Small-group, Multi-level, Bottom-up Democracy Dec. 2008, Economics and Democracy Fred Foldvary Santa Clara University, California Santa Clara CA USA

Objective A constitutional-economics comparative-systems approach to public choice, examining the incentives for voters and policy makers, and the impact on “rent seeking, for mass democracy vs. small-group democracy.

Public Choice The branch of economics consisting of theory applied to collective decisions and their processes and outcomes.

Rent seeking (transfer seeking) Offering and making payments to office seekers and holders and their political parties in order to obtain privileges such as transfers of funds and protection from competition.

Why rent seeking succeeds * Concentrated benefits and spread-out costs. * Rational voter ignorance (not worth knowing better).

Methods to limit rent seeking Federalism Branches of government Constitutional constraints Democracy

Constraints have failed Courts stretch interpretations, e.g. inter-state commerce. Grants of funds are conditional. Intra-party collusion. Voters are rationally ignorant and apathetic.

Remedies have failed Campaign finance restrictions can be circumvented. Government financing of campaigns entrenches the major parties and does not prevent outside spending. Extreme restrictions limit free speech.

Presidential Campaign 2008 Candidate Total Raised Obama, Barack$640,000,000 Clinton, Hillary$221,600,000 McCain, John$370,000,000 source:

Top 10 donors since 1989 AT&T Inc $40,468,000 American Fed Govt Employs $40,050,000 National Assn of Realtors $34,344,000 Goldman Sachs $30,262,000 Am. Assn for Justice (trial lawyers) $29,587,000 Intl Electrical Workers$28,898,000 National Education Assn $28,623,000 Laborers Union $27,213,000 Service Employees Union $26,842,000 Carpenters & Joiners Union $26,159,000

Top Industries Giving to Congress, 2008 Cycle Rank Industry Total Dem% GOP% Top Recipient 1 Retired $124,277,52855%45%Obama (D) 2 Lawyers/Law Firms $119,000,13678%22%Obama (D) 3 Real Estate $58,583,10257%43%Obama (D) 4 Securities/Invest $58,553,17365%35%Obama (D) 5 Health Professionals $52,832,34160%40%Obama (D) 6 Education $33,465,98488%12%Obama (D) 7 Business Services $29,854,44772%28%Obama (D) 8 Misc Business $28,131,35967%33%Obama (D) 9 Insurance $27,689,77051%49%McCain (R) 10 Misc Finance $25,346,93454%46%Obama (D) FEC, Nov. 17, 2008.

Incumbent Advantage 2006 Senate Type Total Raised Number Avg Raised Incumbent $318,615, $10,277,909 Challenger $141,290, $ 1,471,780 Open Seat $ 80,312, $ 2,509,761 Grand Total $540,218, $ 3,397,600

Incumbent Advantage 2006 House Type Total Raised Number Avg Raised Incumbent $460,140, $1,085,236 Challenger $131,928, $ 218,425 Open Seat $122,949, $ 474,710 Grand Total $715,018,553 1,287 $ 555,570

Campaign costs are increasing Presidential Candidates, Total Receipts Year Total (current, millions) 2008$1,634 (up 86%) 2004 $880.5 (up 66%) 2000 $528.9 (up 24%) 1996 $425.7 (up 29%) 1992 $331.1 (up 2%) 1988 $324.4 (up 61%) 1984 $202.0 (up 25%)

Restrictions on rent seeking treat the symptoms, rather than the cause: mass democracy. “Mass”: an electorate so large it is too costly for candidates and office holders to meet face to face with most voters.

Consequences of mass voting There is an inherent demand to use the mass media to communicate to voters, and thus an inherent demand for campaign funds. Special interests exploit the demand by supplying funds in exchange for either privileges or to prevent “milking.”

The alternative "where possible, collective activity should be organized in small rather than large political units.” Buchanan and Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962).

Cellular democracy Just as a biological body is divided into cells, so too the political body can be based on small cells as the foundational political unit. Size of a cell: small enough for face- to-face contact, large enough for contested elections.

A comparative systems analysis Constitutional economics: the branch of public economics that studies the choice of constraints rather than choice within constraints (James Buchanan). A comparative systems approach: contrast the incentives and constraints of mass democracy with cellular democracy.

Elements of cellular democracy Small-group voting only Bottom-up multi-level governance Each council level elected from next lower level council members At-will recall of representatives

Models of cellular democracy 1. Plain cellular democracy 2. Cellular democracy with secession 3. #2 plus decentralized public finances 4. #3 plus demand revelation

Small-group voting (SGV) Each neighborhood cell elects a council, including an alternate member. Citizens who are not council members do not vote for any other offices. Council members may be recalled by a petition calling for a new election.

Multi-level governance A group of neighborhood councils elect, from their members, representatives to the next higher-level council. Level zero is the citizen voter; level 1 is the neighborhood council, and level 2 is the council elected by level 1.

Bottom-up democracy The level 2 councils elect from their members, representatives to level 3. And so on to the highest level h. A recall of a representative recalls him also from all higher-level offices. In each council level 2 or higher, voting is per population.

Multi-level structure

Comparative voting incentives In SGV, the probability of affecting the outcome is much greater. The knowledge needed to make an intelligent choice is much lower. Face-to-face meetings enable the voter to know the candidates.

Comparative voting incentives In a small group, with personal contact, the voter is less likely to vote capriciously. In mass democracy, voters react to the order of candidates on the ballot, the physical appearance of candidates, slogans, etc.

Office-seeking motivation Most people avoid political entrepreneurship. The cost of campaigning for level 1 office is low. Those with ambition can seek level 1 office and then work their way up.

Incumbent advantage With SGV, incumbents still have an advantage (which can be beneficial), but they do not have as much of a financial advantage.

Comparative rent seeking Money can be spent for level-1 posts, but can be countered with personal contacts and low-cost distribution of information. Therefore the demand for campaign funds is greatly diminished for small- group voting.

Rent seeking with SGV Rent seekers have to campaign in many tiny jurisdictions. Mass media can still be used, but competes much more with local communication. Political parties may still be powerful, but independents and minor parties can have a greater voice.

Top-down vs. bottom-up federalism Top-down federalism depletes the power of the lower levels. With bottom-up federalism, level i monitors level i+1 and is monitored by level i -1. Voter knowledge increases with personal contact, less costly monitoring, and voter power: level i+1 can be recalled by level i.

Separation of powers Each level i council elects a leader, e.g. chair, mayor, governor, president. Cellular democracy thus has no separation of powers between the executive and legislative branches, but this is replaced by bottom-up controls.

Model 2: secession Each level i jurisdiction may secede from level i+1 or level i except from level h. Secession can be partial, e.g. for schooling and its financing. A new level i jurisdiction elects its own representatives to the council. Secession from i+1 creates a new i+1.

The exit option complements the voice option. Greater incentives for efficient provision, as unhappy citizens may secede. Less scope for rent seeking, since taxpayers may withdraw funding. Minority interests are better served, lest they secede.

The tyranny of medianocracy The rule of the median voter.

Secession reduces TM Without secession, minority interests, on the tails get, get suppressed. The two-party system caters to the median, reducing political diversity, dampening debate. Secession gives minorities greater clout and reduces majority rent seeking.

Model 3a Decentralized public revenue All public revenues are sent to level-2, representing about 30,000 persons, on an equal per-capita basis. Many services, e.g. police, have economies of scale at that level. Revenues flow down to level 1, and from 2 up to level 3 and then up to h.

Consequences of bottom-up transfers There are no top-down transfers other than from level 2 to level 1. The power of funding enhances the power of voting. Power becomes more decentralized.

Model 3b Only level 1 may tax * All levels > 1 obtain revenues from i-1. * With Model 3a, taxation of income and sales must be at level h or h-1 to prevent tax competition and secession. * With Model 3b, income and sales taxes are repealed due to tax competition and secession.

Model 3b: consequences Public revenues require a non-mobile source: land. Land-value taxation replaces taxes on sales, income, and buildings. Revenues are transferred up only if they enhance efficiency (principle of subsidiarity).

Model 3b: implementation Locally levied land-value taxation with funds transferred to higher- level governments requires assessments by boards represented from all levels, otherwise the incentive is to under-assess.

Model 4: demand revelation Voting for propositions in addition to candidates. The Condorcet voting paradox. Marquis de Condorcet ( ) Suppose 3 outcomes: A, B, C

Condorcet voting paradox Group % 35% 45% 20% 1 st choice A B C 2 nd choice B C A 3 rd choice C A B A > B, B > C, C > A Not transitive, not consistent

Arrow’s impossibility theorem Rules for a good democracy: 1. If all want X, we get X. 2. Transitivity. 3. Independence from irrelevant elements. (A > B independent of C.) 4. No dictator.

An arrow shot through the heart of democracy. Kenneth Arrow: no voting system can satisfy all these criteria. Alternative: demand revelation. Suppose a public good G is proposed.

Demand revelation Each person states the maximum he would be willing to pay for G. Each person is also assigned a cost. If the total stated values > the cost of G, then it is done. Otherwise, not.

Demand revelation If anyone’s stated value, relative to his cost, changed the outcome, he causes a negative externality, and compensates the group for the net social cost (the Clarke tax). The incentive is to tell the truth.

Demand Revelation Tideman, T. Nicolaus, and Gordon Tullock "A New and Superior Process for Making Social Choices." Journal of Political Economy 84, 6 (December):

Consequence of DR Special interests may sway opinions and values, but participants will not exaggerate. Demand revealers are more aware of their costs. Those who don’t “vote” are counted as voting their cost. Participants have a greater incentive to obtain the relevant knowledge.

Related proposal Bryan, Frank M., and John McClaughry The Vermont Papers: Recreating Democracy on a Human Scale. Chelsea, Vermont: Chelsea Green Publishing. Much of state governance would devolve to a "shire" one level above the small town or city neighborhood. The citizens still directly elect the state legislature.

Historical examples Electoral college for U.S. President. U.S. Senate originally elected by state legislatures. Association of Bay Area Governments. An elected official from each member city and county serves as a delegate to ABAG's General Assembly. Labor unions Ancient and tribal examples

All Power to the Soviets! “Soviet” means council. The Bolshevik slogan and plan: bottom-up union of councils. But after the revolution, the Communist Party and dictators ruled. Echoed today, “power to the hoods!”

Conclusions Cellular democracy generates substantially less rent seeking from special interests. This effect is enhanced by decentralized public finance. Secession reduces majority rent seeking. Demand revelation complements SGV for social choices, and discovers social benefits.

Policy implication Mass democracy has inherent problems, and fails even worse when grafted to cultures without a deep democratic tradition. E.g. Kenya, Zimbabwe, Nazi Germany, Russia, Gaza, Iraq, and multiple military coups. Cellular democracy would make election fraud and usurpation more difficult.

Election Fraud Mass democracy is vulnerable to election fraud, especially with electronic voting. Small group voting facilitates paper ballots, observed counting by hand. A military coup can topple level h, but has to contend with all lower levels.

Comparative systems The comparison of mass democracy with cellular democracy sheds light on the cause of rent seeking. It is not democracy as such, but its implementation as mass democracy that causes a high degree of rent seeking by moneyed interests.

The problem is not the traditional belief in democracy, but the belief in traditional democracy.

Comparative systems conclusions The mass-democracy principal-agent problem is exacerbated by: Absence of secession (exit) options Difficulty of recalling representatives Centralized revenue collection and top- down revenue transfers Yes-no issues voting rather than the demand revealing method.

Democracy’s flawed path. Mass democracy is a product of evolution rather than design. We are stuck in path dependency: rent seekers have the power and prevent constitutional change. But we can at least better understand our systemic public choice problem