"...THE REASON WHY"
Barron's this weekend has a timely list of recent Economics books for end-of-year reading. Here's how they introduce it*:
"'TIS THE SEASON FOR MY ANNUAL LIST OF ECONOMICS-related books
worth giving -- or better yet, getting -- as gifts. Works on the
economic crisis are of special interest this year. Unfortunately, my
inner Grinch won't let me recommend any from the raft of those recently
published -- because all deal with economic crises superficially.
But I can recommend seven books -- two titles I've cited previously that are indispensable for understanding 2008's dismal economy -- plus five others, including a highly topical critique of democracy from an economic perspective, and even a novel written by an economist."
The one that stood out the most for me in these extraordinary politically-driven economic times was this one:
THE PRESIDENTIAL ELECTION makes George Mason economics professor Bryan Caplan's scintillating The Myth of the Rational Voter (2007) especially topical. It's subtitled Why Democracies Choose Bad Policies, but actually focuses on why democracies choose bad economic policies.
Caplan's explanation is mainly that the mass of voters are economic illiterates. He does grant that special interest groups can wield anti-democratic power that leads to bad decisions. But even this cannot happen without tacit approval of the voters. For example, businesses enjoy tariffs that protect them from foreign competition, which harms the domestic economy. But tariffs wouldn't get very far if the public didn't already suffer from an "antiforeign bias" that views tariffs as relatively benign.
In a chapter wittily and appropriately called "Rational Irrationality," Caplan explains why people tend to behave irrationally as voters, but far more rationally as consumers. Consumers feel the direct material consequences of making bad decisions with their dollars. But their chances of affecting the outcome of an election or referendum with their votes is effectively nil. So they can enjoy the psychological benefits of voting their biases, while ignoring consequences that would, in any case, require a rational grasp of economics to fully appreciate.
"Democracy lets the individual enjoy the psychological benefits of irrational beliefs at no cost to himself," Caplan declares on page 206. "This of course does not deny the value of psychological benefits. But the trade-off is not socially optimal; democracy overemphasizes citizens' psychological payoffs at the expense of their material standard of living." Caplan therefore proposes more laissez-faire and less democracy to determine economic outcomes."
Understanding the process may not make the end result of what we're going through much better, but it sure makes for one well-informed journey.