An Economic Analysis of Democracy
Part 1: The Theory of Collectivism
Mutually beneficial transactions between buyers and sellers that take place in a free market represent a crucial element of the economic system. Sometimes, however, to ensure the process of mutually beneficial transactions, it is necessary to have more participants than just a buyer and a seller alone. Let’s call the entirety of such participants a collective organization, or club, that represents a group of people whose participants are making joint efforts to increase the welfare of each member. The main difference between the government and a club is that the members of a club can withdraw from it if they do not like rules, whereas the government demands that each citizen fulfills its rules and pays taxes (membership fees), even if they do not agree with the rules.
Regardless of whether we call a collective organization a club or a government, any group of people desiring to perform a joint action faces similar challenges. Before a group starts acting, it must formulate the aims of the group and decide on the objectives to be implemented for achieving those aims. This means that the individual preferences of people must become united into group preferences. The main challenge here is the criteria by which individual preferences within a group must conform to the overall group aims and objectives. In this regard, two aspects of the problem must be outlined: what the motivation of the group is and what the preferences of the collective might imply.
People have different motivations and they set up collective organizations because they think that more benefit can be derived through collective action than through individual activity. People may want to regulate external effects and/or produce public goods through collective actions. A collective action is justified when it contributes to an increase in the welfare of each participant. In case of voluntary clubs, members need to receive certain benefits, otherwise they will leave the club. The indicator to gauge how well local and central governments meet the requirements of their citizens is extremely abstract, while withdrawing from the club would, in this case, mean moving to live in another country, which is unlikely. Therefore, the evaluation of government programs and policies, to gauge their non-acceptance and/or increase their efficiency, is almost impossible.
Given that a group must take collective decisions to determine what type of actions will be best, a group, as an abstract notion, does not have requirements. However, people within a group have their own interests and thus voting is the best way of meeting their requirements, which are then confirmed by a group decision. The interests of each member are accommodated within the group’s interest. Thus, the public interest is nothing more than the accommodation of the interests of every individual in society, though a society, as such, cannot have requirements. In economic terms, the welfare of society must be assessed according to the impact that any given decision of government (society) has on the welfare of each individual.
Since transactions in the free market are voluntary, with each side involved gaining benefit, a mechanism for the redistribution of resources is the optimal option among all possible alternatives. In contrast to the free market, the decision making process in modern democratic societies rests on the principle of the majority, which theoretically implies that the majority of citizens who support a certain course of politics, expect to receive benefit, whereas the minority, which opposes the chosen political course, expect a worsening of their condition. When a segment of society benefits and another segment loses, one cannot speak about the optimal distribution of resources. Thus, in terms of resource distribution, the social sector only becomes equivalent to the free market if social decisions are based on the principle of unanimity. Consequently, a social policy or/and program will bring about a guaranteed result only if each member of society views it as something that will increase his/her welfare. In any other case, a way should be found to evaluate the benefit for the majority and the loss for the minority. This must be necessarily done because there is no guarantee that a decision taken in the name of the majority will improve their welfare to a greater extent than it will decrease the welfare of the minority. Given that a unanimous decision cannot be made and that no cost-benefit analysis can be conducted, many decisions taken in a democratic society for the improvement of social welfare are faulty and do not actually improve the welfare of the majority of society at all. This is in contrast to voluntary organizations and clubs, which people may freely choose to join or pull out of.
Numerous collective organizations with different titles operate in society: clubs, social groups, municipalities, local and central governments. Different goods have different qualities, which condition the optimal number in a group within which a good must be shared. Let’s assume that a swimming pool is in common ownership, serving a certain number of people. Each person pays a membership fee that is needed to cover the costs of the swimming pool. So long as each additional person using the pool does not diminish the benefits of the other people, the swimming pool provides a service of collective use and everyone is happy. But, if the number of users increases to the point where the swimming pool becomes overcrowded, the users will face a problem. One solution to this problem would be to increase the size of the swimming pool. However, this will create additional difficulties in terms of ensuring the quality of service. Similarly, in the event that a highway becomes overcrowded, one of the solutions would be to add new lanes, but this would make the regulation of the entry and exit of the highway, and ensuring the security of traffic, more complicated. Consequently, instead of constructing one gigantic highway or swimming pool, it is better to have several highways and swimming pools. Doing so, would ensure that such services would also be of better quality and more cost effective.
With regard to public goods, society creates consumption groups of various sizes. Consequently, whether specific objectives must be performed on the level of central or local government depends on the specifics of the goods and the amount of consumption. When the consumption of a product significantly exceeds the number of real consumers, excessive consumption occurs (national defense, common resources). Therefore, a good that is consumed by all of Georgia must be created by the central government; whereas a good consumed by a group of consumers within a self-government unit, must be created by a self-government body. The issue of the centralization or decentralization of authority must be considered in this context. The law of Georgia on self governance is too far away from this concept. Consequently, it is logical to assume that a public good that must be created and shared by members of society will either be more or less than the amount that members of society need. In both cases, public costs exceed the public benefit and hence, the distribution of resources is inefficient.
Thus, given that different types of goods have different qualities, the number of members in a group depends on the specifics of the good itself. For a good of private consumption, the optimal size of a group is one person because a good has two qualities – it is excludable and, at the same time, rivaled. The optimal size of a club for a swimming pool may comprise several people, but this is much smaller than the population of a city where a municipality ensures citizens with public goods such as roads, squares, outdoor lighting, et cetera. National defense, inter-regional highways and the like require the involvement of more people than the population of a single city. The structure of society is conditioned by social groups of various compositions and sizes, which, in their entirety, create a society. The list of public goods will decrease as the number of optimal groups increase. In fact, the central government must set an aim of creating fewer public goods than local governments. The reality, however, is different.
The economic model of democracy. Up until now, we have made the assumption that in group decision making each member was actively involved. In reality, however, this is impossible because such decisions are either unachievable or are very costly. As a rule, members of a group elect representatives, or officials, who take decisions on behalf of the group. The economic model of democracy is totally opposite to what the majority wants. In this economic model, elected officials (representatives) have objectives that are determined and clearly formulated in advance, as established by the constitution. Citizens do not exchange their votes for promises, but elect people with appropriate qualifications whose skills and competences meet the job description and requirements determined by the constitution. Actually, the economic model means the process of electing people for the positions of “managers” for a certain period of time because citizens agree that a collective organization (taking into account the optimal size) can provide them with public goods in a more productive and effective manner than the citizens would be able to do individually. Consequently, since citizens are paying taxes, they try to elect such people for positions who will be able to fulfill the pre-determined assignments to the maximum extent. Those persons appointed to such positions become accountable to voters in much the same way that the manager of any joint stock company is accountable to shareholders. The level of responsibility is determined in accordance with the quality of work performed, whilst the work to be done is measurable and concrete. A manager of a collective organization is given the right to use as many resources as are necessary for the fulfillment of a specific task. Consequently, the productiveness of local or central government increases. At the end of the day, political candidates do not give promises, but work on action plans that are needed to fulfill specific tasks.
Who can create a constitution which, on the one hand, will restrict, to an optimal extent, government from impeding the performance of that work which will damage citizens and, on the other hand, encourage those activities which will facilitate the performance of socially beneficial work? The development of constitutional rules requires much more than a simple majority in society. Universal agreement is necessary on what comprises a public good. Each citizen of a country who wants to create a collective organization must have a clear understanding of what he/she is expecting from it because the public interest is nothing more than the common interest of people to obtain benefits from what a collective organization can better ensure. When citizens realize that a necessary service can be received only for a certain fee and not for free, the number of free riders decreases. Likewise, the list of those services that people want to receive from a collective organization decreases. The optimal size of society is determined by the specifics of a good itself. On the basis of this, local, regional and central governments, which have limited resources and create limited possibilities, are more likely to succeed in providing benefits and value more effectively when their members pay a corresponding price. This model fundamentally differs from the concept of democracy that is oriented on meeting the interests of the majority of society. With this in mind, the majority expresses its readiness to hand over indefinite power to a group of people who will try to meet its requirements at the expense of the minority. Such a system does not make economic sense because it becomes impossible to analyze and evaluate social costs and benefits.