Selfishness, Greed and Capitalism. Christopher Snowdon

swing the election towards the candidate with the best policies. However, he says that the situation is even worse than that. Voters are not just ignorant, they are misguided and systematically biased towards bad policies.

      Over a period of many years, voters have been shown to support a range of policies which economists from across the political spectrum agree are costly and counter-productive. A worrying number of non-economists continue to hold beliefs which Caplan describes as ‘positively silly’ such as the notion that technology destroys jobs and that trading with other countries is bad for the economy (the latter objection usually being framed in terms of ‘jobs being sent overseas’). It is not unusual, even in broadsheet newspapers, to be told that crime and disease are good for the economy because they create work for those who have to clear up the mess – a fallacy that was mocked by economists in the mid-nineteenth century (Bastiat 1995). At the most elementary level, very large numbers of voters and politicians are wedded to ancient misconceptions about economics which can most generously be described as only superficially appealing.

      The basics of economics, as explained in Adam Smith’s Wealth of Nations, are not hard to grasp and may even seem obvious, but, as Caplan (2007: 32) points out, people needed to hear them in 1776 and have needed to hear them ever since:

      If Adam Smith’s observations are only truisms, why did he bother to write them? Why do teachers of economics keep quoting and re-quoting this passage [about people naturally being led to ‘employment which is most advantageous to society’]? Because Smith’s thesis was counter­intuitive to his contemporaries, and remains counterintuitive today. [Emphasis in original]

      Take the issue of employment, for example. Individuals clearly benefit from having a job and need to have no understanding of economics to be incentivised to find one, but when economically naive politicians make it their task to find work for others, they are liable to endorse immigration controls, bailouts of failing companies, protectionism for failing industries and ‘job creation’ in the public sector (the only sector that they can easily control). Economists have understood for centuries that such policies are unsound. Although protectionism and tariffs appear to ‘create’ or ‘safeguard’ jobs, such policies encourage unproductive employment which drains the economy. Nevertheless, such schemes continue to be politically popular.

      None of this should be construed as an argument for giving economists supreme executive power, let alone allowing capitalists to run rampant (‘The government of an exclusive company of merchants,’ wrote Smith (1999: 152), ‘is, perhaps, the worst of all governments’). The point about the free market is that it does not require central direction. Individuals do not need to understand the economic system in which they live for it to work. They know enough about their own abilities and aspirations to work productively in their occupation of choice. The problems only come about when authorities devise well-meaning schemes to help them out, often as a result of irrational voters electing badly informed politicians who pander to special interests and ill-informed prejudices.

      Individuals rarely have perfect information, but collectively they have vastly more information about local circumstances and personal wants than any government agency could hope to gather. Once we recognise that the state is run by fallible human beings who have been elected by other fallible human beings, the case for the state making decisions for millions of people – who have different goals, different interests and different abilities – ceases to be attractive except when there is no reasonable alternative. ‘The law ought to trust people with the care of their own interest’, wrote Adam Smith, because ‘they must generally be able to judge better of it than the legislator can do’ (Smith 1999: 110).

      9 In 2005, the Labour government had a large working majority with around 35 per cent of the popular vote and with just over 20 per cent of the electorate voting for it.

      Rational consumers and irrational voters

      Critics of free markets believe that they have spotted a contradiction between economists’ belief in rational individuals in the marketplace and irrational individuals in a democracy – a paradox satirically characterised by one commentator as ‘everyone is rational, except policymakers’ (Quiggin 2010: 107). At first glance, this seems to be as incoherent as socialists’ faith in rational government and irrational markets. Why would a rational consumer suddenly become irrational when he enters a voting booth?

The answer is simple and, like so much economics, it comes down to incentives. Voters have little incentive to be knowledgeable about politics and – crucially – can afford to be wrong. A single vote almost never decides an election. The individual can cast his vote in the near-certain knowledge that it will make no difference to the result. He has scant incentive to vote at all, let alone to read up on each and every policy the candidates claim to stand for. Many people do vote, of course, perhaps out of a sense of duty or to express themselves, but the opportunity cost of voting is trivial – a few minutes going to the polls or filling out a postal vote10 – whereas the effort required in mastering the issues is enormous. An ill-informed decision at the ballot box has practically no private cost to the individual. Even in the extremely unlikely event of his vote being decisive, the costs of electing a fool or a knave will be dispersed over a large population. In short, voters can afford to indulge their irrational impulses at virtually zero cost every few years.

      This is very different from being irrational with one’s own money in the market. A poor decision in the marketplace will cost us our hard-earned money. A mistake at work might cost us our job. It is because the private costs of making a bad choice are so much greater when our own money is at stake that we are incentivised to gather information and choose carefully when making a purchase in the marketplace. The more expensive the item, the greater the incentive we have to educate ourselves about what we are buying. In financial transactions, it is rational to spend time gathering knowledge about the options. In politics, unless you are a journalist, politician or lobbyist, it is rational to ignore the whole circus and spend one’s time more productively. ‘Voting is not a slight variation on shopping,’ says Caplan (2007: 140–41). ‘Shoppers have incentives to be rational. Voters do not.’ There is, therefore, no contradiction between being a rational actor in the market and an irrational or ignorant participant (or abstainer) in a democracy.

      10 Despite this, evidence suggests that many people do not place a great value on their vote. More than a third of registered voters did not cast a ballot in the last UK general election. The fact that bad weather reduces voter turnout implies that some people think their vote is worth less than a relatively trivial opportunity cost.

      Conclusion

      There is no assumption in mainstream economics that people are perfectly rational and it is quite absurd to suggest that ‘neoliberal economists assume that human beings when engaging in the market place are omniscient: they can clairvoyantly foretell everything that might happen and how likely it is to occur and when’ (Murphy 2011: 37).

      Economists do not see a world populated by totally irrational voters, wholly self-serving politicians and perfectly informed consumers. Selfishness, ignorance, altruism and reason are fairly evenly distributed among the population. A fool in a polling booth does not become a sage in a shopping centre and a corrupt politician does not become Francis of Assisi when he sets up a small business. The extent to which we seek out information and behave rationally depends on the incentives we are given and the costs of acting foolishly. As voters, the cost of irrationality and ignorance is practically zero. As agents in the market, the cost is much greater and we respond accordingly. ‘Assuming that all people are fully rational all the time is bad economics,’ writes Caplan (2007: 135). ‘It makes more sense to assume that people tailor their degree of rationality to the costs of error.’

      Free-market economists do not assume that individuals always know what is best for them, but they do assume that individuals are better placed to know their own preferences than a distant bureaucrat. So long as we bear the consequences of our actions, the path of progress is better trod by sovereign beings pursuing their goals through voluntary cooperation