It’s been a while since I contributed to “The Indian National Interest Review: Pragati.” I had to write a piece. I didn’t want the editor, Mr Nitin Pai, to get mad at me. It’s always best to be on his right side. Never get the press angry, is what I always say. Now if you know me, you know that it takes me forever to write anything. At the very mention of writing, I feel a writer’s block coming on. Writing is the hardest thing I try. But anyway, I dusted off the old keyboard, put on my thinking cap and pondered market failures, government failures, and what can be done about them. Here it is for the record.
(Click on image for a PDF copy of the issue.)
The Good Vote Banks
Atanu Dey. Nov 2010. For Pragati.
The institutions of markets and democracy are arguably two of the most elegant and useful creations of humankind. Like twins, they are often found together, and naturally share some features. They are alike since both involve collectives of humans behaving strategically. A study of markets and how they succeed or fail to deliver the socially optimal outcome can illuminate how the workings of a real democracy with its real failures can be improved.
Economists do it with models, often very elegant ones. Beginning with models of ideal markets, they have identified what are called market failures that plague markets in the real world. They have discovered ways to address those failures so that real markets can be nudged to grind out results closer to that of ideal markets. Consider Peter Diamond’s work, one of the three winners of this year’s Nobel prize in economics, which includes the study of labor market imperfections and their consequences.
Diamond’s insight, called the Diamond Paradox, involves the friction introduced by search costs in the functioning of labor markets. Workers incur the cost of searching for jobs, and firms incur the cost of recruiting workers. Add to that the matter of expectations, and the outcome can deviate from that of an ideal labor market. If the workers’ expectations are that firms will strenuously seek recruits, workers will put expend effort in job seeking; and if firms anticipate workers will carefully examine job opportunities, firms will put effort into differentiating themselves to attract the most suitable workers. The outcome, or equilibrium, will be good for all. Instead, if both parties’ expectations are that the other party will not bother much, then the outcome will be disheartened workers and uninterested firms leading to unemployment, or a bad equilibrium. The paradox is the existence of unemployed workers simultaneous with job vacancies.
The existence of multiple equilibria arising from expectations at the aggregate level can be easily understood through Diamond’s fun little “Coconut economy” model. It is set on an island far away where people consume only coconuts which they harvest from (where else) palm trees. Peculiarly, the custom is that a person can eat only coconuts that are obtained in exchange for coconuts that the person has picked. It is costly to pick coconuts since it means climbing a palm tree. If an islander expects no one else to gather coconuts, then it will be pointless for her to incur the cost of picking coconuts since she will have no one to exchange them with. This will be a rational expectation if all others also have the same expectation, and the predictable outcome will be starvation all around. Contrariwise, if everyone believes that a sufficient number of others will also pick coconuts, then a vigorous coconut market will evolve with full tummies all around.
Moving from markets to democracy (substituting voters for workers, and political parties for firms), we can see an analogous mode of failure for a democracy. Like for workers in a labor market, the voters’ rational expectations about the usefulness of their vote on the aggregate can lead to either a good or a bad outcome.
Democracy is not just about voting but rather about informed choice. It is costly for voters to inform themselves about political parties. Besides there’s time and effort required to vote. If the expectation is that others will not be making the personally costly effort of making informed choices, then the individual voter will rationally conclude that it is not worth the cost of informing himself about which party best deserves his vote and then voting – because his vote would not count in the outcome he desires.
Political parties, in their turn, noting that voters are not bothering to inform themselves, and/or are disinclined to vote, will rationally not put in any effort in differentiating themselves – which is costly for the political parties – to appeal to voters. The outcome will be disastrous: political parties that don’t have to put in any effort in attracting informed voters and a set of political parties that are hard to differentiate. The parties then don’t bother to address the concerns of voters and thus misgovern without fear of consequences. The desirable outcome would occur only if voters expended effort required for informed voting, and political parties responded appropriately to the voters’ efforts.
One mechanism to nudge democracy from the bad equilibrium to the good equilibrium readily comes to mind. That is, somehow change the expectation of the voter from one that says that his vote does not matter (which would be rational if he believes that others will not be voting) to one that says his vote matters (because others will also be voting.) Our voter will vote if he is assured that sufficient numbers of like-minded voters will also vote. This can be achieved by creating a coalition of voters who ex ante commit to voting, and this coalition choosing the party or the candidate to vote for based on a set of values shared by the members of the coalition.
Let’s consider this in the context of Indian educated urban voters. It is generally known that they largely choose to not vote, believing that their votes don’t count. With sufficient numbers of them holding this view, the expectation is rational since it amounts to a self-fulfilling prophesy. Political parties, in turn, also rationally respond to this by not even bothering to seek the votes of this segment of voters, and after elections, ignoring their concerns. This further alienates the urban voters. In essence this is voluntary disenfranchisement of the urban voter which partially accounts for the election of undesirable people to political office.
The remedy for this could be the formation of an association of voters whose members will internally decide on specific candidates (“primaries” so to speak) based on how closely candidates match the principles of the association, following which all members will vote, and equally importantly, vote only for those chosen candidates. This allows the association to make a credible claim that its members’ votes matter on the aggregate – both to every individual member of the association and to political parties.
In other words, this association of urban educated voters is an artificial “vote bank,” much like the existing vote banks that are based on other demographic characteristics such as caste and religion, and which currently have a baleful influence on the political outcome. Based on the idea that “if you can’t beat them, join them,” it recognizes that in a second-best world (one in which there are numerous distortions, as opposed to a first-best world in which there are no distortions), the introduction of another vote bank (which would be unthinkable in a first-best world) may lead to improvements.
Democracy as an ideal works flawlessly in an ideal or first-best world. But like markets and their failures, in the real world democracy failures lead to seriously flawed results that have awful consequences for hundreds of millions in a country like India. It is time that we honestly confront the reality of democracy failures and figure out a way to address them urgently and seriously.