Know Your Cooter

So you occasionally run into the argument that, what with modern technology, we should drop representative government and adopt direct democracy. "But congressmen are experts and have time to study the issues," the reply goes, but it's not very persuasive.

I found a much better response in Robert Cooter's The Strategic Constitution. He posits something he calls the democratic Coase Theorem. The basic idea is that, in the absence of transaction costs, legislators will negotiate to an efficient outcome. The intuition is that legislators will maximize the total surplus and then divide it up according to power or whatever. So for instance, certain senators might have the power to adopt farm subsidies. In the absence of transaction costs, if those subsidies are inefficient, someone will propose eliminating them but making a payment to the affected states to offset the loss. So long as the farm states are at least as well off as they would have been with subsidies, there's no reason for them not to support a more efficient policy.

Now the idea is to lower transaction costs so that this bargaining can happen. Here's a model to illustrate the idea. Assume that legislators can trade votes but voters cannot (this is plausible because when regular citizens vote, they do so anonymously and without the ability to communicate and bargain with the other voters). Assume that three bills will be voted on sequentially. Each bill costs 2/3 of the population a total of $1 billion but benefits the remaining 1/3 by $10 billion, for a net national gain of $9 billion. Each bill benefits a different 1/3 of the population, so that each person gains if all three are passed.

Now, imagine direct democracy, in which no bargaining can take place. Each bill will fail, because each bill hurts a majority of voters. Sure, the bills would pass if they were aggregated into one vote, but in real life that is not always possible. Legislators, by developing reputations, voting publicly, and negotiating directly with each other, can reach desirable outcomes that could not have been reached in direct voting. They can get us closer to the efficient, surplus-maximizing outcome. Direct democracy is some kind of sick joke.

Now, one might doubt the democratic Coase Theorem on several grounds. I'll post a quick critique of it in my next post. Still, the logic of representative democracy is pretty solid when you consider the possibilities that are foreclosed by direct democracy.