Freeman

ARTICLE

What's Wrong with Democracy?

The Welfare State Causes Government to Neglect Its Primary Tasks

JUNE 01, 1994 by L. HATZILAMBROU

Mr. Hatzilambrou, a retired Navy Department weapons analyst, lives in Scottsdale, Arizona.

In the twentieth century the United States has been transformed from a relatively low-tax, decentralized laissez-faire country into a high-tax, centralized welfare state with ever-increasing numbers of laws, rules, regulations, and taxes that harass, bewilder, and regiment its citizens. Although this trend has developed to some extent gradually since the beginning of the republic, the crisis atmosphere of two world wars and the Depression of the 1930s provided a welcome rationale for those who view government as the solution to most of society’s problems.

But for every problem seemingly solved by government, many more rise up to confront us. Today’s problems seem insoluble, and the average person feels helpless in the face of them.

We have a democratic system of government that is supposed to produce the good society but instead results in one in which many are concerned about their safety, health, and old age, the deteriorating conditions of the public sector, persisting poverty, homelessness, and other indications of decay, the corruption of elected officials, the decline of morality, and a host of other worries. This is obviously not what people want. Something is amiss. What’s wrong with democracy? Why doesn’t it seem to work reasonably close to the popular perception?

Democracy versus the Market

To find the answer we have to reconcile two competing systems. On the one hand, there is the satisfaction of preferences through democracy: people get what they want by voting for it. On the other hand, the free market is also supposed to ascertain preferences. How do these two systems work together, if they do, to harmonize society? We can explore this by observing the effects of one on the other. To do this let’s begin at the most fundamental level, the minimal state, and observe the effects of democracy on it.

The only functions of the minimal state are to prevent physical harm or coercion of people by others, and to protect private property and contract rights. All other voluntary acts between and among individuals are not subject to any interference by the state, such as wage, price, and rent controls, subsidies, quotas, licensing, zoning, eminent domain, mandated benefits, antitrust, or any other direct or indirect regulations or restrictions not required to maintain the minimal state. In the minimal state only those taxes can be levied that provide for the necessary minimum tasks, and a limit is placed on the total amount of taxation and spending to perform such tasks. Only those functions are allowed that are necessary to support the minimal state.

In the minimal state a completely free market—within the restrictions against fraud, theft, and violence—exists for the exchange of goods, services, and ideas. Prices are determined by the laws of supply and demand. Each individual allocates his scarce resources (monetary income, nonmonetary goods, actions, and time) and makes choices that maximize his utility. An optimal society results when all individuals maximize their utilities. We call this free- market allocation of resources and satisfaction of wants market preference. Prices and other outcomes determined by market preference are “just right.” People get exactly what they want by the most compelling criterion, viz., putting their money and other resources where their preferences are.

The optimal society resulting from market preference is not a utopia. In any society populated and governed by mortals there will always be the poor, the sick, criminals, vagrants, and others who are afflicted or discontent in various ways and for various reasons. But such a society is as good as it can be, given the real world. Any governmental interference in the minimal state will result in a net number of people worse off than before.

Logic and experience throughout history show that any movement toward the minimal state, by tax cuts, decreasing regulations, and the like, expands both the economy and personal liberties, and any movement away from it, through increased government control, does just the opposite.

The alternative to market preference is the allocation of resources by the state, which we call political preference. As the government responds to the desires of various individuals and groups for an allocation of resources that differs from that indicated by market preference, the result is a mixed economy such as prevails in varying degrees everywhere in the world, with some alloca tions determined by the market and others by politics.

In a democracy, political preference is exercised largely, but not entirely, by voting. To see what the effects are of political preference in a democracy, let’s start with the minimal state and observe the effects that one measure of political preference has on it. We take as an example the allocation of resources for eleemosynary purposes, i.e., people deciding how to spend some of their income for charity. They can give money, goods, or services directly to those whom they consider deserving of their help, or through organizations, such as churches, hospitals, research centers, or other philanthropies. In either case these are voluntary contributions directly under their control, and they become a part of their total utility maximization.

Suppose, instead, that a vote is taken, and we assume here a referendum rather than a legislative vote, on giving money to a group, e.g., “the poor,” however defined, with the majority deciding the outcome. We can even assume, to give the benefit of the doubt to this process, that most of the taxes for this purpose go to the designated recipients; with no graft or other waste by government officials, and only a minimum consumed by administrative costs. The minimal state has thus been modified to include a charity tax.

This charity tax differs from the individual voluntary contributions in several respects. Those who vote against the measure will be forced to support the charity tax, as well as those who vote for it. Not even all of those who vote yes are completely satisfied. Some of them may not agree with the exact amount of the tax, favoring either a lesser or greater amount. It would be surprising, indeed, if a large number of the majority supporters thought that the tax was exactly right and precisely corresponded to what they would have voluntarily contributed. Nor do all of the majority agree on who the designees of the charity tax should be.

The “no” voters range from those who are mildly against it to those who are adamantly opposed. Regardless of the degree, all of the opponents would not, with few exceptions, have given money to charity exactly in that amount and to exactly the designated group, in the absence of compulsion. Even some of those who would have done so nevertheless object to the coercive aspect. Thus there exists a sizeable group, probably a large majority, who would not have thus allocated their income through market preference.

People in this latter category must then adjust their preferences to accommodate the new tax. Prices and other market relationships and individual actions therefore change from what they were before the tax, and these distortions thereby produce a suboptimal societal outcome. The more there are who would not have voluntarily spent their money in the exact amount of the tax, or who would have taken other nonmonetary actions, the greater are the distortions and the lower the suboptimal results in society.

Expansive Government versus the Optimal Society

Any direct tax for a purpose other than to support the minimal state will have an effect similar to the above example. Any other governmental action, even if not a direct tax, also has the effect of distorting preferences, prices, and actions, and thus also produces suboptimality. Every form of action by government that tends away from the minimal state is in effect, directly or indirectly, a redistribution of income away from the optimal, and thus another step in the progress of the welfare state towards full socialism.

Although some issues are decided by referenda (in some states, but not at the federal level), most are not. A representative form of government prevails in which legislators represent voters who have little control over their representatives, except to vote for the total package that each one initially offers but who can also change some contents of that package after being elected. These legislators over the years have passed multitudes of laws at all levels of government. Rather than the handful of laws that would suffice for the minimal state, the average citizen is confronted with a bewildering array of laws. How many laws are there? Nobody knows, but the U.S. Code, which contains the federal laws in several volumes, has about 250,000 pages. The laws of each state and its subordinate governmental units are probably as numerous. Since these laws cover virtually every facet of life, peoples’ abilities to control most aspects of their lives are severely circumscribed.

The more laws there are, the less people will be able to determine their own preferences and the less control they will have over their own lives. By contrast, in a free society everyone can allocate his resources exactly as he chooses. Except for obeying the few strictures of the minimal state, he has unlimited choices in the marketplace and in his personal life. The total output of the economy in the minimal state is just right, and the economy grows at the optimal rate. In a mixed economy the total output is not the right amount, and the economy grows at a less than optimal rate. The income redistribution resulting from political preference has the effect of decreasing savings and investment, thereby slowing the growth of the economy. The greater the degree of political intervention, the slower the growth. At the limit, in a pure socialist state, the economy stagnates.

This reveals the basic paradox of democracy in the welfare state, which is the attempt to discover a broad range of preferences through the political process. Real preferences can be revealed only through the free market. The delusion that the equivalent can be discerned through political preference is an attempt to square the circle, and as useless. It is asking far more of democracy than it can possibly deliver. People don’t reveal their actual wants by voting, but only by matching their finite resources with their wants through the free market. There is no other way that doesn’t amount to a form of wishing. Solutions that do not recognize this paradox can only be counterproductive, as people will spend ever-increasing amounts of their time in futile attempts to get what they want through the political process.

The Limits of Democracy

We can now answer the question—what’s wrong with democracy?—by looking at it in terms of sovereignty. With a dictator, emperor, or oligarchy, the sovereign is either a single person or a small group of people. But in a democracy “the people” are the sovereign. The political ideas that founded and sustained this nation through its early history had their origins in Western Europe, and particularly England, where a struggle took place over centuries to limit the power of the sovereign. The American Revolution and Constitution were attempts to affirm and perpetuate that limitation. A system of checks and balances was instituted to prevent the domination of the government by any one person or group.

But this original attempt to limit power has been gradually eroded, as the Constitution has been virtually abandoned over the years, until today the sovereign people have, directly and indirectly, acquired enormous power. We are approaching the vulgar unconstrained democracies of ancient Greece, in which the people had arbitrary power, including that of life and death over any individual, e.g., Socrates. Unless the power of the present sovereign, the people, is limited by some means, the consequence may soon enough be as great a tyranny as that of any emperor, dictator, or oligarchy. That we did it to ourselves may add a bitter note of irony, but it will make it no less tyrannical.

What then is wrong with democracy? The conclusion is that democracy only works well when the issues do not violate market preference. The only issues that should be decided in a democracy are the choice of temporary leaders to govern and maintain the minimal state, and the fidelity of those leaders in executing those tasks. But when the issues involve political preference, however slight, and no matter in what form, democracy does not work.

Does this imply that, in the minimal state, government will entail only such simple acts of administration that eventually the state will wither away? Is this just a corollary of the Marxist vision? By no means. Neither the free market nor the minimal state is a utopian ideology. There is, and always will be, a great deal of work to be done in the minimal state, and by concentrating on the proper roles of government, perhaps these can be accomplished with some degree of competence. By contrast, the welfare state attempts through political preference to do everything for everyone, and thereby neglects its primary tasks while inadvertently creating a society whose actual welfare is inversely related to its efforts. The rulers of the minimal state will have their hands full to preserve domestic peace, repel foreign invasions, and protect property and contract rights.

When the strictures of the minimal state have been breached in a democracy, then for those measures enacted to further political preference, taxation with representation is no better than taxation without representation. Thus, in a democracy in which political preference predominates, questions can be raised concerning the obligation of the citizen to vote and the effectiveness of that vote. There are very few times when one vote makes any difference to the outcome of an election. And even when it does, in a society dominated by political preference, the choice is largely irrelevant, since any of the candidates would likely continue to support the system most of whose measures the citizen consciously or otherwise opposes. The welfare state thus breeds voter cynicism, apathy, and despair.

The answer is not to abandon democracy, but to strengthen it by negating its vulgar aspects. That can be done by constitutionally restricting democracy only to electing rulers whose functions are limited to those of the minimal state. In this way the people act in the manner of Odysseus, by restraining themselves so that they cannot react to the siren song of political preference. Recognition of the addiction to political preference is the first step in instilling self-discipline and vigilance in a citizenry—traits that are required to achieve and maintain anything close to the minimal state.

The people must recognize that democracy is not a remedy for all ills. It is indeed a powerful medicine. But this medical analogy suggests the fundamental axiom of toxicology, which states that it’s the dose that makes the poison. A small dose of democracy can preserve the health of society, but in larger quantities it can be fatal.

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June 1994

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