Striving to Get Richer and Poorer

“Government by the people for the people” is as apt to make them richer as it is liable to make them poorer. That its effects go both ways is not the fault of the government alone, but also of the people who, as the putative masters in this peculiar master-and-servant relation, send perverse signals and instructions to their putative servant. In obeying the people, the government does them much disservice. But it is in the nature of democracy that it has little choice in the matter if it wants to remain in office.

Normally constituted individuals do not deliberately seek to get poorer. The vast majority strive to get richer. For the economist and perhaps for the moralist, too, one undying virtue of democracy is that it lets them strive without brute prohibition, even if, like the beekeeper who lets his bees gather the honey though it does not let them eat it all, it does interfere with the free disposition of the fruits of human striving. Dictatorships are often try, sometimes successfully, to force people to give up striving for prosperity and devote all their efforts to some more or less insane goal they fix for them. Democracy is at least innocent of this sin.

Most economists ascribe further virtues to democracy that positively help people get richer. Such virtues are credited with giving society the rule of law, education, health and (other) public gods. Each of these boons is contestable and needs a closer look.

To regard the rule of law, surely one of the most crucial positive externalities an economy can possibly enjoy, as a by-product of democracy is simply erroneous and is belied by history. The rule of law has prevailed in England from the end of the 17th century onwards. It dominated some aspects of civil and even public life in France under the absolute monarchy of the Bourbons. It established itself in Prussia in the 18th and in Austria-Hungary in the 19th century. None of these countries waited for democracy before submitting to the rule of law. Democracy may produce a favourable climate for the rule of law to take root. However, it does not always do so, as witness some Latin American countries that adopted universal suffrage and majority voting as their means of choosing governments in the second half of the 20th century. Saying that they are not really democracies because they do not have the rule of law would be to turn the relation of the two into an empty tautology.

Democratic Education

Compulsory instruction of every child in the three Rs has strong arguments in its favour, apart from the obvious advantage literacy confers on the individual and the positive externality it represents for society. Compulsion may be excused by the fact that children cannot be asked to choose voluntarily, while voluntary choice by negligent parents may be detrimental to dependent children. Democracy, however, cannot stop at the three Rs. Electoral majorities soon come to find it iniquitous that some children’s education stops at 12 while others go on till 16, 18 or, at university level, to their mid-20s. The school-leaving age is thus ratcheted up, the socially very valuable institution of apprenticeship is stifled and often violently condemned by the teachers’ unions, and (at least in most of Continental Europe) universities are thrown open to all comers with most or all of the cost of tuition being a charge on the community. Selective admission is resented as undemocratic, elitist and inegalitarian. The result is a serious decline in the quality of higher education, an often unhappy and rebellious student body, a chronic shortage of skilled young entrants to blue-collar trades, and a hopeless surplus of graduates in “soft” subjects where even the unfit are allowed to scrape through and given a useless degree. This involves massive waste of time and resources but much recent experience suggests that democratic political systems do not tolerate attempts to stop, let alone reverse, these trends. It is as if society were striving to impoverish itself by self-inflicted educational excess.

Nor is universal compulsory health insurance, a typical democratic objective now widely achieved in most European countries, immune from perverse effects. These act at the two ends of the demographic spectrum. Widely accessible health care, including the publicly financed benefits of advancing medical technology, is a major cause of the spectacular lengthening of life expectancy we are witnessing. It would probably not have happened without the spread of majority rule, and we should no doubt regard it as a welcome by-product of democracy. However, so is legalised and widespread abortion and the easy availability of the Pill. Democracy and some social trends that accompany it are at least partly responsible for the falling birth-rate that casts a baleful shadow over the future, notably of the German and Italian peoples.

The obvious result is the “ticking time bomb” of increasing numbers those who are retired and non-working overwhelming the falling numbers of those who are still of working age. No creative national accounting can undo the fact that one way or another, average incomes must fall. This effect can be mitigated by more immigration and a lengthening of the retirement age. However, neither measure is likely to help re-elect an aspiring politician.

The provision by government of public goods in a democracy is likely to be more extensive and more costly than under political systems that depend less directly, or not at all, on majority suppprt. The reason is, broadly speaking, that while everybody has a free rider incentive to throw the cost of public goods on the community as a whole, it is only under majority voting that the free rider can enforce his wish to ride free by voting for more public goods. The government cannot avoid bowing to this wish even if it leads to disproportionate spending. (Deficits, as we know, are a charge on future generations who do not vote at the next election). The upshot is a “mix” of the national product between public and private goods that is apt to leave most people discontented, yet unable to resist the free rider temptation that is the root cause of the “wrong” public-private balance.

Wrecking the Resource Allocation

Voters do themselves probably the worst possible service when they try to use the mechanisms of democracy to obtain by politics what the economy is denying them. Car owners hurt by high gasoline prices will then demand an “energy policy,” sugar beet farmers an import tariff on cane sugar (euphemistically called a “trade policy”), assorted business interests tired of sundry taxes demand a “positive fiscal policy,” farmers blockade roads with their tractors to defend “national self-sufficiency in food,” small shopkeepers demand that supermarkets be refused building permits in the name of a “policy of proximity,” the labor unions threaten to strike if there is no “meaningful policy of employment,” regions ill served with roads urge a “balanced transport policy,” and all who have pet schemes in mind call for a “policy of purposeful public investment.” As some of these demands are met, the unmet ones are urged with ever greater stridency.

It would be starry-eyed classical liberal purism to claim that in the absence of politics, the allocation of resources in the economy would necessarily be optimal. We are not even sure whether “optimal allocation” really has a meaning except perhaps that it is the outcome of untrammelled voluntary exchanges. It is safe to say, though, that each “policy” will only make the allocation worse, more contorted, further removed from the position that free individuals would bring about by the matching of their marginal benefits and costs. “Policy” will block, upset or reverse equilibrating forces. It will redistribute income, punish those who best succeed to satisfy the wants of their fellow humans and reward those who fail to do so. Success is not always admirable and failure not always the fault of those who fail. But to make it a policy systematically to do justice in these controversial matters can only have the direst economic consequences.

It is thus that the striving of some to get richer (or less poor) by using the leverage democratic politics offers them, looks very much as if they were striving to get poorer, though it takes an outsider to see how pitifully they defeat their own purpose.