Archive for April, 2015

Recently I finished reading the book Gaming the Vote by William Poundstone. I also assigned part of it to my Ethics & Economics Challenge students. It’s a fun and informative read, draping heavy-duty political science in engaging story-telling. (My post at e3ne.org on the topic is here.)

The book’s central thesis is that the American electoral system is irrational, and that range and approval voting methods provide obviously superior alternatives to the plurality rule for “single-winner” elections. Along the way, Poundstone discusses the Arrow Theorem and why it provides no obstacle to making a comparative judgment among voting rules.

Arrow’s impossibility theorem says that no social choice rule (method for coming up with a social preference ordering over possible alternatives) can satisfy the criteria of non-dictatorship (no one person can make the decision for the whole group, irrespective of the preferences of the rest), universal domain (no preference orderings are simply ruled out of order), Pareto optimality (if everyone prefers X to Y, so should the group), and independence of irrelevant alternatives (changing your relative ranking of X and Z shouldn’t affect your choice between X and Y). In simple language, the Arrow theorem says that there’s no such thing as a “will of the people”: only individuals have preferences.

Poundstone takes issue with that interpretation of the theorem, arguing that the “independence of irrelevant alternatives” criterion should be relaxed or removed. In essence, Poundstone believes that we can make interpersonal comparisons of utility (utility as cardinal, not just ordinal), and that once we do so, we can come up with some social choice rules that are objectively superior to others, because they result in more aggregate human welfare.

The assumption of cardinal, interpersonally comparable utility lies behind the case for range (or score) and approval voting as alternatives to plurality rule. The former methods are said to result in less “Bayesian regret” when used either sincerely or strategically. For instance, plurality voting leads to the “spoiler effect” (Nader causing Gore to lose to Bush) and lots of tactical voting (Nader supporters voting Kerry instead). Sometimes it can even result in victory for a candidate that would lose by a majority to every other candidate, or simply fails to choose the candidate that would beat every other candidate (Poundstone discusses how Stephen Douglas likely would have won a pairwise majority vote in 1860 rather than Abraham Lincoln).

From page 239 in the Poundstone book comes this graphic based on plausible simulations of different elections under various voting rules:

Bayesian regrets under alternative voting rules

Bayesian regrets under alternative voting rules

Lower scores here are better, and thus you can see that range voting leads to overall least “regret” when voters are sincere. When voters are 100% strategic, range and approval tie (fully strategic range voters simply cast strategic approval-like votes: full marks to their favorite and the preferred candidate of the two with the best chance of winning, none to the rest).

Of course, the whole exercise depends on the notion that you can sum up regrets across voters. In some parts of life, we make rough-and-ready interpersonal comparisons of utility. When we speak of those “less fortunate,” we clearly have in mind the idea that the poor are less happy than the rich. The possibility of empathy seems to require a view that others are “more or less similar” to ourselves, including in their capacity for happiness. At the same time, the possibility of individuality seems to require that we acknowledge that others are “in some ways quite dissimilar” to ourselves. I can’t know what’s best for you, because your happiness has a large idiosyncratic, unmeasurable component.

Where does that leave us? The Bayesian regret calculations, it seems to me, give us good reason to favor range and approval voting over the current system, simply because in the absence of any other numeraire for making cost-benefit calculations of policies, the assumption of interpersonal comparisons of happiness, with everyone capable of the same amount of happiness (no utility monsters), is better than the alternative of throwing up our hands. But we still can’t get away from the fundamental insights drawn from the Arrow theorem: that only individuals have preferences and act on them, and that trying to maximize social welfare at the expense of respect for individuality is not only possibly unjust, but also irrational.

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At e3ne.org, I have posted some reflections on my last discussion with the Ethics & Economics Challenge students, on the topic of private property rights. The work of Acemoglu, Johnson, and Robinson on how property rights support high levels of development plays a prominent role. Here’s a scatter plot from their famous 2001 paper:

property rights and development

Source: Acemoglu, Johnson, and Robinson (2001)

Economies with greater protection from expropriation have higher per capita incomes. There are plausible reasons to think the relationship is causal. As I note in the post,

If I have a stock of lumber in a warehouse in Oregon, and I hear that a hurricane in New Jersey is causing prices to spike there, I have an incentive to ship lumber there only if I can enjoy the profits of doing so. If the government taxes my profits at 100%, I have no incentive to ship the lumber where it’s needed most. Even if the tax is only 70% or 60%, it reduces my incentives enough that I’m not going to incur a lot of time, effort, and cost to ship the lumber. Similarly, if the government owns the lumber, or no one does, then no one earns the profit from shipping the lumber where it’s needed, and so no one wants to ship the lumber where it’s needed.

Still, private property rights are not sufficient for development:

If private property rights are so great for the economy, why didn’t the economy grow tremendously during the age of classic feudalism, when aristocrats held absolute property rights in their land, and serfs had to work on their estates for low pay? It should be clear that just as prices without property rights do little good, so do property rights without real markets. When a small group of people own vast quantities of land and use their ownership of land to oppress everyone else, you won’t get economic progress. We need private property rights, but they need to be dispersed enough to prevent the biggest property owners from converting their wealth into effectively absolute political power.

For that reason, I’m willing to consider comprehensive redistribution of land in former conquistador states, where owners of the great latifundias work the land inefficiently with hired laborers and convert their market power in the rental market into political power.

The other benefit of private property rights I talked about with the students was environmental. Private property rights can solve the “tragedy of the commons,” whereby people tend to overuse and deplete open-access resources. In that vein, I shared with them this very interesting article on different property regimes in the Maine lobster fishery. Where (communal) property rights are strictly defined and enforced, lobster are not overfished: lobster caught are larger and more mature, and lobstermen earn higher wages.

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This week’s post at e3ne.org is about the miracle of the price system:

Natural disasters harm people’s standard of living by destroying resources, but in a free marketplace, rising prices and profits in scarce goods give both buyers and sellers an incentive to heal the economic wound. Drawn by the possibility of making good profits at high prices, sellers bring the scarce goods to market from afar. Facing high prices, buyers demand less of the scarce goods than they would if prices were not allowed to rise.

For this reason, George Mason University economist Alex Tabarrok calls a price a “signal wrapped up in an incentive”…

Read more.

As it happens, I’ve also assigned this week F.A. Hayek’s article, “The Use of Knowledge in Society,” in my Dartmouth course this term, American Political Economy. Hayek’s article is itself a kind of minor miracle, in that it was published in the world’s top economic journal, The American Economic Review, despite having no equations in it and a grand total of one cited reference.

Hayek’s point is that the free market’s price system aggregates and condenses distributed, particular information unknown to most market actors. No one has to know where all the stocks of a scarce resources are located, and what the relative valuations of that resource are to all possible consumers, for the market to allocate the resource to the highest-valuing users from the lowest-cost producers. A price is a signal wrapped up in an incentive.

At the end of Hayek’s article there is a wee bit of gloating about how he and Mises had persuaded the rest of the profession that economic calculation is impossible without prices. The state of the debate ended as a sort of compromise between the two original positions. The socialists had conceded that economic calculation was impossible without market prices, and the free-marketeers had conceded that, in principle, a decentralized socialist economy could generate market prices.

The problem for even a decentralized socialism is that while it can have price signals, it lacks the virtue of the “incentive” feature of prices. I might know that the price of lumber is high in New Jersey after a hurricane, but if I’m sitting on a warehouse full of lumber in Oregon, I won’t necessarily ship that lumber to New Jersey unless I can reap the extra-normal profits afforded by those high prices. If I’m not the “residual claimant” on the value of the lumber, I might as well send it to my political cronies, or not do anything with it at all, which might be the easiest course of action. Even decentralized socialism with price signals, for instance as attempted in Yugoslavia in the 1970s and 1980s, fails on account of its poor incentives.

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