Knowledge And Decisions

Political systems provide some feedback via the electoral process, so that laws can be amended, repealed, or given varying amounts of financial support. This feedback is neither as fast nor as universal, nor as immediately coercive as in economic market processes. The growing area of administrative decision making is even more insulated from electoral feedback, and legal institutions at the higher, appellate court levels have been made virtually election-proof, except for the confirmation process. As compared to economic institutions, the virtues of political, administrative, and judicial institutions are not so much responsiveness as reliability. Their decisions are not separate and episodic but precedential: political, legislative, and administrative rulings are in effect until explicitly repealed or declared unconstitutional, and changes in court rulings are self-restricted by deliberate reluctance to needlessly upset precedents. The basic framework of political, administrative, and judicial rulings is categorical — legal or illegal, guilty or innocent — though much ingenuity may go into introducing elements of flexibility and incremental decision making into these institutional processes. Still, these flexible and incremental features are not as integral to such processes as to economic institutions.

Political systems allow affected third parties to influence economic transactions from which their interests are excluded. Political decision making can lower transactions costs by allowing a relatively few surrogates to make and implement decisions reflecting the will of millions who have insufficient individual stake (or resources) to incur the huge costs of devising and transacting some of the decisions they believe in.

Social transactions may generate not only costs external to the transacting parties but also benefits external to those parties. Economic institutions do not bring such benefits to bear on the decision makers. Theoretically, the beneficiaries might bring such considerations to bear through offers of reward to the transacting parties to shape their decisions so as to optimize third party benefits, but in practice the number and dispersion of the beneficiaries, and the corresponding cost of identifying and welding these diffuse interests into a coherent bargaining agent typically prevent this.¹²

A special case of external benefits is “social overhead capital” — investments whose benefits accrue to a wide variety of individuals and institutions which do not themselves incur the cost of making the investment. For example, a sewage system reduces the incidence of disease and debilitation, enabling workers to work more days and earn more pay, and enabling employers to have a more reliable workforce and correspondingly higher profits. Raising children to be honest is an investment made by parents, but among the beneficiaries are credit card companies, self-service stores, and the Internal Revenue Service. The fact that those who incur the costs of the investment are not the same as those who reap the dividends makes it more difficult for economic institutions to achieve the level of investment justified by the returns, and thereby creates a role for political surrogates.

The time horizon of the constituent may be his lifetime, and perhaps that of his children, or even the longer range interest of the whole society as an on-going enterprise. The inherent incentive structure facing a political surrogate emphasizes the time remaining between a given decision and the next election. The opportunity for policies with immediate benefits and longer run negative consequences are obvious, not only in theory but in practice. Similarly, differences in information and transactions costs per unit of benefit between the citizen and organized interest groups, as well as between the citizen and his political surrogate, create inherent incentives for policies with concentrated benefits and diffused costs — even though the costs may be several times the benefits, whether measured financially or otherwise.