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Is Democracy Dying?

November 19, 2012

Democracy, Government, Politics

Democracy

Most of us find our own beliefs to be very comforting, and as long as we don’t have any ‘skin in the game’, we usually don’t go to the trouble of subjecting them to any form of rigorous criticism. However, if serious money is at stake through, say betting or investing, then we are much more likely to think longer and harder about the truth of our beliefs. For example, I’m confident that there are many more Muslims who believe that martyrs are rewarded with 72 dark-eyed virgins in paradise, than there are Muslims willing to become martyrs on account of the virgins. It’s relatively easy to profess a belief, but when it comes to betting one’s life on that same belief, doubt invariably replaces certainty. In other words, people tend to become more rational the higher the personal cost of their irrationality. If you still doubt this, consider the following example. Most people I have spoken to instinctively reject the idea that setting a minimum wage above the market rate increases youth unemployment. However, if you were advising your own teenage children on how to get a job would you really tell them that they could ask for any salary they want? This principal has important implications for voting behavior.

If a businessman makes the wrong decision and pays $100 for a product that he can only sell for $80 dollars he will soon go out of business unless he learns to stop making the same mistake. Compare this to voting. A person can make the wrong decision and vote for a foolish policy, but since they incur no cost in voting this way, there is no incentive to learn how the world really works and change their voting behavior. Furthermore, some people know that the policies they are voting for will not work but vote for them anyway, just to feel good, much like sports fans cheer their team on, not to help them win but just to express their support. This ‘expressive’, ‘feel-good’ voting behavior is most likely to take place where people believe their vote is not likely to affect the outcome.

While economists have become increasingly aware of just how irrational voter behavior is, and how this weakens democracy from within, the current financial crisis has unleashed forces which threaten to topple one or more of the several pillars which support democracy from without. Indeed, it could be argued that the evidence of  bailed out banks and families evicted from their homes, indicates that a number of those pillars have already been toppled, following an assault by special interest groups. In Europe people riot in the streets because they sense, correctly, that their government is more responsive to the interests of the banks than to the interests of the people. Here at home “central banking has become the new central planning”, with the Federal Reserve firmly entrenched in its new role of attempting to micromanage the entire financial system irrespective of which party is in power. For those who care to see it, the financial crisis appears to have morphed into an existential crisis of democracy.

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“Thus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again.”  Joseph Schumpeter, Capitalism, Socialism, and Democracy

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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10 Comments on “Is Democracy Dying?”

  1. Michael Says:

    Moreover, when you buy a pair of shoes, you’ll have a pair of shoes after the purchase. However when you vote for a candidate who promises what you want, he may change his mind after the election. .

    Reply

  2. A Gripping Life Says:

    “When the takers can out vote the makers – it is a sure sign of a society in demise.” I hope I didn’t already write that in a previous post but it made a lot of sense to me. I feel like we have reached the tipping point. Gone are the days when educated citizens voted responsibly – now we have people casting a vote for the politician who is the most likable, who will promise the most things and who is the most adored by the media and celebrity world. Never mind the foundation of American principles, today’s youthful voters, in my estimation, are lemmings. They’ve not taken notice that they are headed for disaster and have, by voting for the cool candidate, pushed the entire country over the fiscal cliff.

    Reply

  3. Malcolm Greenhill Says:

    Thank you for this thoughtful comment. I agree that we appear to have reached a tipping point and in the United States that appears to happen with some regularity every 80 years or so (1930’s Great Depression, American Civil War, American War of Independence). During these periods of crisis and upheaval all the excesses of the prior period are flushed out as society is reorganized and we start again from a new reset point. I only hope our flushing out period is not so violent and convulsive as the periods mentioned above.

    Reply

  4. Robert-preneur Says:

    I live in California. We voted ourselves a tax increase this past election and the projected state budget shortfall is still around $2 billion. In the meantime taxpayers keep leaving the state in droves. The tax base keeps shrinking while taxes increase. The Schumpeter quote is apropo. All the best Malcolm.

    Reply

  5. Malcolm Greenhill Says:

    Robert, thank you. I think the French expression is “Plus ca change, plus c’est la meme chose” – things change but everything stays the same. History teaches us that we have all been here before. Nobody ever learns until the crisis hits. Then we start again and eventually make the same mistakes anew. Sorry to sound so pessimistic before Thanksgiving. I am grateful for the simple but important things in life, which even the politicians would have difficulty messing up.

    Reply

  6. Jeff Hummel Says:

    Another nice post! And thanks for the plug!

    Reply

  7. Argus Says:

    The answer of course is to get those self-serving politicians out of the way and have the People make and pay for their own mistakes. It’s amazing how careful most folks would be with their own money and future …

    Reply

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