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In Politics, Your Choice Is Worthless. In Economics, Your Choice Is Definitive.

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In nearly 40 years of teaching, I’ve learned that students predictably react with hostility if told that none of their individual votes in political elections will ever determine the outcome of any election.

When discussing public-choice economics, I’m careful never to say that an individual’s vote “doesn’t matter.” Of course it matters, at least to each individual who votes — a reality proven by the fact that each individual who votes chooses to spend time and effort to do so. I’m also careful to preface my remarks with the assurance that nothing that I say should be interpreted as a plea, or even as an excuse, for people not to vote.

No Individual Vote Determines Electoral Outcomes

But I nevertheless do insist on driving home the correct understanding that in any majority-rule election with more than a small handful of voters, the probability of any one vote determining the outcome is virtually zero. I conclude by stating frankly to my students this verity: “Your vote will never make the outcome of any election other than what that outcome will be if you vote differently or if you don’t vote at all.”

Not one of the thousands upon thousands of students who have taken my classes over the decades has ever denied outright that the outcome of any election is extraordinarily unlikely ever to be determined by a single vote. When explained straightforwardly, the “non-determinativeness” of a single vote is simply too obvious to deny.

Yet intellectual awareness of this reality seems, strangely, to fuel in many students a need to venerate voting — to describe voting as being not only a sacred secular act, but as the most precious right that an individual can possibly possess.

And what’s true of students is true of the public at large. Majoritarian democracy is widely (if mistakenly) regarded as being synonymous with freedom, and the right to vote is held to be a priceless privilege that gives to each person who exercises it remarkable power to determine how he or she fares within society by giving each person a loud voice in determining the course of society.

Very few people are willing to accede to the reality that voting gives no individual any influence whatsoever over the manner in which he or she is treated, or how he or she fares, in society. The widespread romantic belief is not only that the person who votes has a meaningful say in the affairs of society, but also that the “say” that a person has through voting is more powerful and important than any other “say” that a person can have in society.

As a simple matter of arithmetic, however, this belief is a complete fairytale. Yet it persists.

Contrast this myth of the power of voting with another myth, one almost diametrically its opposite — namely, the myth that in markets every ordinary person is powerless, with his or her puny individual choices swamped and made insignificant both by those of “powerful” others and by faceless market forces.

Decision-Making Power Within Markets

A prominent version of the “people are powerless in markets” myth is the notion that, because each of us in markets is highly dependent upon the efforts of others, we as individuals are not really responsible for that which we produce.

Barack Obama alluded to this myth when, during the 2012 presidential campaign, he reminded his audience that businesses that use infrastructure such as roads and bridges to transport their goods to market “didn’t build that.” Nor do businesspeople typically provide for the education of their workers. The insinuation is that any profit that businesses earn could not have been earned without these state-supplied goods and services. And — the insinuation continues — because the state made possible these profits, the state is entitled to a large chunk of them.

Others have exposed the factual and logical errors that infect the insinuations drawn from Obama’s “you didn’t build that” declaration. What’s relevant here is the stark difference between the presumptions at the root of the “you didn’t build that” myth and those at the root of “voting gives each individual a real say” myth.

While of course it’s true that each individual in the modern market economy is highly and daily dependent upon literally billions of strangers for his or her existence — with most of these strangers, by the way, not being operatives of the state — it is emphatically untrue that each individual in market economies has no significant personal influence over his or her economic well-being.

Of course roads, bridges, communications networks, and all other manner of infrastructure make possible nearly every productive effort of people in modern economies. But to be necessary is not to be sufficient. The most extensive network of highways by itself produces no economic value. Ditto for the most excellent schooling of the population, and for the most efficient judiciary. Actual economic value arises only if and when entrepreneurs create goods and services to be made available on markets.

Without the creativity, risk-taking, and efforts of individual entrepreneurs, no economic value would be produced. This reality is made not one whit less certain because successful entrepreneurs rely upon infrastructure as well as upon the productive efforts of countless strangers in the market.

If, for example, Steve Jobs had lazed about all day gazing at his navel, we would not today have as many and as high-quality smartphones and other electronic marvels as we have. And if you retort that had Jobs been nothing but a lazy navel-gazer then some other entrepreneur would have done pretty much what the real Jobs actually did, I will note that we would then still be beholden to that other entrepreneur for his or her individual creativity, risk-taking, and effort. In no case does infrastructure itself create valuable goods and services, however beneficial, or even necessary, it might be for the creation of valuable goods and services.

And what’s true for successful, famous entrepreneurs is true for each ordinary person.

The market gives to the plumber, the pipefitter, and the political-science professor each a real and meaningful say in how his or her life proceeds. The young man who chooses to pursue a career as a physician need not persuade 51 percent of his fellow citizens to endorse his choice; that choice is his and his alone. Likewise for the woman who chooses to delay having children in order to work full-time as an attorney: the decision is hers, and it’s a decisive one.

Unlike in politics, each person’s individual decisions outside of politics are typically decisive. Each of us, individually, chooses what to eat, what to wear, where to live, whether or not to attend college, whether or not to have a pet hamster, with whom we have sex and how often, how many tattoos and piercings adorn our bodies. This list is practically endless.

In short, popular mythology insists that matters are exactly the reverse of what they are in reality. We are told that we have meaningful voice when we don’t, and that we don’t when we do.

The danger is this: as the state comes to superintend ever more aspects of life, the say of each individual in how his or her life plays out diminishes. Yet the naïve, stubborn popular belief that the most powerful “say” that each person has in democratic society is through the vote will mask this loss of personal say. People will be herded down the road to serfdom, all the while with each person mistakenly supposing that, because he or she votes, he or she chooses to make this ominous journey.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University

Democracy Was A Valid Way To Make Collective Decisions. Now It’s A Toxic Tool For Ramming Through The Preferences Of A Voting Majority.

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Pop quiz: what’s the most economically significant difference between the style of your underwear and the cabin temperature of a 747 jet en route from New York to Paris?

The answer is that the style of your underwear is highly individual in a way that the 747’s cabin temperature is not. You can wear whatever style of panties, briefs, or boxers you like without obliging anyone else to wear that same style. On any NY-to-Paris flight there might be 400 people without any 2 of them wearing exactly the same style, color, and size of underwear.

Not so with the 747’s cabin temperature. At any point in time, the thermostat on that jet can be set on only one temperature — a temperature that must be lived with by everyone on board. Unlike with underwear, I cannot “wear” the 69-degree temperature that I prefer while the person in the seat next to mine “wears” the 73-degree temperature that is ideal for her.

Deciding on Collective Goods

Economists call the cabin temperature in the jetliner a “collective good” — to be distinguished from a “private good” such as underwear. Roughly speaking, one central feature of a collective good is that, if it is supplied, it is supplied in a lump sum to a large collection of people. Its provision cannot, at reasonable cost, be individualized. Therefore, deciding on the provision of a collective good — whether to provide it at all and, if so, in what particular form — poses challenges that are absent for the provision of underwear and other private goods.

Because individual passengers cannot each have his or her ideal temperature, there is required some process for selecting the temperature for the group. One possible process is randomness: keep the thermostat set at whatever temperature it happens to be set on. But randomness is unappealing. If the setting happens to be at 82 degrees, most people will be uncomfortably warm. Surely it’s desirable to exercise some human decision-making to choose the setting.

Let’s imagine that this 747 is owned and operated by Democracy Air, which, as part of its marketing, boasts that it lets all passengers on each flight choose the cabin temperature setting through a majority-rule voting procedure. (Obviously, on real-world jetliners the cabin-temperature setting is chosen by the captain. It’s not unreasonable to suppose that this method is used because the chances of the captain choosing a disagreeable temperature are so small that the benefits of turning the choice over to a majority of passengers aren’t worth the costs of conducting such an election.)

Although it’s impossible to devise any method of voting that produces outcomes that reflect only the preferences of the voters (and not also some arbitrary feature of the voting method itself), majority rule in this case is nevertheless a reasonable method for choosing the thermostat setting. Everyone who votes on a temperature setting has a say. And because human beings do not have wildly different preferences for ambient air temperature, the winning temperature in this election will almost surely be one that is acceptable to — if not ideal for — everyone.

Yet regardless of the “correctness” or “incorrectness” of the democratically chosen thermostat setting, the fact remains that all passengers on the plane must live with whatever setting is chosen — a reality, of course, that is true regardless of the method for choosing the thermostat setting.

Deciding on Individual Goods

But now suppose that a genius engineer at Boeing invents an air-conditioning system that allows each passenger for the entire flight, at no extra cost, to have his or her ideal temperature. Jones in seat 31A enjoys his 76-degree environment while Smith in seat 31B is comfortable in the 69-degree air surrounding her. What effect would this invention have on Democracy Air’s boast that the cabin temperature on each of its flights is determined by majority-rule voting of the passengers? Answer: that boast would lose all marketing appeal.

When only one cabin temperature is possible, many airline passengers might value Democracy Air’s majority-rule system. Yet with individual temperatures now available, there is no reason to submit cabin temperature to a collective decision.

Democracy, in other words, is valuable only for making decisions that are truly collective — that is, for choosing outcomes that many people must simultaneously live with. Real-world examples include, nationally, the size of Uncle Sam’s defense budget, and, more locally, the level of pollution abatement for Lake Pontchartrain.

For these and other collective choices, it’s justifiable to support democracy over other means of choosing, such as dictatorship or coin flipping. But any enthusiasm for democracy born from the desire to have genuinely collective choices made by voters rather than by monarchs, autocrats, or random chance should not metastasize into the blanket superstition that democracy is the best means of making any and all decisions.

When decisions can be individualized at reasonable cost, the appropriate decision-maker in each case is the individual who is most affected by the choice. Just because democracy is the best way to decide on the appropriate level of pollution abatement for Lake Pontchartrain does not mean that democracy is the best way to decide which style of undergarments we all wear.

A Serious Point

Because no serious person wishes to subject our choices in underwear to majority rule, my narrative above might seem pointless. Yet the point becomes clear by surveying modern governments’ vast range of activities. Surprisingly few of these activities involve the provision of genuine collective goods. The great bulk of them involve the state overriding choices that each individual could and would make privately — that is, that each individual could and would make without obliging other people to consume the same good or service that the individual decision-maker chooses.

In the United States today, government superintends individual decisions to purchase imports; it prevents individuals from voluntarily choosing to patronize hair-braiders, dentists, and physicians who have no state-issued licenses; it compels each worker to save some minimum amount for retirement; it specifies many of the detailed terms on which we may and may not participate in financial markets; it dictates the maximum rate at which water may flow from our household faucets. Although each of these — and countless other — officious interventions is sold as somehow furthering the collective good, in fact each such intervention substitutes the state’s choices for the choices that individuals could make on their own without imposing their preferences on others.

In the face of this egregious officiousness, too many people remain nonchalant. Because the American government is democratically elected, there’s a widespread presumption that the actions of this government are, as a rule, the best ones possible. Yet this presumption is mistaken. It is the product of the metastasizing of a correct understanding — namely, that democracy is a sound means of making collective choices — into the lethal fiction that democracy is ethically and epistemologically superior to individual decision-making in nearly all situations.

 

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and a professor of economics and former economics-department chair at George Mason University.

Small Businesses Are Key In Improving the Lives of Workers – And Everybody Else.

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While one often hears a lot of talk about the virtues of “mom and pop” shops (and the evils of “big box” stores) policy makers do remarkably little to encourage the growth and health of small businesses. While the federal government has created a federal boondoggle ostensibly designed to favor small business — known as the Small Business Administration — only a tiny number of businesses ever benefit from anything the agency does.

Policies Stacked Against Small Businesses

In actual practice, policymakers fawn over large firms, creating special programs for tax breaks and subsidies, as made obvious every time a large firm looks for a new place to put a corporate headquarters. The stated political justification is often that “this business will produce a large number of jobs!” This rationale, however, ignores the fact that if a thousand of the city’s small businesses were given a similar tax break, they would likely produce a comparable number of new jobs. This is conveniently ignored, and policymakers instead choose to favor certain large firms, which in turn makes it harder for small firms to compete.

At the same time, governments at all levels relentlessly hand down ever more regulations and mandates to businesses of all sizes. Yet it is small firms who suffer the most because they have less access to financing, equity, and resources needed to cope with mounting regulatory requirements. Licensing and labor regulations create more pitfalls for small business owners to fall into, while locking many potential business owners out of industries entirely, unless they comply with arbitrary “training” or certification mandates. These mandates can be quite draconian, such as Iowa’s requirement that barbers receive 2,100 hours of training — more training than is required of a paramedic — in order to cut hair.

Other regulations indirectly disadvantage small businesses as well. As finance researcher Karen Petrou noted in the wake of the Great Recession, banking regulations in recent years have made it harder on small businesses:

[C]apital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose.

Small Businesses Increase Competition for Workers

It’s at this point that a seasoned reader might expect me to go into a variety of explanations about how the small business economy is important to GDP growth, and to employment growth, and to vague notions of “innovation.”

But that’s not where I want to go with this.

Yes, the small business economy is good for employment and economic development. But small businesses also serve very important social functions, while offering benefits to many workers as well.

The small business economy offers more options for workers who are competing for wage work, while also offering a potential exit from wage work altogether — and entry into sole proprietorship.

In Human Action, Ludwig von Mises  notes that one of the greatest limitations on a worker’s bargaining power with employers is the ability of a firm to exercise monopoly power over hiring. The thing is, this is impossible in a relatively free market. So long as new firms can enter the marketplace, hiring firms will come under pressure from competitors, and thus bid up workers’ wages. As Mises notes, firms must compete with each other for all types of resources, whether building materials, square footage, or financial services. It is no different with workers. Consequently, one of the worst things that can happen to a worker is for governments to create what Mises calls “an institutional restriction of access to entrepreneurship.” If governments act to limit the ease with which new businesses can enter the marketplace and compete with existing firms, this lessens the power of workers. The more firms a worker has to chose from, the better off the worker is. This is, of course, facilitated by a diverse and healthy small business economy.

More Potential Opportunities for All Types of Workers

Benefits for workers also extend to “eccentric” or “niche” workers who might find themselves otherwise relatively unemployable.

After all, large firms often become large firms because they excel at catering to the needs of the most common preferences in the marketplace. Workers who are accustomed to dealing with these mainstream preferences — whether they be along linguistic, cultural, or socio-economic lines — will be a good fit at the large firms. On the other hand, a worker who has poor English-language skills, but who is well versed in in dealing with customers of a certain ethnicity, may find employment far more easy to come by among certain small business owners who cater to a niche, ethnic-enclave, or socio-economic group.

In other words, the existence of numerous small businesses don’t just provide more employment opportunities in the abstract. They often provide more opportunities to workers who have the most trouble in finding employment otherwise.

This is part of the reason why small business ownership has so long been an important part of economic development for ethnic minority groups and for immigrants. Today in the United States, around 25% of U.S. firms are founded by immigrants, and this share rises to above 40% in states like California and NewYork.

And immigrant small business owners are often just part of a growing economy of minority-owned businesses, whether founded by native-born or immigrant owners. According to CNBC:

Business ownership among minorities has been on the rise in recent years. Between 2002 and 2007, minority-owned businesses increased 46 percent, while nonminority-owned businesses grew 10 percent during that same period…

In 2007, Asians owned 1.6 million businesses, African-Americans owned 1.9 million, [and] Hispanics owned 2.3 million.

It’s not a coincidence that many people outside the cultural mainstream are founding their own businesses. Often, these businesses are founded precisely because they provide relatively better job security and flexibility to owners and workers who could not find similarly attractive terms at larger mainstream firms.

Benefits Beyond Money Profits

Economists often debate whether or not the small-business economy is “efficient.” Some have even suggested that small businesses should be regarded as harmful because they use resources that larger firms might be able to more “efficiently” use due to advantages of economy of scale.

This is, of course, a terrible way of looking at small businesses

In addition to the benefits offered workers, small businesses often provide a wide variety of benefits to both owners and consumers in the form of services to the community, and the psychic profits afforded to owners.Unfortunately for small businesses, many of these benefits don’t show up as money profits, and thus economists ignore them.

For example, it is clear that that demonstrated preference of a small business owner is to run a small business even if, in theory, he or she might be able to command a higher wage some other way. It’s not difficult to imagine why this might be. Many small business owners — even if the enterprise does not provide for an especially high income — prefer self-employment to collecting a wage because it offers the sort of flexibility, control, and peace of mind that is not often available to wage earners. While self-employment can often mean long hours, it also often means the proprietor is unlikely to lose all of his income at once, due to being laid off. Even if the business becomes less profitable, the proprietor is not going to walk to his desk one day to find a pink slip. Moreover, if the economy is weak, a business owner can temporarily cut his own wages with more flexibility and ease than he can normally cut the wages of an employee. If times are good, a business owner can temporarily increase his own hours (and income) to take advantage of the sudden increase in demand. For a great many business owners, this sense of control over one’s schedule and career are worth it, even if the full benefits do not show up in any government statistic.

Negative Attitudes Toward Small Business Endure

In spite of all of this, we can expect both policymakers and pundits to largely ignore small businesses and to continue to ignore the high costs imposed on small firms and small entrepreneurs by government regulations.

Some even continue to attack small business owners because they are allegedly not regulated enough.

Last year, for example, the left-wing Jacobin magazine declared that “small businesses are overrated” and that “[w]e shouldn’t fetishize mom and pops. They offer lower wages, skimpier benefits, and inferior labor protections.”

This “analysis” by author Matt Bruenig attempted to make the case that since some government regulations don’t apply to businesses with fewer than 15 employees, this creates a “loophole” through which workers can be oppressed with impunity by small business owners. The ideal economy for Bruenig, it seems, is one in which even the smallest firm must do all the same paperwork and pay the same government mandated benefits as huge corporations.

In real life, of course, this would ensure that few new small firms are ever created at all.

Fortunately, even the center-left Institute for Local Self-Reliance sees the danger in attacking small businesses. As noted by the ILSR’s Stacy Mitchell, small businesses disperse economic resources more evenly throughout a community, and, as Mises noted, they provide more options to employees while creating more competition for large firms. Nor do small firms really pay less, unless we’re talking about highly-paid managerial jobs. Although Bruenig thinks small business should be trashed because they allegedly pay lower wages than large firms, Mitchell writes:

For low- and middle-income workers, there is no wage gap between small and large firms. People in the bottom 50 percent of the income distribution earn about the same working at large firms as they do at small. In other words, the fact that big companies pay more on average is solely a function of the earnings of their highest paid employees.

In fact, this myth that larger firms offer a cornucopia of higher wages for everyone has become widespread across the ideological spectrum. A belief in this trope is partly why Kevin Williamson at National Review last month insisted that big business is getting the short end of the stick thanks to a romanticizing of small business. But in the age of “too big to fail,” the idea that big firms are America’s punching bag is not terribly convincing. Meanwhile, recent efforts by conservatives and leftists to denounce small businesses as overrated is not an encouraging trend.

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute.

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