There appears to be something basic that most people in most of human history don’t understand. Or is it me (along with a lot of economists)? Here is the argument.
It would be better if our car were chosen democratically. A democratic referendum could ask voters to choose which car will be available to consumers. (How individual purchases would be financed, either with private money or by government, does not matter at this point.) Assume the voting system is the one you prefer and that the number of choices or write-in options is also what you think is most democratic. The voters are asked to vote for the single brand and model of car to be produced or imported. Each individual has one vote, however “one vote” is defined in your preferred voting system. The economies of scale brought about by a single model would reduce the price of cars compared to the wasteful diversity of the market—the 250 different models available on the American market, not counting the numerous options and colors for each model. Collective rationality would replace individual ignorance and market anarchy. Equality would be promoted: the times would be over when the rich could afford more luxurious and safer cars than the average American. The car manufacturer whose model has been chosen would, in a real sense, be elected democratically. A true collective choice would democratically decide which car we drive. What can be wrong with that?
Many things. In fact, this whole argument is invalid. A few reasons:
(1) Depending on the voting system (majority, plurality, ranked-choice, Borda, Hare, etc.), a different choice of car would likely prevail, so the person or group that chooses the voting system and the choices to be proposed would indirectly decide, or at least strongly influence, which car you will drive (on voting systems, see, in the forthcoming Spring issue of Regulation, my essay on William Riker’s Liberalism against Populism).
(2) Each individual’s vote has an infinitesimal chance of changing the result of the referendum, that is, of getting him the car he wants—or, for the real altruist, the car he thinks is better for the large masses.
(3) With only one producer and a lack of competition, including import competition, economies of scale would soon be overcome by reduced incentives, bureaucratic growth, and union power. In between referendums, the main incentives of the chosen producer would be to satisfy a faceless average consumer; or to swindle him if the incumbent thinks it is unlikely to be allowed to put one of its cars among the candidates next time. The consequences would be similar if, in a more complex referendum, a number of producers were chosen to offer, say, a black-made car, a white-made car, a LGBTQ+-made car, or any other stakeholder-made car. History provides us with an example of a near-collective car named Trabant, “a sparkplug with a roof.” (A Trabant model is shown on the featured image of this post.)
(4) This reminds us that political processes, even democratic ones, are very rough and imperfect. The most popular car in the American market is a pickup, Ford’s F-150, but only those who individually choose it are obliged to drive it, which is what individual choices are about.
(5) Economic efficiency, which is defined as the satisfaction of the varied preferences of different individuals, would be replaced by some common preferences of a centrist group of voters according to the median-voter theorem.
(6) Socialism and imposed uniformity in consumption are antithetical to individual dreams and their subjective utility—the sort of car you have wanted to buy for yourself since childhood, for example. I say “socialism” but it is the same in conservative collectivism or the old elitist right.
(7) Another obstacle to “collective rationality” would come from the voters’ “rational ignorance.” Since every individual voter knows that his vote has practically a zero chance of delivering the car he prefers, he would have no incentive to buy (if only with his time) information on the referendum alternatives—to subscribe to Consumer Reports, to read car magazines, to google technical terms or watch YouTube videos, to visit manufacturers online or physical showrooms, and so forth. (See also David Henderson, “The Logical Basis is a Difference in Incentives,” Econlog, March 9, 2021; and my own post “One Thing Rationally Ignorant Voters Don’t Know,” September 14, 2020) And if there are many voters whose cognitive limitations or sensibility to propaganda lead each of them to believe that he will decide the vote, how can anybody trust the rationality of such an electorate? Collective rationality amounts to voting blind or, at best, voting with one’s tribe.
(8) Market competition, not political competition, is, theoretically and historically, the way to reach economic efficiency.
(9) The equality obtained by letting every voter vote on our collective car would be illusory. Even with the ideal referendum, the real influencers would be the car manufacturers’ P.R. departments and popular pundits and media personalities (as well as perhaps QAnon-type websites).
(10) Even in this ideal democratic system, political competition would fill the void of economic competition. When economic markets are forbidden to clear, political markets will clear. Rent-seekers would try to influence which models will be put on the ballot, which producers will thus be privileged, and how long the monopoly will last.
(11) Consider the financing aspect of car purchases, ignored up to now. This issue would also need to be decided by an equally imperfect referendum. Suppose that “our national car” is to be paid by the government and financed by public debt. All the voters who think that their individual votes count and who want “social justice” hic et nunc would likely vote for Cadillacs to be paid by their descendants.
What most people do not understand, even apparently in America and in other sophisticated countries, is that individual choices are preferable to collective choices for both economic and moral reasons. This is true not only for cars but also for most other goods. Only goods or services that must be consumed simultaneously by all—what economists call “public goods”—escape this characterization but a separate argument has to be made for them.
READER COMMENTS
BC
Mar 22 2021 at 7:26am
Nice. A few more points:
1) Even though cars generate some externalities like pollution, such externalities are insufficient reason to force consumers to consume collectively rather than individually.
2) Even though cars may be “essential” for many people in that they may need a car to work, that also is insufficient reason for collective consumption. One can subsidize car purchases separately, if desired, through cash payments.
3) One might argue that government can use “negotiating power” to buy a single model more cheaply. But, that also seems outweighed by the gains from individual consumption choice.
4) On the collective rationality point, individual consumption not only makes it rational for consumers to research cars, individuals are more credible in sharing information with each other, e.g., through user reviews and forums. With individual consumption, fellow consumers have no incentive to mislead each other because one consumer’s decision doesn’t affect the others’ choices. When consumption is collective, if one voter say wants a sports car, he is likely to oversell the car’s relative merits to say a minivan, even if he knows that a minivan would be more appropriate for other types of voters. Instead of honestly exchanging information through user forums, we would likely get tribal “debates” where users act more like salesmen than consumers.
5) Substituting health insurance or education for cars does not seem to change the validity of any of these points.
Thomas Hutcheson
Mar 22 2021 at 7:28am
It looks to me as if most people including politicians DO understand these arguments, so much so that we do not in fact organize the car market as collective decisions.
Even for most goods that are “collective” like living in a society where even the poorest have some basic level of food and health care, we allow the direct recipients of the food and medical care to choose what to consume from among multiple, somewhat competing providers, for many of the reasons outlined.
It seems to me that Libertarian insights, which as far as I can tell are no different from Ne0-Liberal insights, would be better applied to specific policy problems such as whether to or how to deal with the increase in CO2 in the atmosphere, diminish differences in incomes or consumption, regulate the availability of health care and of new drugs and medical devices, where my feeling is that they would lead to large improvements over the status quo.
Pierre Lemieux
Mar 22 2021 at 10:17am
Thomas: I wish you were more than a little bit right. (Classical liberalism did have an influence!) Consider another sort of car called a vaccine. It is true that most of the covid sort were produced privately but, except for Pfitzer’s, with government subsidies and government distribution in most cases. (Such an emergency is special? Perhaps, but consider how the very concept of emergency has changed.) Consider cotton swabs, PPE, and toilet paper, where most people thought that government interventions were necessary after their production had been hampered by another sed of collective decisions (in 42 states and by the feds), that is, price caps. Consider housing, where the federal government finances one-half of mortgages, of which it sells a large number. Consider the government financing of half of basic research. Consider the state of free speech now, where most people seem to think collective choices are necessary. Consider Donald Trump. And do forth.
Juan Manuel Perez Porrua Perez
Mar 22 2021 at 10:48pm
Vaccines such as the ones for an infectious disease like COVID-19 are a public good — you need near universal immunization for it to work. In this case it doesn’t make sense or is fair to ration the vaccine by price, as distribution by a market would do it not to mention that a degree of force is necessary to vaccinate enough people.
Christophe Biocca
Mar 23 2021 at 9:34am
If that was the case then why prioritize the oldest/sickest people at all? COVID-19 vaccine doses are a private good (it has a decent chance to stop you from having symptoms/going to the hospital/dying, even if no one else takes it), with a significant positive externality (if, like most vaccines we know of, it makes you less likely to become contagious after exposure). Vaccine doses are still excludable and rivalrous.
A private good with a positive externality can just be subsidized. Sending every American a $300 voucher, redeemable by getting themselves vaccinated, alongside their stimulus checks would probably have worked better than what was actually done.
Pierre Lemieux
Mar 23 2021 at 1:06pm
Christophe: I defend arguments similar to yours in my just-published Reason Foundation paper: “Public Health Models and Related Government Interventions: A Primer.”
Jon Murphy
Mar 22 2021 at 10:19am
Point of fact: living in a society is not a good, collective or otherwise.
Thomas Hutcheson
Mar 22 2021 at 3:19pm
I wish I were more than a little bit right, too, but I’m happy to work on the margin I have. 🙂
I be happy to hear your proposals for vaccine development an distribution. The cotton swab and TP markets seem to have worked fine, but you can suggest improvement to them too. Ditto mortgages. I suspect I’d agree with them in the main. I think those margins would lead to greater returns on your time.
AMT
Mar 22 2021 at 11:45am
So, you disagree we are better off with collective choices (government run or heavily government regulated monopolies) for the provision of natural monopolies such as water (which are not public goods)?
robc
Mar 22 2021 at 2:04pm
I think a lot of problems would be solved if water was owned.
For one thing, we wouldn’t be subsidizing farming in deserts.
Tulare Lake would probably still exist.
Etc, etc.
AMT
Mar 24 2021 at 6:36pm
That doesn’t answer the question of whether it is optimal to have unregulated natural monopoly.
I could quit my job and it would solve the problem of not having as much time for leisure as I would like, but I would not be better off.
Pierre Lemieux
Mar 22 2021 at 2:37pm
AMT: I basically agree with robc. Hayek might salvage your argument, though, as well as Buchanan who argues that public goods depend on the definition of property rights at the “constitutional level” (see https://www.econlib.org/library/Columns/y2018/Lemieuxlimitsofliberty.html). But their’s are complex arguments. Often, a simple presumption of liberty suffices to tell Leviathan to stand back.
AMT
Mar 24 2021 at 6:41pm
I do not see why you are referencing them, or bringing public goods into this at all. Water is clearly not a public good because it is rivalrous and excludable, even according to the source you cite.
The question is whether an unregulated natural monopoly leads to greater deadweight losses than the inefficiencies from government regulation or ownership. Do you have an actual answer to that?
Jon Murphy
Mar 22 2021 at 1:47pm
What I think is also interesting to note is that democratic voting (however situated) will require a lot of logrolling, compromise, and the like to get outcomes. This is especially true if you have a supermajority rule. In other words, certain bargains take place in the political system that would be wasteful in the market system. For example, in political negotiations, horse-and-buggy owners may be able to extract compensation for their lost profits from the automakers in exchange for their votes.
So, collective decision-making at the political level will likely be more wasteful than the market because of these side-bargains, no?
Pierre Lemieux
Mar 22 2021 at 3:00pm
Jon: You are right. I tried to use a model of pure, perfect, and nirvanic democracy from the point of view of each reader, which, I supposed, required eliminating “that insidious and crafty animal, vulgarly called a statesman or politician” (to quote Adam Smithy): the politician—as well as the government bureaucrat. This is of course unrealistic. Once you introduce the politicians, even a Trabant would be a great achievement worthy of the Medal of Freedom. The Democrats would accept to support the bill only if autoworkers would start at $50 an hour and the Republicans would insist that each car-candidate have a 101.5% American content.
Grand Rapids Mike
Mar 22 2021 at 4:32pm
Instead of selecting one car, focus the selection on real important stuff such as a golf driver. There is way to many options and they cost way to much. Having a vote by everyone on one golf driver would make my decision so much easier and probably save me lots of money. But don’t stop there, next select a putter. Mine doesn’t work to well so I would like the collective to select one for me.
Phil H
Mar 23 2021 at 2:27am
In general, I think this is the lamest kind of blog post. The appeal to an unnamed “they” who are much dumber than the poster. What evidence is there that “most people in history” think any of the things you ascribe to them?
But I do like one bit of phrasing:
“The economies of scale brought about by a single model would reduce the price of cars compared to the wasteful diversity of the market”
This view of the market seems very helpful to me. It’s the worst system for running an economy – except for all the other ones that have been tried. It’s fine to acknowledge problems with markets, just so long as we remain clear that other mechanisms would have much bigger problems.
robc
Mar 23 2021 at 6:50am
There are at least two of those people in this thread, one making the same argument for water, the other for vaccines.
I think human history makes it abundantly clear that lots of people think this way. Most? Maybe not. But the Trabant is a real thing, so maybe, yeah, most.
Pierre Lemieux
Mar 23 2021 at 10:23am
Phil H: Mine is a rather standard (at least among classical-liberal theorists). In Capitalism and Freedom, Milton Friedman notes how individual liberty is a rarity in the history of mankind. Friedrich Hayek suggests that, until the 18th century, the only exceptions were classical Athens and the Roman Republic. Even that can be doubted as modern liberty is very different from ancient liberty.
Craig
Mar 23 2021 at 8:15am
Die Trabbi for its day, when introduced, apparently was relatively competitive. See for instance the similar looking West German built ‘Lloyd’ — of course makers like VW were subject to the competitive pressure by Renault, FIAT and US and German rivals and the Trabant doesn’t evolve.
The socialist manufacturers can’t hide from their products the same way socialist service providers can. This is the danger of public schools. The Trabant is there it’s just not in your face and so obviously lacking compared to a 1986 VW Golf.
Jon Murphy
Mar 23 2021 at 12:03pm
Pierre-
I know you are paraphrasing other people’s arguments for single-style production, but does the economies of scale argument hold? Monopolists are typically output restrictors, and they do that by raising price. They’ll produce where mc=mr, but raise price to the highest level the market will tolerate (as indicated by the demand curve). Thus, we tend to have higher prices in a monopoly compared to a perfectly competitive market.
Now, one could argue that economies of scale would lead to the happy outcome you discuss. But if that were true, we’d already have a monopoly situation since whichever firm could produce the output needed to capture the economies of scale would have already undercut their competitors. So, “wasteful diversity” would only exist if we assume every firm is either not profit-maximizing or there are barriers to exit, no?
Pierre Lemieux
Mar 23 2021 at 1:26pm
Jon: I agree, for the very arguments you present. I was only paraphrasing. I would add the argument that management costs increase with the scale of production, so it is difficult to think of a natural monopoly in the automobile industry or in most if not all industries. (This being said, is it sure that, in the case of a natural monopoly [continually decreasing marginal and average cost], we could say that the competitive price would be lower? It seems to me that there cannot be a competitive price and that the average cost of the monopoly is not the long-term competitive supply curve. Wasn’t there some debate on that c. the 1950s?)
Mark Bahner
Mar 23 2021 at 1:25pm
One additional aspect of democratically selecting automobiles is that it’s likely that in less than 25 years, more than 90 percent of vehicle miles traveled will be in fully autonomous electric vehicles providing transportation-as-a-service. This revolution would probably not even happen, or would be seriously delayed, if cars were chosen democratically.
The electric car portion of the revolution has been led by Tesla. The only way that Tesla continues to prosper and grow is to continuously develop lower-cost, better-performing batteries. There would be no incentive to develop lower-cost, better-performing batteries in a situation in which a single car was chosen democratically. There would be no niche market of people, like Tesla customers, who are willing to pay what is now a premium for battery electric vehicles. Without that niche market, Tesla and others would have no money to develop the lower-cost, better-performing batteries that will eventually completely replace gasoline vehicles.
Similarly, Tesla, Waymo, and others are working towards fully autonomous vehicles. But without niche markets to provide revenue for further development, such progress simply wouldn’t occur. For example, Waymo started in Phoenix, because Phoenix is sunny, dry, with flat and straight streets. It would be much more difficult to try to start in, for example, Boston, or to provide fully autonomous vehicles for everyone. And Tesla keeps offering additional capabilities that are still well short of full autonomy, but which their customers are willing to pay, because they want to be pioneers of a technology they think is cool.
Even technology revolutions that are very rapid can’t occur in a step fashion, as would be required in a situation where a car was chosen democratically.
Pierre Lemieux
Mar 23 2021 at 3:55pm
That’s a very important point, Mark, which answers the guy who may have been the central democratic planner par excellence: New Dealer Rexford Guy Tugwell. Explaining how the government would decide whether or not to launch new industries, he wrote in an AER article:
In his book The Industrial Discipline and the Governmental Arts, he further explained:
See my essay reviewing this book and Tugwell’s general ideas in Regulation.
Mark Bahner
Mar 31 2021 at 10:57am
It’s too bad Rex Tugwell is not still alive. It would be interesting to know whether the collapse of the Soviet Union would have had any impact on his (crazy! :-)) ideas about centralized planning.
And it would be especially interesting to discuss the future of automobiles with him. The idea that a government could figure out and command the future of automobiles is really insane, to me. There are just too many variables, and if the government forces change in certain directions, it seems to me that it virtually guarantees the destruction of the automobile industry in the country in which central control is attempted. What it will mean is that the production of automobiles will shift out of that country to other countries without centralized control.
I’m presently too lazy to look, but do you know how Tugwell responded to Hayek’s “knowledge problem” writings of 1945 and up to Tugwell’s death in 1979?
David Seltzer
Mar 24 2021 at 7:31pm
Voters with dollars walk into Costco and choose from thousands and thousands of products. I suspect that’s the referendum of free people in free markets.
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