Markets, Politics and Rationality

Chidem Kurdas

We’re watching markets and politics go through gyrations. Stock market volatility appears linked to psychology: Prices move as traders alternatively act from fear or greed.

But political outcomes are more emotional than market outcomes. This is because people are better informed and more logical in their private decisions than as voters. The pioneering thinker on this subject was Joseph Schumpeter, the oddball economist who achieved fame for his work on cycles of innovation and creative destruction. Here’s a short summary of his argument, from Ponzi Regulation:

“That people behave differently as voters than they do as workers, shoppers, homeowners or business managers is an obvious but often ignored fact. Schumpeter explained why. In private transactions, we experience the direct result of our action. We like or don’t like a soda we purchase. The price of a stock we invested in goes up or down. Our business is successful or fails. We understand the consequences, bear the responsibility and try to avoid bad outcomes—we pay attention to buying the right soda, picking a good stock, running the business well.

Experience shows us the errors, so we learn; the more experience, the more we learn. “In the ordinary run of often repeated decisions the individual is subject to the salutary and rationalizing influence of favorable and unfavorable experience,” wrote Schumpeter.

Human conduct is largely driven by deep-seated emotions, but in the economic realm the rational component is relatively substantial because there one confronts definite magnitudes – income and spending, cost and revenue, profit and loss – that are subject to calculation and purposeful effort. One wills to make more money, keep down spending, reduce costs; seeks the means to achieve those ends; learns from success or failure.

None of these conditions are present for voters in the political realm. There, private individuals do not bear responsibility and do not face consequences in the way they face the result of buying the wrong soda or stock or even making the wrong move in a game of chess. Voters are not grounded in the realities of politics as they are grounded in earning a living or running a household.

Most people have no real experience in politics—the majority of policies and events are at a far remove from their lives, unlike actions they take in the course of daily life. For an individual outside the government and not running for office, politics is to a large extent unreal. Government actions have complicated and long-term effects that are difficult to understand and untangle from other influences, even by experts who study the policies. A conscientious citizen who tries to make informed, independent political decisions would have an extremely hard time.

But most voters don’t try, because they have no incentive to be better informed about public policy. It does not pay to spend their time learning about abstruse matters that may affect them little or not at all. After all, the average citizen has no control over political decisions, given that one voter is an insignificant part of a national electorate.”

So people go for easy picks – dynasts with famous names like Clinton or Bush – unless they’re unhappy with the status quo. Then they may reach for an obvious alternative, a loud alternative that doesn’t require work, with a catchy name like Trump. But the long-term solution is the principle of limited government, leaving free the private realm where individuals tend to make better choices.


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