Garett Jones returns to the podcast to discuss his book, 10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less.

During the 2016 presidential election, both Donald Trump and Bernie Sanders argued that elites were hurting the economy. But, drawing together evidence and theory from across economics, political science, and even finance, Garett Jones says otherwise. In 10% Less Democracy, he makes the case that the richest, most democratic nations would be better off if they slightly reduced accountability to the voting public, turning up the dial on elite influence.

To do this, Jones builds on three foundational lines of evidence in areas where he has personal experience. First, as a former staffer in the U.S. Senate, he saw how senators voted differently as elections grew closer. Second, as a macroeconomist, Jones knows the merits of "independent" central banks, which sit apart from the political process and are controlled by powerful insiders. The consensus of the field is that this detached, technocratic approach has worked far better than more political and democratic banking systems. Third, his previous research on the effects of cognitive skills on political, social, and economic systems revealed many ways in which well-informed voters improve government.

Discerning repeated patterns, Jones draws out practical suggestions for fine-tuning, focusing on the length of political terms, the independence of government agencies, the weight that voting systems give to the more-educated, and the value of listening more closely to a group of farsighted stakeholders with real skin in the game—a nation's sovereign bondholders. Accessible to political news junkies while firmly rooted and rigorous, 10% Less Democracy will fuel the national conversation about what optimal government looks like.

Today's guest is Edward J. Lopez of Western Carolina University. We discuss his book, Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change, which was co-authored with Wayne Leighton.

Does major political reform require a crisis? When do new ideas emerge in politics? How can one person make a difference?

In short: how and when does political change happen? Madmen, Intellectuals, and Academic Scribblers tackles these big questions, arguing that ideas and entrepreneurship are the key ingredients in any episode of political change. Authors Wayne A. Leighton and Edward J. López begin with the first lesson in economics — incentives matter — and artfully explain how the lesson applies throughout political life. Incentives explain why democracies often generate policies that impose net costs on society, and why these inefficient policies persist for years.

Yet beneficial reform does sometimes occur. So Madmen goes beyond incentives to offer a framework in which political change channels its way from ideas in society, through society’s shared institutions (i.e., its rules of the game) , which in turn shape incentives. This type of change is seldom easy, because new ideas for shaping the rules of the game must overcome two forces in society: widely shared beliefs and powerfully vested interests. Yet at certain political moments – perhaps during a crisis, but not always – shared beliefs and vested interests begin to weaken, and the opportunity for reform emerges. Within this framework, Madmen shows why certain inefficient policies eventually get repealed (e.g., airline rate and route regulation), while others endure (e.g., sugar subsidies and tariffs).

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In the course of the conversation, Ed mentions Thomas Hazlett's work on the radio spectrum and Tina Rosenberg's discussion of Iranian kidney markets on Econtalk.

Tooday's guest is Jennifer Murtazashvili of the University of Pittsburgh. We discuss her book, Informal Order and the State in Afghanistan.

Despite vast efforts to build the state, profound political order in rural Afghanistan is maintained by self-governing, customary organizations. Informal Order and the State in Afghanistan explores the rules governing these organizations to explain why they can provide public goods. Instead of withering during decades of conflict, customary authority adapted to become more responsive and deliberative. Drawing on hundreds of interviews and observations from dozens of villages across Afghanistan, and statistical analysis of nationally representative surveys, Jennifer Brick Murtazashvili demonstrates that such authority enhances citizen support for democracy, enabling the rule of law by providing citizens with a bulwark of defence against predatory state officials. Contrary to conventional wisdom, it shows that 'traditional' order does not impede the development of the state because even the most independent-minded communities see a need for a central government - but question its effectiveness when it attempts to rule them directly and without substantive consultation.

Our conversation dives deep into the modern history of Afghanistan, including its 1978 communist revolution and subsequent Soviet invasion.

Today's guest is Randall Holcombe of Florida State University. Our discussion today focuses on his book, Political Capitalism: How Economic and Political Power Is Made and Maintained.

Problems associated with cronyism, corporatism, and policies that favor the elite over the masses have received increasing attention in recent years. Political Capitalism explains that what people often view as the result of corruption and unethical behavior are symptoms of a distinct system of political economy. The symptoms of political capitalism are often viewed as the result of government intervention in a market economy, or as attributes of a capitalist economy itself. Randall G. Holcombe combines well-established theories in economics and the social sciences to show that political capitalism is not a mixed economy, or government intervention in a market economy, or some intermediate step between capitalism and socialism. After developing the economic theory of political capitalism, Holcombe goes on to explain how changes in political ideology have facilitated the growth of political capitalism, and what can be done to redirect public policy back toward the public interest.

Today's guest is Vlad Tarko of Dickinson College. We discuss the life and work of Elinor Ostrom, the 2009 winner of the Nobel Prize in economics. Vlad is the author of Elinor Ostrom: An intellectual biography.

We discuss Elinor Ostrom's work on polycentric governance, the management of common-pool resources, and policing. We also discuss the continuing work scholars are doing in this research area, including Vlad's new book Public Governance and the Classical-Liberal Perspective: Political Economy Foundations co-authored with Paul Dragos Aligica and Pete Boettke.

Phil Magness returns to the podcast to discuss the life and work of James Buchanan and to defend him against some of the more bizarre criticisms levied against him.

James Buchanan was a Chicago-school economist who created the field of public choice economics along with Gordon Tullock. He was awarded the Nobel prize in 1986.

Buchanan has received criticism recently from Duke historian Nancy MacLean, whose book Democracy in Chains places Buchanan at the center of a grand right-wing conspiracy to maintain segregation and undermine democratic institutions. Phil shows that the theory of Buchanan as a segregationist falls apart under scrutiny. It all stems from a typo in a footnote that erroneously placed Buchanan's article on school choice in a segregationist newspaper (the Richmond News-Leader) when in fact the article was published in the competing (and not segregationist) Richmond Times-Dispatch.

Today's guest is Jeremy Horpedahl of the University of Central Arkansas. Jeremy's work builds on a famous theory from Bruce Yandle's 1983 article " Bootleggers and Baptists-The Education of a Regulatory Economist." The article explored the idea that laws are often passed or defended by coalitions of economic interests (bootleggers) and moral crusaders (Baptists). Though these two groups may be quite different, as in the canonical example, policies are unlikely to succeed without support from both groups.

Jeremy's work focuses on a particular example of bootleggers and Baptists in the modern world; specifically in Arkansas. Arkansas has many dry counties, where alcohol may not be sold. Many of these dry counties are adjacent to wet counties, where liquor stores just across the county line can sell to the residents of the dry county. When there are ballot initiatives to make dry counties wet, these liquor stores have the most to lose, so they often spend hundreds of thousands of dollars to prevent the prohibition laws from going to a vote.

My guest on this episode is Shruti Rajagopalan of the State University of New York's Purchase College.

We discuss Shruti's work on constitutional political economy as it relates to India. We start by talking about the Indian constitution. India got its independence in 1947 and ratified a constitution shortly after in 1949. Interestingly, it is the most amended constitution in the world. Shruti argues "that the formal institutions of socialist planning were fundamentally incompatible with the constraints imposed by the Indian Constitution."

We go on to discuss Shruti's work on the Bhopal gas tragedy, which demonstrates some of the failings of India's institutions. The Bhopal gas tragedy was a man-made disaster in 1984 where mishandling of dangerous chemicals by the company Union Carbide resulted in thousands of deaths and hundreds of thousands of non-fatal injuries among the public. The Indian government mismanaged the legal cases against Union Carbide, resulting in no payout to the people affected by the disaster.

What follows is an edited partial transcript of my conversation with Stephen M. Jones. He is an economist for the US Coast Guard. However, we are discussing his own research, so nothing in this conversation should be taken to represent the official views of the US Coast Guard.

Petersen: So Stephen, let's start just by defining regulatory discretion. What does that mean in this context?

Jones: Sure. So, I think first off, we should probably define regulation because when Congress writes a law, they pass the law on to regulatory agencies and it will say something to the effect of "agencies: issue a regulation." So, when we talk about regulations this point isn't always clear because people just aren't familiar with this process. The regulation is a statement that kind of clarifies existing congressional law or is written in direct response to congressional law. And this could be as specific as, say, Congress can direct an agency to set an exact amount of pollution that is permitted for an industry to as broad as saying something like "protect consumers from unreasonable risks." And then the agency has room to interpret that statement as wide as it wants to.

So, when I talk about agency discretion what I'm really talking about is Congress wrote a rule that gave the agency power to issue legally binding rules that may or may not trace directly back to Congress.

Petersen: Yes. So, in the example you use with the pollution, Congress has something fairly specific in mind---a specific type of pollution---but the agency might have to clarify and to say what counts as pollution and how much they're measuring it and maybe they might establish a quota system, they might have specific rules for specific firms. And in the other example you gave, which is just protecting consumers from unnecessary risk, in that case they can basically write rules as if they were their own legislator, they're essentially doing what Congress is ostensibly meant to do. Is that correct?

Jones: I'm not sure I would go that far. So, there are various theories of the purpose of the regulatory apparatus in the bureaucracy. Some people---I cite them in the paper---Baumgartner and Jones and Workman have one that is called 'The Politics of Information' and I forget what the other is called, it was written in 2015. And their theory instead is that Congress gives the agencies discretion because Congress doesn't know the problems it needs to solve and so the agency is kind of like the specialists that you subcontracted to figure out what Congress wants them to solve without actually knowing, say the relevant information to determine that.

That's one theory. You've got other people like Philip Hamburger notably, who has written a whole book on how administrative law, which is another word for regulation, is unlawful and so he goes through sort of the common-law tradition and cites numerous pieces of evidence to say, exactly in the way that you put it, that it's a deep legislative function and only Congress should be performing that.

And so, whether that's true I think depends on a number of different assumptions that aren't always discussed directly in the literature. That would be my interpretation if that makes sense.

Petersen: Right. And of course, we're approaching this from an economic standpoint so there are important public choice issues involved with this. The same rule whether it's written by a legislator or a bureaucracy---a regulatory agency--- it's the same rule and so in principle, there should be no difference. But the important thing is that the agency and the Congress may have different incentives and may write different rules. That's what I interpret as an important underlying theme in your paper.

Jones: That's most certainly true. So, that's actually one of the things that frustrate me greatly about reading a lot of these other, I think, great researchers who don't in my opinion sufficiently consider the role of incentives. To couch it in Baumgartner's or in Jones' and Workman's terms, okay, let's assume that the purpose of the bureaucracy is to create the information that's necessary to solve the national problems, whatever these supposed national problems are. Why would you assume that bureaucrats would supply the right amount of information in the right ways consistently throughout time?

And it's not clear to me that those incentive systems are ever worked out; or if you do work them out, I don't think it actually shows that bureaucrats are beholden directly to Congress. So the big terminal literature, which comes from McNollgast, which is McCubbins, Noll, and Weingast, in the 80s is called Congressional dominance. They basically say that because Congress writes the rules they structure all the incentives and have all the tools at their disposal to monitor and police agencies. And I'm just deeply skeptical that that works as well as they describe.

Petersen: Right. Your paper mentions the Administrative Procedure Act which is sort of an attempt by Congress to keep these agencies in check. Could you describe that act and what exactly it does?

Jones: Sure. So, the Administrative Procedure Act is the main document that governs how agencies regulate. It defines the process by which regulation is made. And the chief component is that it really says before an agency issues a regulation it has to go through notice-and-comment. And what that means is when it sends out a rule it issues it in the Federal Register, which is the government's journal of record, and then it allows everybody to comment on this rule, and literally anybody will comment on these rules, and the agency is legally required to respond to all comments.

So, the basic theory is this, it's kind of got a two-part mechanism here. On the one side, it's a sort of direct structural constraint and doesn't really affect agency decision making because all it's really saying is you have to send out all rules---if the fire alarm is triggered it acts like a fire alarm. So, if you get a whole bunch of comments it's a really easy way for Congress to tell, "oh there's a problem with this policy" or it's a contentious policy because all of these people commented it and it's really loud, it's like a fire alarm. But it doesn't necessarily mean that an agency, that an individual bureaucrat in that agency really feels that alarm. It's more like it'll just be triggered, make sure just do something that doesn't trigger that alarm and you should be okay.

The other way in which it might change agency behavior is that by forcing agencies to publish rules they reveal a lot of information and in the rule itself you have to describe, say, the cost of the benefits. You have to describe whether or not it has impacts on Native American tribes, or on the Federal structure, or various other executive orders that have been issued. So, one of the main ways in fact that notice-and-comment system has changed is executive orders that define how in a very practical sense these final rules will be constructed. And so, they're all today reviewed in an office inside of the OMB---the Organization for Management and Budget---and the office is called a wire at the Office of Information and Regulatory Affairs. And so, they're responsible for reviewing all regulation and they are an Office of the president. So, some people then conclude that the President has all this power, in effect, of rulemaking in general.

Petersen: I guess the idea of the President is that it's the executive branch and so it executes and it sort of makes sense that these agencies that are executing laws would ultimately be beholden to the President. It sort of fits. So, do you know quantitatively how many comments? Are these regulatory agencies writing regulations and getting hundreds of comments every time, or is it rare to get even one comment?

Jones: It depends on the agency and it depends on the rules. So EPA because many of its rules will have national effects, and then there are national environmental organizations that you can say are key stakeholders in the outcome of all these rules could very easily generate hundreds of thousands of comments. And so, they'll actually have computer programs that scrape the comments and kind of try to sort them in the boxes. You have other organizations, like FRA for instance, they might have a rule that only gets 30 comments.

Petersen: Sorry what does FRA stand for?

Jones: Sorry, that's the Federal Railroad Administration and that's one of the two main regulators of railroads in the United States. The other regulator, the Service and Transportation Board, is primarily focused on business practices, antitrust type issues, and FRA is focused primarily on health safety and welfare of anything railroad related. So that's everything from, say, the occupational safety of railroad workers to the safety of passengers on trains. And so, the Federal Railroad Administration might only get 30 to 40 comments on a normal rule, they might even get less than that. It really depends on the rule itself.

Petersen: And typically, this would be if a rule affects my business and I might pay attention to the new rules coming out in my industry and if one I thought was going to be detrimental to my bottom line if I work for or run a private business, then I would comment. Is that the typical thing that happens?

Jones: Probably. I really think the diversity of interaction is so high it's really hard to characterize exactly what normal public commenting looks like. Because it could be everything from "I'm a regulated businessman who wants this," there might be somebody on the other side who benefits directly because the new rule sets a standard and the standards organization writes in and says your standard isn't strict enough. It could be something like there's a proposed rule that the Federal Aviation Administration, which regulates commercial flying, or anything air related at all pretty much, and they have a rule on the use of cell phones on planes. They've got about 5,000 comments, 6,000 comments. It's quite a number. Once you get above 100 that's usually quite significant. And a lot of those could be something as simple as "we just think phones shouldn't be on planes" and just average citizens writing in upset at the very concept of a phone being on a plane. So, there's quite a diversity of interactions between the agency and public on that.

Petersen: So, getting into the main topic of your paper you discuss what you call channels of influence. So, what are those and why are they important?

Jones: Yes. The way I think about it is this. I think the chief question of the bureaucracy literature is who does this regulatory bureaucracy exist for? Does it exist for interest groups? Does it exist for Congress to ultimately provide information that Congress needs? Does it exist for the President to carry out the President's wishes and his policy? Or does it exist for the bureaucrats themselves which is the one I also like to emphasize because the literature on that one is not very common today. It was more common I think about 30 years ago but the framing of it is a little different.

And so, my point is to say each one of these separate groups should have an effect on the outcome itself of the final rule which changes say the regulatory set. Some rules may be demanded by bureaucrats, some rules are demanded by interest groups in Congress. If I were to put it in the econ speak---because I'm writing this paper probably more for a political science literature---but if I had to put it in an econ speak my I'm kind of saying you have four different demanders for this product and so who is the regulatory agency really supplying this for? It's I think really how I'm thinking about it.

For the full conversation, listen to the episode.

In this episode, Diana Thomas discusses the relationship between the Virginia School of Political Economy and the Austrian School of Economics. Diana is an Associate Professor of Economics at the Heider College of Business at Creighton University.

The Virginia School is a branch of public choice, the application of the tools and techniques of economics to the study of political actors. The Virginia School’s founders, James Buchanan and Gordon Tullock, were the first to systematically apply a rational choice framework to the study of politics in The Calculus of Consent.

Two assumptions commonly made by neoclassical economists are the “benevolence assumption” and the “omniscience assumption.” The benevolence assumption is implicit in normative analysis of what governments “ought” to do, as this assumes that political actors are motivated to maximize the common good rather than pursuing their self-interest. This assumption is challenged by public choice economists. The omniscience assumption is at play in economic models that depict the economy as being in equilibrium, whereby nobody is misinformed of or surprised by economic reality. This assumption is challenged by Austrian economists.

The omniscience assumption implies that the economy should be possible to rationally plan, an idea that Mises and Hayek debunked in the socialist calculation debate of the 1920s and 30s.

As Diana states in her paper, Entrepreneurship: Catallactic and Constitutional Perspectives, “both Buchanan and Tullock reference Mises’ Human Action as the central reference for their understanding of methodological individualism.” The Virginia and Austrian schools also share common understandings of rationality and of self-interest.

Diana draws a parallel between Israel Kirzner’s distinction between calculative and entrepreneurial action and Buchanan’s distinction between reactive and creative action. While calculative or reactive action consists in simply responding to known incentives and constraints, entrepreneurial or creative action consists in envisioning a future that is different from the present and in acting on that expectation. Kirzner applies the concept of entrepreneurship to businessmen seizing anticipated arbitrage opportunities in the market. Buchanan applies the concept of creative action to political actors attempting to reform constitutional rules.

Buchanan conceives of constitutional rules as being made behind a “veil of uncertainty” since it is beyond political actors’ ability to predict in precisely what situations the rule will be applied, and whether their own self-interest will be served or hurt in those situations.

Diana believes that political action is more entrepreneurial than most economists recognize.  But while market entrepreneurship is guided by profit and loss towards those processes that best serve consumers, political entrepreneurship has no such guiding principle. Political entrepreneurs may innovate in ways that actually harm their constituents, but these innovations may nonetheless thrive and endure.

Poll numbers and bad press can motivate political actors, but these signals may not conform to the actual impacts of the policy. Good policies are often derided as evil, while bad policies are often popular. A US President can boost his popularity by declaring war, but US military ventures have a terrible track record in terms of their ultimate consequences (see Chris Coyne’s After War). Market innovations such as Lyft and Uber clearly benefit consumers, and yet there has been a political backlash against these popular businesses.

Public choice economists recognize that voters are “rationally ignorant,” since becoming informed about issues is costly, while the benefit is only manifested in better policy if the specific voter happens to be the swing vote in an otherwise tied election. Given these incentives, it would be irrational to be informed about policy, so it’s surprising that so many people vote at all. Diana explains it in terms of “expressive voting.” Voters vote because they want to express their views, not because their vote is particularly potent in shaping political outcomes.

Diana argues that policies aren’t particularly strongly affected by who is elected to office, rather they stem from institutional incentives. The median voter theorem demonstrates how, under plausible conditions, politicians attempt to please the most people by converging to a centrist policy. Another theory says that policy is not directed primarily by elections but by the lobbying efforts of special interest groups (see Olson). Since these groups get concentrated benefits from preferential policies, they have a strong incentive to agitate for them. Those who pay the costs of these policies (usually consumers) have only a small incentive to agitate against them, as the costs are dispersed among a great number of individuals.

Specific examples of policies made for the benefit of concentrated special interests are the US sugar quota, and Canadian customs duties charged for the importation of dairy products (leading to absurd cases of cheese smuggling).

You can read more from Diana Thomas at her professional website.