Social Choice An Overview Michael Munger Duke University

Social Choice: An Overview Michael Munger Duke University Public Choice Outreach GMU, Fairfax, VA July 2006

Why Study Social Choice? l Isn’t a society just a bunch of people arguing? l B&T: Origin of Government is disagreement, capturing gains from “exchange”

Why Study Social Choice: Contract? Discussion must be concentrated on the "margins" of variation in political institutions, not on the "totality" of such institutions, and the relevant question becomes one of criteria through which the several possible marginal adjustments may be arrayed. The contract theory, in this context, may be interpreted as providing one such criterion. Adopting the criterion implicit in the contract theory, the analysis of political institutions asks: On what changes in the existing set of rules defining the political order can all citizens agree? This embodiment of the unanimity rule for all basic, structural reforms in political institutions, in the constitution, reflects the individualistic ethic in its broadest sense. (Calculus, Buchanan Appendix)

Why Study Social Choice? l What does justice mean? Fairness? Do these words just mean whatever the speaker wants, or do they have objective meanings? l Is it more important to have Justice l Liberty? l Justice? l Security? Liberty Security

Common Heritage, Though Different “Schools” l In fact…. . What about it, Dad?

“The” Right Thing There may not be any one right thing to do. It depends. l It is the nature of collective choices that they are unitary: One defense budget, one standard for pollution, and so on. l Asking “What Will We Do? ” begs the question. The real question is… l Why Do You Think There is a ‘We’? l Buchanan and Tullock’s “Two Levels”: Can’t let the majority decide what the majority gets to decide

Coherence and Legitimacy Can a group of people who disagree come to a consensus? How would this work? Why would we believe that the “consensus” is any more than an imperfect choice? Do the choices of majorities tell us anything about “the right thing to do” in the face of disagreement? Is there such a thing as “the majority, ” which we just have to discover through voting or some political process? I want…you want…what do we want?

Institutional Design Institutions are the humanly devised rules of the game that shape and direct human interactions. l Institutions reduce uncertainty by shrinking the choice set of all of the “players. ” If the rules are not formalized, the players spend too much time arguing over the rules, and less time in productive activities. The actual choice of institutions, however, is hard, since there are countless ways of choosing. What makes some institutions better than others? l In particular, is democracy a “good” institution? How would we know? What are the alternatives? l

Tacoma Narrows Bridge

THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

I. Unintended Consequences (Part the First) Unexpected aggregate consequences of individual choice l Hog cycles l Keynes’ paradox of thrift l Hobbesian So. N/Prisoner’s Dilemma

1. I. Unintended Consequences (Part the Second): Social Choice is Different Unexpected individual consequences of aggregate choices l Auto safety: Are Safer Cars Safer? l Alliances: Most Fail When Attacked. . . l Pigou vs. Coase

Ind’l reactions: Some Examples. . . l. Auto Safety: Peltzman claimed people choose their own risk level. Tullock’s “Modest Proposal”:

Ind’l reactions: Some Examples. . . l. Alliances: Clearly, alliances are worthless. Nearly alliances fail when attacked, in fact. So an alliance agreement is of no value in deterring attack or protecting one’s citizens. Right? No.

Ind’l Reactions: Examples--Pigou vs. Coase Pigou’s Conjecture: Markets are inefficient, as a means of allocating resources, to the extent that the (social) opportunity cost of a resource diverges from its price, or private cost to the user. Coases’s Counter-Conjecture: If property rights are clearly and exclusively defined, and the cost of writing and enforcing contracts is not too high, market forces will make the opportunity cost and the price of a resource converge.

THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

II. Social meta. Choice or Meta. Social Choice? l Choice of rules creates “the” society…The society is constituted by its constitution. l Choice of basic allocations, distributions of power and wealth l Partition of choice authority / legitimacy

Social meta. Choice or Meta. Social Choice? l Choice of rules creates “the” society…The society is constituted by its constitution. l Constitutional Political Economy

Social meta. Choice or Meta. Social Choice? l Choice of basic allocations, distributions of power and wealth PPF Bergson-Samuelson SWF Secular Deism

Roses Social meta. Choice or Meta. Social Choice? PPF 2 PPF 1 Guns

Social meta. Choice or Meta. Social Choice? Roses Bergson-Samuelson PPF SWF Guns

Social meta. Choice or Meta. Social Choice? Roses Bergson-Samuelson: Deism Two Welfare Theorems Guns

Social meta. Choice or Meta. Social Choice? Roses Arrow: No SWF!!! Buchanan: Ontology Guns

THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

Legitimacy/Authority: Hobbes or Hume? The origin of civil government and the major influences in its development may be almost wholly nonrational in the sense that explanation on a contractual basis is possible. Societies form governments and change governments for a variety of reasons, many of which remain mysterious and far below the level of objective, scientific analysis. Political institutions, like languages, get changed, almost beyond recognition, by the gradual and largely unconscious modification imposed on them by the movement through time. In this sense political society can be said to develop and to grow organically; and, if the purpose of investigation is solely that of explaining such growth, there is perhaps little purpose in inventing anything like the contractual apparatus. (Calculus, Buchanan Appendix)

Legitimacy/Authority: Hobbes or Hume? Partition of choice authority / legitimacy My own view: Three sources of authority, or legitimate decisionmaking, in any society 1. Politics/Democracy 2. Experts/Bureaucracy 3. Markets Munger (2000), Analyzing Policy, W. W. Norton

Markets Experts Politics

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THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

Focus for a moment on Markets…. Markets are not the absence of other sources of authority. Markets do not just happen. l On the other hand, unless the other sources of authority actively prevent market development, then at least some rudimentary market processes will nearly always spring up. l Active markets tend to drive prices down toward production costs. Corporations and firms prefer profits go up, not down. So the self-interest of firms is generally to try to suppress the workings of markets. l Fortunately, markets are robust enough that they are not easily suppressed, without the active complicity of one of the other sources of authority. l

Preconditions for Markets (Necessary Conditions) 1. 2. 3. 4. Differences in goals, tastes, or desires (diverse preferences) Differences in endowments of productive resources and personal talents (diverse endowments) Declining average costs as more output is produced (economies of scale) Declining average costs as the scope of action of one producer is decreased (specialization and division of labor)

Gains From Trade l Gains from trade: Differences in endowments, or differences in preferences, result in improved welfare for all participants, as long as trades are informed and voluntary. This is a benefit in consumption, since by rearranging the consumption bundles among citizens, we can make everyone better off, even though there is no increase in the total amount of goods available for consumption. Magic? No, just markets.

Gains in Productive Efficiency l By allowing entrepreneurs to take advantage of economies of scale, or economies accruing to increased specialization, markets foster economic growth. An increase in the level of economic activity means growth in the total amount of consumption goods available to citizens. Increased efficiency in production means that more can be produced with the same resources, again creating the potential for everyone to be better off.

Bonus: Reductions in transactions costs, using information transmitted by prices Quite separate from efficiency in the allocation of consumption goods (i. e. , ensuring all gains from trade are exhausted) and efficiency in the allocation of productive resources, markets also provide the important service of providing information. Prices convey information about relative scarcity in a concise, yet effective way.

Information, Tastes, and Culture “The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data. " It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. ” (F. A. Hayek, 1945, AER).

Four Ways to Allocate Resources in the Face of Scarcity 1. Price System (market): Resources are directed to their highest-valued use, so that whoever is willing to pay the most (either in terms of other valuable goods, or in currency) gets to control the resource. Big winners: People with lots of money, or with talents or resources the society values highly. Disadvantages: There are two. (a) Poor people may get too little, creating ethical problems of equity. (b) Independently of their basis in justice, market allocations may be politically untenable, if democratically-based authority is in a position to impose redistributive or confiscatory taxes.

Four Ways to Allocate Resources in the Face of Scarcity 2. Queuing: A queue is a line. Queuing means a system of allocation based on waiting your turn. So, first in line is first in priority. If all the resource is used up before your turn, you lose out. Big winners: People with lots of time (actually, a low opportunity cost of time spent waiting in line). Disadvantages: There are two. (a) People standing in line incur lots of “deadweight losses, ” or time wasted, for no gain in consumption or productivity. (b) There is no reason to believe that resources are directed to their highest valued uses: “black” markets

Four Ways to Allocate Resources in the Face of Scarcity 3. Chance: Lotteries, drawings, or other random selection processes mean everyone has an equal chance of winning. Big winners: No individual is a winner from the process, because in terms of expected value everyone is treated the same. From an ethical perspective, however, this may be an advantage. Disadvantage: By definition, allocation is random. The person who actually gets the resource may value it at only a fraction of its worth to someone else. Opportunity cost is explicitly ignored in random processes. Consequently, chance allocations evoke secondary markets for reallocating by price.

Four Ways to Allocate Resources in the Face of Scarcity 4. Authority/Discretion: Allocations can be made by experts, party officials, elected leaders, or central planners. This sort of allocation process is also called a “command” system. Big winners: Guess who: the party officials, their friends, and family! Alternatively, the beneficiaries of the policy may be those targeted by the policy, if discretion is used to avoid corruption and follow the rules. Disadvantage: There are two. (a) Lose the information inherent in prices. (b) Corruption is irresistible.

Can Markets “Plan” the Economy? Adam Smith’s “invisible hand” Social planner, and the farmer

My Plan + Your Plan Our Plan Socialist Calculation Debate “This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly. ” (Hayek, 1945).

Division of Labor It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employes a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. (Wo. N, p. 485).

Specialization To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. . the important business of making a pin is, in this manner, divided into about eighteen distinct operation, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of middling size. Those ten persons, therefore, could make among them upwards of forty eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day. (Wo. N, pp. 4 -5).

Division of Labor is the Most Powerful Force for Social Change the World has EVER Known l Division of labor is limited by the extent of the market l Globalization would result from Do. L regardless of colonialization or any other conscious policy of governments l But, is it good? Is it just? Is it inevitable? Would we CHOOSE it, if the choice were presented? Or, is it just the aggregate unintended consequence of ind’l choice?

Markets…. l Coase l Kaldor-Hicks l Potential Pareto l Hayek

THE PROBLEMS OF SOCIAL CHOICE “Overview”: Absolved!! l l l I. Problem of Unintended Consequences II. Meta. Social, or Meta. Choice III. Three sources of legitimacy/authority IV. Transactions Costs and Markets—Coase, Kaldor/Hicks, Hayek. V. Politics—Three problems: Buchanan, Hayek, Condorcet

Step back for a moment…. The Fundamental Human Problem (according to Munger) How can we construct or preserve institutions that make individual self-interest not inconsistent with the common good?

Origins of Markets l Differences in endowments l Differences in preferences l Technical cost conditions (div of labor, economies of scale, increased dexterity, innovations in tool design)

Origins of Government Institutions l Disagreement/exchange (B&T) l Capture gains from trade by reducing transactions costs l Make public goods possible

Origins of Government Institutions What if we all wanted the same thing? Would government even be necessary? It would. Because we do all want the same thing: more…. On disagreement, Charles IV: “My cousin Francis and I are in perfect accord—he wants Milan and so do I. ”

Collective Choices ‘What is truth? ’ said jesting Pilate, and would not stay for an answer. True Statements? Democracy means: “rule by the people” Democracy is the best form of government The many are wiser than any one person Morality is defined by majority—Democracy is a means of discovering truth

Collective v. Public: Buchanan Problem Property of Choice Individual Decision: I can choose, alone and Property of Good without interference Collective Decision: Choices are made by a group, and are binding on all Private Decision: My choice has no consequence for your welfare Liberty of the individual: What socks should I wear? Whom should I marry? Tyranny of the majority: Invasion of privacy Theft of property rights Public Decision: My choices affect your welfare Underinvestment, or else theft by the minority: Air or water pollution Education Liberty of the group How much to spend on defense? How to take care of the poor?

Central Questions: Can reasonable people differ? Can a reasonable person oppose gay marriage? Can a reasonable person be pro-life? Is it possible to support the war in Iraq? What is the basis of disagreement— 1. Chocolate vs. Vanilla? In politics, values. Are they primitives? Deliberation won’t help. 2. Different information sets? Evidence about causes, different understandings of means-ends relations. Deliberation might help. Is there a “fact of the matter”?

Central Questions: Is it true that the many are wiser than any one? Many people have argued this claim…. “For it is possible that the many, no one of whom taken singly is a sound man, may yet, taken all together, be better than the few, not individually, but collectively. ” (Aristotle, Politics, Book I, Chapter 11) Some important analytical support, under some circumstances. Condorcet’s “Jury Theorem, ” for example.

Central Questions: The real problems of political/democratic choice: 1. Scope of government/collective power: the Buchanan problem 2. Information of time and place: the Hayek problem 3. Coherence and legitimacy: The Condorcet / Arrow problem

Scope What can government decide? How would we decide what government can decide? What do I get to decide, by myself? What things does my family get to decide? Suppose a group of people want to decide something for me, for my own good? Can they do that? How could I stop them?

P. J. O’Rourke—Information and Scope Problems of MR Now, majority rule is a precious, sacred thing worth dying for. But—like other precious, sacred things, such as the home and the family—it's not only worth dying for; it can make you wish you were dead. Imagine if all of life were determined by majority rule. Every meal would be a pizza. Every pair of pants, even those in a Brooks Brothers suit, would be stone -washed denim. Celebrity diets and exercise books would be the only thing on the shelves at the library. And—since women are a majority of the population, we'd all be married to Mel Gibson. (Parliament of Whores, 1991, p. 5).

James Buchanan: Like Hobbes, too much liberty? “What should government be allowed to do? What is the appropriate sphere of political action? How large a share national product should be available for political disposition? What sort of political decision-structures should be adopted at the constitutional stage? Under what conditions and to what extent should individuals be franchised? ” (“Politics Without Romance. ”)

Coherence and Legitimacy Can a group of people who disagree come to a consensus? How would this work? Why would we believe that the “consensus” is any more than an imperfect choice? Do the choices of majorities tell us anything about “the right thing to do”? Is there such a thing as “the majority, ” which we just have to discover through voting or some political process? I want…you want…what do we want?

Problem of the U. S. in Iraq

Democratic Choices: War in Iraq You’ve got to help me out here…play along! YOUR Preferences and beliefs, as assigned card. REALLY! Accept the premise, and act like those are your preferences. Three choices: No war: N Aggressive war: W Police/political means: P

Choices: War in Iraq One possibility: isolationist variant of Powell doctrine N > W > P We should not get involved. But, if we do, we should go in with overwhelming force. Worst thing is to expose our troops/workers in a limited police action, depend on the U. N. If your LAST name starts with A-F, this is YOU!

Choices: War in Iraq Another possibility: Rummy World W > P > N Iraq/Saddam is an imminent threat, will develop WMD. If not war, then must vigorously pursue sanctions Worst thing is to do nothing, relax sanctions and let Iraq become nuclear power If your LAST name starts with G-N, this is YOU!

Choices: War in Iraq Final possibility: Prudent Dove P > N > W Let sanctions and inspections do their work, because Iraq is a potential danger to its neighbors and the world We have no good claim to just war, so next best is to do nothing Worst thing is to use war against a nation that has made no overt attack on the U. S. If your LAST name starts with O-Z, this is YOU!

Choices: War in Iraq So…we have disagreement 1. Prudent dove wants to use P, police action 2. Rummy wants war 3. Isolationists would prefer to stay far away from foreign entanglements, so do nothing.

Choices: War in Iraq Let’s use “democracy, ” the pure kind where the people make the choice directly. First, let’s decide whether to use force, or do nothing…. Vote P vs. W to decide which activity is better, and then vote that against N. That way, we are comparing the best “do something” against “do nothing. ”

Choices: War in Iraq So, P loses to W. What remains is to put W up against N. How about that? It turns out N beats W, and W beats P.

Choices: War in Iraq Consider what just happened. Simply by changing the order in which we consider the alternatives, I could generate as the “winner” any one of the three alternatives. Choosing the agenda, then, is tantamount to choosing the outcome. Is this just a conjurer’s trick, or does it tell us something about democracy?

Choices: War in Iraq If there are three (or more) alternatives, and there is disagreement, then democracy may be radically indeterminate. More simply, there is no correct answer to the question, “What do the people want? ” In fact, some majority opposes every alternative.

Choices: War in Iraq Here is the problem: I/P Rummy N W W P P N Prud Dove P Best N Middle W Worst Majority preferences: W > P > N > W Endless, infinite cycling over alternatives. Not a tie, but a literal perpetual motion machine

But this is nonsense: meetings end That is what should terrify you: meetings end, and things get decided. The point is that we are rarely presented with three or more alternatives. We usually are presented with two. How are those two chosen? The “Tomasi Revolution”: coalitions form, charismatic people take power. Not the will of the people, but the force of will of some demogogue or tyrant If the rules matter to this extent, that means that procedures, not preferences, determine outcomes. And elites control procedures….

Democracy works fine…. So long as everyone agrees But if there is disagreement, and at least three alternatives, then a majority opposes every available choice. So, democracy fails us when we need it most! Since some choice has to be made, we are left with an outcome that is either § Imposed (tyranny) § Arbitrary (random or procedure-driven) In either case, “democratic choice” is chimerical Dictatorship with the trappings of democracy

The worst of all worlds Democracy without constitutional liberalism… 1. Rule of law, protections of property and liberty 2. Limits on scope of issues within the jurisdiction of collective choice… Democracy without these is the most terrifying kind of tyranny you can imagine. Americans, and the West, are confused about “good government. ” The key is constitutional liberalism, not democracy.

Three Problems in Politics as Solution for Social Choice Dilemmas l Buchanan Problem: Scope l Hayek Problem: Information l Condorcet / Arrow Problem: Coherence

One Further Problem…. Leadership: Social Choice? l Why do we put the pictures of leader on postage stamps? l So we may thumb their noses, and lick their hinder parts. l What role can leadership play in a democracy? Can leaders forebear, resisting the temptation to use the immanent potential for cycles to their own advantage?

Shakespeare’s Tragedy of Coriolanus: Act II, Sc 3 BOTH CITIZENS. The gods give you joy, sir, heartily! (Exeunt citizens) CORIOLANUS. Most sweet voices! Better it is to die, better to starve, Than crave the hire which first we do deserve. Why in this wolvish toge should I stand here To beg of Hob and Dick that do appear Their needless vouches? Custom calls me to't. What custom wills, in all things should we do't, The dust on antique time would lie unswept, And mountainous error be too highly heap'd For truth to o'erpeer. Rather than fool it so, Let the high office and the honour go To one that would do thus. I am half through: The one part suffered, the other will I do.