merits than the stale Churchillian joke about it being the least-worst form of government.

A useful starting point, for a system of government whose proudest boast is that it is "of the people, by the people, for the people," would be to recognize that there is no such thing as "the people." There are only individual men, women and children, each with their own ambitions, needs, wants, dreams, preferences, interests and values. That these are necessarily incommensurate with those of every other individual is obvious. It is fanciful to believe that, in settling the inevitable contradictions between the ambitions, needs, wants, dreams, preferences, interests and values of different individuals, a democratically elected government can make a better job of the necessary compromises than individuals could make for themselves. An individual is much better equipped to arrive at his own balance between work, money and leisure, for example, than public officials manipulating different combinations of taxes, tax incentives and welfare entitlements. Indeed, it is impossible in principle, and not just in practice, that any single political system could ever reproduce the trade-offs that every individual would choose for himself or herself. Even in a democracy, and especially in one that sets no limits to its scope, the dissatisfaction of a substantial minority is a guaranteed outcome.

The only plausible solution to this conundrum is to minimize the number of conflicts that are resolved politically. Unfortunately, democracy tends to the opposite effect. Far from flinching at the sheer scale of the incommensurabilities, democracy brings ever more minute concerns within the scope of political decision-making. Yet there is a ready alternative to hand, to which whole areas of activity presently conducted by the democratic state could be transferred. It requires no direction or coercion at all, yet arbitrates between the wants and needs of hundreds of millions of people all over the planet. It is called the market. Unlike a democracy, where people are invited to cast their votes once every four or five years on packages of policies whose contents they may not even support, a market is a place where consumers take part in a referendum on what should be produced, and where, and at what price, every day. Every penny they spend in countless daily transactions is a vote in a continuous ballot of the wants and needs of the population of the Earth. It can of course be objected that the market is unequal, since some shoppers have more money than others. But in the market, every penny counts in a way that every vote in a democracy never does. Even the poorest shopper has a greater impact on the structure and price of output than the poorest voter ever has on the outcome of an election.

In a market, the cumulative expenditure of the modestly endowed easily trumps the expenditure of the rich. And even the rich are ultimately answerable to the market: They became rich by satisfying consumers, and will remain rich only so long as they (or their investments) continue to satisfy consumers. Consumer sovereignty is far more powerful a constraint on the rich than political sovereignty. Indeed, even the erosion of the rich by democracy is ultimately self-defeating, for it eliminates that class of men and women in public life who are under no financial pressure to remain at their posts, pursuing policies in which they no longer believe. It is not by coincidence that the democratization of politics has been accompanied by a decline in resignations on points of principle or of honor. The vast majority of modern politicians simply needs the money. But even the restoration of a rentier political class would not be enough to restore the blessings of good government. As long as politicians must compete for votes, they cannot govern honestly, or even disinterestedly. They cannot reverse decisions or policies that have proved unworkable. They must persist, even in intellectual error, and cannot escape a certain narrowness of vision.

To release politicians from this predicament, a revolution is required. That revolution must be one not of blood, but of constitutional and political ideas. It must put an end to democracy without limits, before the prosperity of the species is destroyed and liberty extinguished. The beginnings of that revolution lie in replacing the democratic state with a more limited conception of government as guarantor of a framework of rules and institutions that allow individuals to pursue their own aims with the minimum of friction between them. Such a government, based on permanent principles rather than the absolute discretionary authority conferred by a temporary majority, is far removed from the practice of any modern democracy. It will be asked by what means principle can be made permanent in a democracy. After all, even the most ingenious constitutional devices - bills of rights, separation of powers, electoral reform, written constitutions and the like - remain susceptible to demagogic alteration. It is hard to avoid the conclusion that the only solution to the boundless appetites of democracy is to recognize that liberty and property are more precious than equality, and that votes should henceforward be weighed rather than counted, and earned rather than granted. The only lasting solution to the plague of unlimited democracy is to attack democracy at its moral foundation: the political equality of the citizen. GC

 

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