A Flaw in the Democratic Coase Theorem?

So, as I explained in the previous post, Cooter's democratic Coase Theorem is that in the absence of transaction costs, legislators will reach an efficient outcome. The basic idea is that any proposal that "makes the pie bigger" can fully compensate anyone harmed by the legislation, with some pie left over (I used the word surplus earlier, but that's confusing because I don't mean a fiscal surplus).

I thought I had identified an objection to this theory, but after more thought I'm not so sure. Imagine this scenario. One state elects a minority senator. Every other state is racist against that minority. Now, their distaste for a minority in the Senate might be strong enough that it's worth it for them to pay the state to elect a white person. Meanwhile, the state's desire to be represented by this particular senator might not be very strong (there might be a white candidate who is almost as good, as far as they're concerned).

There's room for a bargain here, so absent transaction costs, the state will elect a white senator in exchange for a payment from the other states. [If you're troubled by the idea that it might be "efficient" to satisfy racist preferences, just switch the example and make the senator himself a bigot, with most of the country bothered by the presence of a bigot in the Senate]. The reason this isn't satisfactory to me is that everyone recognizes that there are prohibitive transaction costs for individual voters. The question is whether transaction costs for legislators can be reduced to the point that some fruitful bargains are made. I think that this is possible, which is why the democratic Coase Theorem might be useful. I don't think the theory is at all applicable, though, to the voters in a general election (I should note that it still might be useful conceptually, but I find this particulay application inapt).

Now, say the theory is only applicable to the legislature. Now how does the country get rid of the minority senator? Again, strictly speaking, the theory has an answer. The senator should resign in return for some kind of payment to his constituents (in the form of federal spending or whatever). This counterintuitive result follows from the unrealistic assumption that legislators merely seek to represent faithfully the interests of their constituents.

Given this assumption, my objection doesn't stand. The "efficient" outcome is reached through a bargaining process. Instead of identifying a technical problem with the theory, I've proposed a situation in which application of the theory leads to implausible results. That's less of a strike against the theory than you might think, because the Coase Theorem (and Cooter's derivative theory) don't claim to describe the world accurately. Rather, they set out an ideal and then examine the ways in which we fall short of it, and the consequences of those shortcomings. I'll come back to this theme again, no doubt, but for now I'll just note that such theories can be misused rather badly when they are mistaken for accurate descriptions of the world.

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.

All's Fair

So here's how you make someone fall in love with you. Give that person a very unpleasant bacterial illness (curable with Cipro - see below). Let him/her suffer for a week or 2. Then see that the person goes to a doctor and gets Cipro. Then, after about 2-3 days of Cipro, the person will wake up basically cured, and will fall in love with the first thing he/she sees (you!).

I know this because I woke up this morning and fell deeply in love with my snooze button. I had been experiencing varying degrees of discomfort for weeks, but last weekend was miserable. On Monday I started taking Cipro and on Wednesday I woke up feeling great. I had a strong feeling of unfocused, vague love. All I needed was an object of affection to bestow my love on... in the event my snooze button sufficed (it is really a re-kindling of a longstanding love affair).

So there you have it. Don't come whining to me about how hard it is to find someone to love you.

I MADE A FUNNY

So you know when a basketball player goes up for a dunk, but the ball slams off the back of the rim and he falls on his ass or something? The announcer should say, "That looked like George Tenet's idea of a slam dunk!" and eventually could just call it a "Tenet."

So You Think You Can Tell

Syd Barrett died yesterday. He was the inspiration for one of my favorite songs, "Wish You Were Here." On a completely different subject, you should be skeptical when the US demands something from another country. Often behind the scenes we're making damn sure that they don't give in to our demands.

For instance, we slipped CIA agents into the weapons inspections teams in Iraq. This basically guaranteed that Saddam wouldn't let inspectors back in. The basic idea of the tactic is to appear reasonable in our demands, but in fact put someone in an impossible position. Then his intransigence is the excuse for more extreme action. Saddam was a monster, but the tactic works fine against non-monsters too.

Sex and the Wealth of Nations

So Amrit is going to teach a class on economics. I thought I'd help him out by finding some good stuff, but I've gotten bogged down on questions that probably don't deserve too much attention, like behavioral economics.

Anyway, it struck me the other day that most male behavior can probably be explained by the desire to get laid. I get up in the morning and dress in conformist clothes and clip a Blackberry to my belt because these are the behaviors that establish me in my community. The young gentlemen that I see on the subway, engaging in sharply different behavior, are really doing the same thing in a community that values different attributes. At first glance, I'm more successful than they are, but one rather suspects that by the relevant metric they are vastly more successful.

Of course, we are playing to our strengths. I have to compensate for being physically unattractive and intellectually uncreative by making money and "selling" my other attributes. It would be different if my talents were athletic or musical or existent at all.

This is my new theory on the relative wealth of nations. If a nation grants status and sexual success to its conformist, white-collar workers, it will prosper. See Japan. If women favor attractive, nonconformist men (as they generally do absent socialization), the country will fail to develop (economically; culturally it might thrive). The United States is a mix. To some extent we bridge the gap by having our women marry conformist white collar workers but sleep with, for example, musicians. We also split by age: young men do worse by conforming and being boring, but in middle age these are the attributes women seem to prefer. In a sense my behavior is an investment in the future. Women who today prefer interesting, attractive men may decide that they prefer to drive a Lexus or something.

Of course, it would be best to be interesting, attractive, AND wealthy, but that's not an option for too many people. Note also that as women improve their economic prospects, the pressure to find an affluent husband will diminish. This will mute the "Japan" effect identified above, but many of those professional men will be replaced by women, so the net effect on the economy is uncertain. So maybe I'm making a very bad investment. In the future, the women will buy their own Lexus's, and men will compete for sexual success by developing their physical and creative attributes. This bodes ill for people like me.