Politics, Democracy, Invisible hand and Equilibrium

Is Democracy a self correcting system?

In my old article in which I noted the parallels of fallacies in mainstream political theory (Classical democracy) and mainstream economic theory, I made an assertion that Democracy is sanctimoniously believed as a self correcting system. Now I elaborate some more on this fallacy. If you’ve read my series of past articles, you would know that my thesis on Democracy is intertwined with political economy of Capitalism. In fact, modern Democracy is a Capitalist concept as emphasized by Schumpeter and other philosophers. So it’s not surprising that problems and fallacies of Democracy have parallels with mainstream economy theory.

In mainstream economic theory, general equilibrium or market equilibrium is a critical concept. It’s a point where markets clear out, the forces of demand matches with forces of supply in markets of goods & services and Labor. Orthodox theory prescribes that Laissez-faire invisible hand clears the market if the governments don’t create obstacles and hindering regulations. The sweet spot of equilibrium is the holy grail of orthodox theory and orthodox economists spend their time building mathematical models and identifying this point of equilibrium and related parameters.

(there’s no invisible hand that provides an anchor to markets. Economic agents take decisions in endemic uncertainty and there’s no invisible hand that can guarantee that economic decisions of all agents can achieve some net balancing position. Keynesian thinking recognized this shortcoming of markets and thus proposed government as a stabilizer of aggregate demand. But Keynesian thinking has vanished in Neoliberal age.)

What do I think about concept of General equilibrium? General equilibrium is an idealistic concept and special case where markets may reach, if ever, a point of balance and that too may only be momentarily. The driving forces of creative destruction means that there cannot be any stable equilibrium in an economy as new products & services keep arriving with ever changing technology of production. Another perspective is that equilibrium can be reached at any point - there can be multiple points of equilibrium. You can have an economy which is in equilibrium but the economy has low production, high inefficiencies, high unemployment and low supply. Such underperforming economy can be called low equilibrium (or bad equilibrium) and this is a situation in many poor developing nations. With right set of economic policies, the economy can be taken to a high equilibrium where Production increases as well as the Demand and economy utilizes the resources more efficiently with higher level of employment.

(In orthodox theory, prices and wages are determined by invisible hand but heterodox economists have different kind of models. While prices in unorganized sectors of economy like Agriculture are determined by demand & supply mechanism (more or less), prices in organized sectors of economy are determined by markups which are based on market power of firm (market power of firm is based on its capitalization in oligopoly/monopoly). Wages in organized economy is determined by bargaining power of labor (stronger unions can negotiate for higher wages). Wages and prices are thus determined by complex factors including power relations between Capitalists and Labor.)

Orthodox economists spend their time on models as if achieving the equilibrium in itself is the goal of economic policy. But the goal of economic policy is not just about achieving equilibrium (if such a state exists) but a much broader set of objectives. The goals such as high employment, high production, good standards of living, clean environment & sustainable growth, low inequalities, decent wages etc. But orthodox economists believes that all the good things will automatically follow from equilibrium if we allow invisible hand to work its way. People like Milton Friedman were the most radical proponent of invisible hand who scorn any intervention by government in the markets and profess that independent central bank should only focus on money supply (QTM). Now let’s move onto Political theory and Democracy.

There is a parallel in Political theory to that of invisible hand and general equilibrium in orthodox economic theory. Orthodox economists say that government should not meddle with forces of markets and let the markets find their point of balance. Similarly, mainstream political scientists believe that Democracy is a self correcting system and it should be allowed to play out for healthy political discourse. What invisible hand is to orthodox economists, the universal suffrage is to political scientists & similar intellectuals. I’ve already explained the fallacies of classical theory of democracy and especially its key tenet - the rational electorate theory. Rational electorate theory professes that people are rational, intelligent and informed who have capacity to exercise sound political judgement.

Political thinkers say that even if electorate is sometimes fooled by demagogues, deceptive scoundrels and incompetent politicians, the electorate will learn and corrects its mistakes, and vote out these sort of politicians in next elections. The order of democracy is that mistakes are fixed and delicate balance is restored in terms of healthy and competent government. Many political thinkers also say that mistakes are part of democratic process and a learning curve for electorate. But universal suffrage do not actually provide any sort of invisible anchor that keeps it in balance.

Anybody who has studied the democracies of poor third world nations knows that many of these countries could never correct themselves. Their democratic systems keep getting worse, more & more dysfunctional and sometimes even to a point to a complete State failure. Such States are commonly called Potemkin Democracy or electoral autocracy or Zombie States. These failed States appear to have a process of elections, multiparty politics and universal suffrage but the Democratic process is just a facade to legitimize rule of autocrats and oligarchs. Nations like Russia, India, Turkey are example of Potemkin Democracy. America is now moving in same direction. The incompetent and corrupted leaders can keep getting elected by the people despite continuous failures and long term decline.

Democracies can tolerate a degree of marginal dysfunction but when they spiral out of this range, entire political system can go into chaos and breakdown. It’s like a flexible spring which is stretchable to a length. But if you try to stretch it beyond tolerable limit, it will get permanently deformed and won’t go back to its old shape. America is a recent such case. The democracy in America had been dysfunctional since quite some time. There were contradictions, fissures, corruption, institutional decay and bad actors in American political system but American democracy still worked. But Trump was the turning point. With arrival of Trump and MAGA phenomenon, American democracy spiraled out of control so violently that it may never go back to its original state.

Many political scientists, activists and intellectuals are religious disciples of classical democracy. They think that all good things automatically flow from universal suffrage. Recall the American attitude on foreign policy or at least its official stated position about exporting democracy to other countries. If Democracy is implemented in a country, all other fruits of social good will flow out from fountain of democracy. But nothing came out of Democracy in Iraq or Afghanistan as they remained failed societies.

So just like economists who believe that invisible hand & equilibrium is fountain of economic progress, mainstream political thinkers believe that universal suffrage is the fountain of national prosperity & development. But a nation can have universal suffrage while still languishing in abject poverty, corruption, social and economic backwardness and failure of the State. Repetitive elections and universal suffrage don’t correct anything in such nations and they continue to go into abyss of failure. I haven’t got a hand on this book but here is an interesting passage from Economic Theory and Underdeveloped Regions - Gunnar Myrdal (1957 ed).

Universal suffrage as a stabilizing force in Politics is a myth just like invisible hand in modern Capitalism.

P.S - Here’s a good article by Yanis Varoufakis which debunks invisible hand in modern capitalism.