Coherence and Legitimacy Can a group of people who disagree come to a consensus? How would this work? Why would we believe that the “consensus” is any more than an imperfect choice? Do the choices of majorities tell us anything about “the right thing to do” in the face of disagreement? Is there such a thing as “the majority,” which we just have to discover through voting or some political process? I want…you want…what do we want?

Institutional Design Institutions are the humanly devised rules of the game that shape and direct human interactions. Institutions reduce uncertainty by shrinking the choice set of all of the “players.” If the rules are not formalized, the players spend too much time arguing over the rules, and less time in productive activities. The actual choice of institutions, however, is hard, since there are countless ways of choosing. What makes some institutions better than others? In particular, is democracy a “good” institution? How would we know? What are the alternatives?

Coherence and Legitimacy I Four categories of activity: My money, my consumption: I’m careful and frugal Your money, my consumption: I’m extravagant, but I care about the service and will monitor it My money, your consumption: I will underprovide, though private charity does work more than you might think. And, it is crowded out by public spending. Your money, your consumption: I pay no attention to cost, and I pay no attention to quality of service. Welcome to “DMV World”!

Step back for a moment…. The Fundamental Human Problem (according to Munger) How can we construct or preserve institutions that make individual self-interest not inconsistent with the common good?

Two Approaches Madisonian “Ambition must be made to counteract ambition…” Rousseauvian Transform the self, solve the problem of amour propre. Inscribe the law on the hearts of men. Some preferences are better than others.

Markets and Government Markets, for the most part, focus on individual choice. I get what I want, you get what you want…. Collective processes, backed by government, focus on group choice. You get what you want, and I get what you want, too.

Origins of Markets Differences in endowments Differences in preferences Technical cost conditions (div of labor, economies of scale, increased dexterity, innovations in tool design)

Origins of Government Institutions Disagreement/exchange (B&T) Capture gains from trade by reducing transactions costs Make public goods possible

Origins of Government Institutions What if we all wanted the same thing? Would government even be necessary? It would. Because we do all want the same thing: more…. On disagreement, Charles IV: “My cousin Francis and I are in perfect accord—he wants Milan and so do I.”

“The” Right Thing There may not be any one right thing to do. It depends. It is the nature of collective choices that they are unitary: One defense budget, one standard for pollution, drive on one side of the highway, etc. Asking “What Will We Do?” begs the question. The real question is… Why Do You Think There is a ‘We’? Buchanan and Tullock’s “Two Levels”: Can’t let the majority decide what the majority gets to decide

Madisonian Institutions Markets—Smith’s baker Politics—Federalist #51: Men are not angels Men are not ruled by angels “Ambition must be made to counteract ambition…”

But it is asked how a man can be both free and forced to conform to wills that are not his own. How are the opponents at once free and subject to laws they have not agreed to? I retort that the question is wrongly put. The citizen gives his consent to all the laws, including those which are passed in spite of his opposition, and even those which punish him when he dares to break any of them…. (From The Social Contract) Democracy Unbound….Rousseau

When in the popular assembly a law is proposed, what the people is asked is not exactly whether it approves or rejects the proposal, but whether it is in conformity with the general will, which is their will…. When therefore the opinion that is contrary to my own prevails, this proves neither more nor less than that I was mistaken, and that what I thought to be the general will was not so. If my particular opinion had carried the day I should have achieved the opposite of what was my will; and it is in that case that I should not have been free. Democracy Unbound….

Loyal Opposition? This conception of democracy is logical. The actions of government are driven by the people; the general will is sovereign. Opposition to the general will is treason, and must be punished. No need for two parties: only one general will. All those countries with “Peoples’ Democratic Republic of ___” were not perversions of democracy, but examplars. That is what pure democracy, with no limits on scope, looks like. Cannot be otherwise. Democracy, in and of itself, is an attractive concept that must constitute a recipe for tyranny, unless the scope of collective sovereignty is strictly limited.

Che Guevara’s “Man and Socialism in Cuba” (1965). Society as a whole must become a huge school....We can see the new man who begins to emerge in this period of the building of socialism. His image is as yet unfinished; in fact it will never be finished, since the process advances parallel the development of new economic forms. Discounting those whose lack of education makes them tend toward the solitary road, towards the satisfaction of their ambitions, there are others who, even within this new picture of over-all advances, tend to march in isolation from the accompanying mass. What is more important is that people become more aware every day of the need to incorporate themselves into society and of their own importance as motors of that society