Originally Posted by
r3volution 3.0
Let's talk about consequences, or costs.
Every deviation from laissez faire decreases economic output (i.e. the tax base). A profit-maximizing monarch has no incentive to deviate from laissez faire unless it benefits him. In other words, he may tax for his own consumption (though this still has a cost in terms of reduced future income), but he has no incentive to implement mass or corporate welfare schemes, labor regulation, environmental regulation, etc, etc. It is the same with the sole proprietor of a small business. He may choose to increase his income at the expense reinvestment in the business (at the cost of reduced future income), but he has no incentive to allow his employees to steal their paychecks from one another (analogous to a monarch implementing welfare transfer payments), as that only retards production and his own income.
Do we agree on that at least?
If so, then the remaining issue is how much the monarch would tax on his own behalf, to finance his consumption spending, and how that compares to the interventions likely to be carried out by other types of governments. The actual fraction of economic output that the monarch taxes away depends on his time preference: how much future income he's willing to forgo for increased present income (just as with the sole proprietor deciding how much to may himself v. reinvest in the business).
How does oligarchy compare? If the oligarchs (let's say there are 10 of them with equal votes) have the same time preference as the monarch, and they operate by unanimous vote, there wouldn't be any difference; they would choose the same tax rate. But if they operate by majority vote, the situation is different. If members of the majority can either capture more of their share of the revenue from a tax increase, or bear less than their share of the cost (in terms of lost future revenue), any given tax increase looks more attractive to the members of the majority than it would to the monarch. For example, suppose a tax increase of $1000 would ultimately (over whatever period of time) cause a loss in revenue of $1500. For a monarch, the ratio of gain to loss is 1:1.5 ($1000 now, $1500 in the future). Whereas, for each member of the majority in the oligarchy, the ratio would be 1.67:1.5 ($167 now, $150 in the future). The monarch may or may not go for this tax increase, depending on his time preference. Every oligarch would happily trade $167 now for $150 forgone in the future.
So we can see that, all else being equal (esp. time preference), a monarch would tax less than an oligarchy.
Turning to democracy, it appears similar to oligarchy - i.e. the majority can implement policies that disproportionately benefit themselves at the expense of the minority - but there are important differences. (1) The larger the group in absolute terms, the larger the minority in proportional terms: i.e. 4/10 (40%), 49/100 (49%), 4,999,999/5,000,001 (49.999999%). Hence, the larger the group, the greater the opportunity for cost externalization by the majority. Where the oligarch majority (6/10) could only push 40% of the costs of their tax hike onto the minority, the democratic majority (5,000,001/4,999,999) can push 49.999999% of their costs onto the minority. In other words, any given deviation from laissez faire is "cheaper" in a democracy from the perspective of voters. (2) But in fact the voters are rationally ignorant, and aren't even aware of most of the costs (they really only see the direct cost of taxation, not indirect costs like slower wage growth or price inflation). This makes interventionist economic policy yet cheaper (much of it in fact cost-less) from their perspective. And finally, (3) because of the rational ignorance of the voters, the lobbies (via the politicians, who are just tools of whoever will help elect them) control much of the policy-making, e.g. on regulations. And what costs do they bear for such interventionist policies? Essentially none, and the benefits to them always dramatically outweigh whatever minor, indirect costs there might be. Where the oligarch majority could capture 100% of the gain and bear only 60% of the cost, the lobbyist who gets a tariff on imported sugar (for instance) will capture 100% of the gain and bear ~0% of the cost.
To conclude: Every deviation from laissez faire has costs in terms of economic output. Whether a political actor has a material incentive to support interventionist policy depends on how much (if any) of that cost he bears. A monarch bears the full cost. An oligarch in the majority bears a sizeable fraction of the cost. The share of cost borne by a democratic voter is only slightly smaller than in an oligarchy, but he is rationally ignorant of much of that cost, for which same reason he leaves large swathes policy-making to people who bear virtually no cost at all (lobbyists). Hence, economic policy is likely to be most liberal under monarchy, somewhat less so under oligarchy, and dramatically less so under democracy.
N.B. Think about the business analogues of monarchy, oligarchy, and democracy. Monarchy would be a sole proprietorship. Oligarchy would be a partnership. What would democracy be? A corporation, where millions of people hold exactly one (inalienable) share, which they obtained in virtue of being alive upon turning 18. Sole proprietorships are common; partnerships are common. Have you ever once heard of a "communistic" corporation such as I described? No, because such a thing would be a monstrosity of inefficiency; it wouldn't survive in the market. The management would focus less on profitability of the company and more on looting the rationally ignorant shareholders (sound familiar?).
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