Harold Demsetz

Economic, Legal and Political Dimensions of Competition

Perfect political democracy assumes there are no informational or transactional costs to acting politically. These costs, to distinguish their field of application from market exchange, may be called 'voting cost.' The assumption that voting cost is zero is analogous to the assumption that exchange cost is zero in the perfect decentralization model.

The major difference between perfect political democracy and perfect decentralization lies in the nature of individual ownership entitlements. In perfect decentralization, most wealth is privately owned and may be sold in open markets. In perfect political democracy, there is only a private right to vote. This right may not be sold openly, but it can be cast for programs designed to benefit the voter, and, in practice, many votes are secretly sold. To this basic difference may be added more or less arbitrary rules of political decision, such as the common one requiring that the preference of the majority of voters is what determines political policies and programs. In perfect political democracy, the voting majority calls the tune. Any person desirous of hearing a different melody must emigrate, if he is allowed to by his fellow citizens. Voting majorities determine political outcomes, and all outcomes are political.

Neither constitutional roadblocks to majority preference nor the existence of a parallel private sector can be assumed. If they exist, they are a result of political choice. Such a choice is highly plausible in a democracy. Everyone will prefer to exercise personal control over some resources, so virtually everyone would be willing to concede personal control to others in order to obtain some for himself. Perhaps more important, the majority will be willing to create and protect private rights to wealth, even for those not in the majority, if this encourages production from which the majority will benefit; if we superimpose on perfect political democracy the right of every individual to refuse to work, such protection should be forthcoming.

Citizen owners of entitlements to vote will use these to maximize their individual welfare. All voters are potential gainers if they cast their votes to reject inefficient political programs, but the majority of voters are sure gainers because they stand to receive some or all of the increment to output value that remains after compensating those whose voluntary efforts are required to achieve efficiency. In a situation in which there is full information and no cost of acting politically, there is nothing to bar the majority from achieving this result (setting aside problems of cyclical voting and strategic behavior). The reasoning is the same as that which argues that private property rights, in this case the right to vote, will be exercised efficiently if the cost of exchanging entitlements is zero and if there is full knowledge of opportunities for deploying resources. In such a setting, political policies can always be devised to pay voters for voting in a desired manner. The avoidance of inefficient political programs provides the wherewithal for such compensation.

The most important similarity between perfect political democracy and perfect decentralization is that in both no individual exercises authority or wields control over others. No single voter can control events. Nor can a single politician. The most significant difference lies in the exercise of authority by a majority of voters in perfect political democracy. No such authority exists in perfect decentralization. Individuals operating through markets may offer to buy and sell without securing the permission of others. This distinction derives from the absence of a unanimity voting requirement in democracy. Not every voter's agreement is necessary to implement policies, even policies to which all voters will be subjected.

And there must be some political programs that impact all voters. If the concept of a nation has meaning, there must be important government activities consumed by the entire population. A nation cannot offer a multitude of foreign policies, one to suit each voting faction, nor can it possess two different defense establishments. Government policies such as these require that the entire population consume what winning voters choose. Many political choices need not be so uniform over an entire population, in which case political decisions can be left to local communities (or to markets).

In contrast, under conditions of perfect decentralization, the assumption of sharply rising marginal cost guarantees that no penalty is paid by consumers who purchase different products than do others.