Brexit: What does it teach us about democracy?

I have so far been avoiding this sensitive topic as it does me no good, and it can easily backfire. Yet, Brexit provides a good opportunity, a good entry point, into this potentially highly regrettable subject of discussion. Seeing that everyone has a mixed feeling about Brexit (mostly negative though), and seeing that Brexiteers are being blamed, while the democratic process that gave birth to the whole nightmare is ignored, this exact moment is an appropriate time to start asking one simple, yet profound question: “Is democracy a good system?”.

The short answer remains: “Yes. Absolutely yes.”

The long and typical answer from any economists with two hands: “Well, it depends.” On the one hand, democracy is, thus far, the best system out of many other worse alternatives. Is it a good system? Yes. On the other, is it a perfect system? No. Not even qualified as great.

Democracy originated from the Greek word “dēmokratia” a combination of dēmos ‘the people’ + -kratia ‘power, rule.’

Power of the people, basically. Democracy is a solid ground on which free market is built. It makes possible the “bottom-up” economic management style, allowing feedback from the frontline (voice of the people to be heard) and timely response to problems in the real economy. Democracy helps control perverse individual incentive, and thus makes corruption harder. It puts national interest in the front because leaders are forced to act in accordance to the will of the people or risk being sacked from their office. But, democracy has its own drawbacks.

The lag it causes in executing discretionary policies aside, the true inherent problem in any democratic society lies in the essence of democracy, its definition, the fact that it draws upon power of the people. By transferring power to the people, it involves a strong presumption that people are sensible and know what they are doing. Yet, this has proven to not be the case on many instances. Let’s look at several reasons.

People are short-sighted beings who sometimes yield to their emotion and act to fulfill their immediate thirst. They can easily panic and have the tendency to follow the herd (bandwagon effect). A good and simple example here is bank run. Everyone makes a rational decision to draw their deposit from the bank during severe economic downturn, but this individual rationality does not add up into a positive result. Why? Because when everyone tries to withdraw their deposit, the bank will go bankrupt and loanable fund will dwindle; hence, aggravating the situation.

There are also times when people carry out an action even if they know that it will make them worse off in the long-run. This idea is introduced in the concept of “Hyperbolic Discounting”. Basically, it is the notion that people often opt for action that yields short-term satisfaction even though they know they can gain way higher utility if they act differently. This is why it is so difficult for some people to practice personal finance or go on diet.

People also do not have a good understand of risk. As author Charles Wheelan mentioned in his book, Naked Economics, and I paraphrase here. His neighbour thought that travelling by plane is riskier than travelling by motorbike even though statistics suggests otherwise that the number of death per year due to road accident (for motorbike) is significantly higher, on average, than the number of death resulted from plane crash.

Another case to be noted is the case of social gain and cost. Individual making decision does not take into account of the social cost or benefit their decision entails. Your decision to drive an SUV even though you do not need one is life-threatening to the others (Again, I borrow this example from the book, naked economics). First, it consumes more fuel (thus contributes more to global warming), and second, when your SUV crashes into a Sedan, the likelihood that the other party will go to heaven is high (if compared to the scenario where your car is also a Sedan).

Last but not least, people usually possess only fragments of information, partial truth that can potentially cause false conclusion/judgement. This applies to all classes within the society, even for the highly educated bunch. First, we lack the foundation necessary to understand complex information outside of the familiar fields of our life. For example, farmers normally do not have a good grasp of the long-run economic implication when they ask for import barriers on agricultural products. Second, the media, through which information is conveyed to people, suffers greatly from what is known as “Publication Bias”. Yes, that is a legit term. A good example can be found in scientific journals, like the one related to health. Virtually no journal wants to publish papers that find no significant connection between eating onion and lower risk of cancer. Yet, there are tons of papers like this out there. The problem is they are not interesting enough to be published. So, in the end, the paper that got published normally is the one that finds a strong and interesting relationship between consuming onion and lower risk of cancer. Is this the result of superior sample data, methodology, or knowledge? No. Still, it draws the most attention from people. The golden rule is that, when looking from a broader perspective, if the research conclusion is not consistent with other research, then there is room for doubt. This is no different in the case of the media we enjoy so much nowadays. News like this (partially truth, biased, etc) spreads like wildfire. Why? Because it attracts attention, because it is interesting. The advent of social networking worsens the problem. People are like sponge. We absorb and retain information despite a lot of it being false.

All these boil down to a single sentence. People can make a collectively beneficial decision if only they are educated and well-informed in the first place. This is what developing nations lack the most (and sometimes even in the developed one). It is easy to see that an educated voter is a better decision maker. An educated, or at least informed, voter is more likely to cast a vote that improves their overall well-being in the long run.

However, if people suffer from the symptoms described above, in any democratic process, it is possible that individual rationality can turn into a collectively irrational one that has adverse long-run consequences. In other words, when democracy draws on power of the people who are misinformed, then there will be systematic errors.

The bottom line here is not that we should all go full banana and support communism. The job of the government is not to oppress its people’ voices, but to assess them and provide proper guidance accordingly. Aside from the general election to pick prime minister/president (an indispensible mechanism that combats institutional inefficacy and systematic corruption), it is not wise to just blindly follow the cry from below on every single matter. The lesson to take home is that, within any nation, democracy should be practiced with restraint by taking into account various unique characteristics of the nation itself. Democracy should not be practiced alone. It should be exercised in conjunction with binding laws, rules and regulations to ensure the best possible outcome. More importantly, it is absolutely a must to understand that there is no such thing as a one-size-fit-all democracy. If you admire the US, then remember that US-style democracy might not be applicable in countries like Thailand or your country, wherever you are. The same can be said for many other countries around the globe.

The bottom line of the bottom line is that there is no absolute. It all depends, said every economist.