January 23, 2010

What we have here is a failure to coordinate

Posted in Miscellaneous tagged at 1:15 am by Eamon Aghdasi

Why does the recent ruling by the US Supreme Court on corporations and political influence strike us as so potentially dangerous? The answer lies not in the legal side of the issue, but rather the economics of how individuals consolidate to influence decisionmaking.

This past Thursday’s ruling by the US Supreme Court — to reduce limits on political campaign contributions from corporations, labor unions, and other organizations — has ignited a frenzy of debate over the original intention and the appropriate modern interpretation of free speech in America. As someone who is concerned about the influence of corporate interests in politics in general, my initial reaction was one of alarm. I personally have felt that this is maybe the biggest problem facing our country today, and it is hard to argue that the Supreme Court’s decision won’t exacerbate the situation.

Source: bendib.com

It’s clear to me that from a legal perspective, both arguments on this issue have validity. The point argued by a slight majority (five of nine justices) — that corporations are entitled to First Amendment protections and thus can not be differently restricted in their political contributions — is hard to refute, if one focuses on the language of the Constitution itself. Nonetheless, one could easily respond that this was never the intention of the authors of the Constitution, and that the ruling would have destructive effects on democratic institutions. The complexity of the issue is summed up by the words of Justice John Paul Stevens, who sided against the court’s decision. Stevens conceded that “we have long since held that corporations are protected by the First Amendment”, but ultimately concluded that “the court’s ruling threatens to undermine the integrity of elected institutions around the nation”.

But regardless of the legal correctness of the ruling, there is the issue of ruling’s actual effects, and this is where many of us feel a chill down our spines. We imagine a world where corporate interests have even more sway in legislation than they have now, and the voices of individuals are drowned in a sea of lobbies and interest groups. But is this really what will happen? Wouldn’t a free market for information produce the best possible political decisions, just as it does in goods markets? The argument is that if the market for information and political influence are free, then the elements with the most to gain will push and spend the hardest to get their policy choices to the front in Washington. Just like people vote with ballots, the free market allows the nation to vote with dollars. At least that’s how the narrative reads.

Most people with sense, however, take a look at American politics and realize that this narrative doesn’t quite play out in real life. There seems to be something getting in the way of this neat and just market scenario, and skewing the distribution of influence towards the big players. But most of us can’t really put our finger on what that something is.

That missing something in the narrative above is a well-known phenomenon in economics called coordination failures. The premise is simple: there are costs to coordinating efforts and information, and because these costs can be particularly large for some groups (especially if those groups have lots of people), these groups will tend to have more trouble coordinating than others.

The textbook example of this is international trade, where a large number of individuals within a country each receives a very small benefit from liberalizing trade, and a relatively small group of individuals stands to lose in a big way. Even though the total benefit from liberalizing dramatically outweighs the costs of not liberalizing (because the winners are so many), liberalizing trade is hard. Why? Because there is a small group of individuals who stand to lose very acutely from liberalization, and they can organize themselves relatively costlessly and channel their resources into influencing policy. On the other hand, the larger group, with loads of people who each stand to gain only modestly from liberalization, are extremely unlikely to get organized.

What you see in American politics — as in other democratic environments — is exactly this story playing out in a multitude of contexts. Whether it’s the health insurance industry, Wall Street, or labor unions, small pockets of the population who stand to win or lose in a big way from policy decisions will have a disproportionately loud voice in government. And unfortunately, the story of a perfect market for political influence ends up being just a fairy tale.

Economists understand this perfectly, and yet I rarely hear them weigh in on the problem of corporate influence. Why not? It’s one thing to adhere to the Constitution, but it’s another to ignore a problem altogether.



  1. Sahba said,

    Thanks for this fantastic post – as usual. Yours is one of the best blogs I have ever come across. Extremely relevant – and interesting – topics, written with great eloquence and simplicity, in just the perfect number of words, and with a brilliant style. Kudos!

  2. Levi Kafka said,

    I’m glad to see you’re on top of this, Eamon, and our lines of reasoning tend to be very similar. Much as I reject the notion of debating religion in a “market of ideas” that Ross Douthat recently propounded, however, so I reject your concept of “free market for information.” Such a thing would be laudable if we all conformed to an academic editorial standard. Unfortunately, the public is often lobbied via arguments that are specious at best, and they are presented by interested parties as equal to fact-based positions.

    Of course, I’m sure I sound like a liberal Fascist, and I have no solution to propose at the moment. My first thought would involve whacking a lot of folks across the back of the head with the realization that corporations are not, in fact, people, and the right to political influence ought rigorously attach only to actual individuals.

  3. Ceschino said,

    Eamon, your insights are thoughtful and reasoned, as usual.

    As a lawyer, however, I am personally quite perturbed by just about every legal aspect of the Supreme Court’s decision. Here are the main issues that I have with it:

    1. Overreaching (to put it lightly). The Court–notably, the supposedly “conservative” justices (which, in this context, refers to one’s predilection toward restraint in terms of scoping out topics to address and readiness to challenge, not to mention overturn, well-established statutory and case law)–(1) went beyond the scope of the case at hand and the legal issues in play and (2) defied a huge body of law, (3) violating the separation of powers engendered in the Constitution and the whole notion of the rule of law to override the legislative process and a century of adjudication. Activist judges are a bad thing. Especially when they’re in the pockets of major corporations (remember, this is coming from a corporate lawyer in Manhattan–I’m hardly anti-corporate in general).

    2. A corporation is technically a “person” in the eyes of the law. However, this is a legal fiction created for the purpose of allowing corporations to enter contracts and own property, so that they may engage in commerce. It is debatable whether this status as a “person” entails any sort of Constitutional/Bill of Rights protection. We certainly wouldn’t apply Constitutional safeguards regarding, say, the right to bear arms, or against unfair arrests, to a corporation–abstract entities don’t hold guns and they don’t wear handcuffs. It would appear, therefore, that the authors of these Constitutional safeguards had natural people (humans) in mind, not corporations. We should question, then, whether it is really appropriate to apply other Constitutional protections to corporations so blindly. In any case, going back to the first point (overreaching), the lack of a clear error in the established law on the issue makes the Court’s decision to overturn all of that precedent disgustingly, blatantly inappropriate.

    3.a. Money is not speech. This point has been debated in courts and in law schools, but I am against equating spending power with speech content. The First Amendment protects the content of people’s speech, not their ability to bombard everyone with it using the money at their disposal. There are plenty of “time and manner” restrictions on people’s speech, long held to be Constitutional, and expenditures on speech should fall into this category, not the “content” category.
    3.b. The *amount* of money one spends is certainly not speech. To me, this is possibly the most ludicrous aspect of the decision. The holding’s tortured logic seems to imply that a variance in dollar amounts somehow correlates to the substance of speech, which, if you think about it, is mind-numbingly stupid. I’ll take the argument that one must be able to spend some money on speech in order to disseminate it, and thus that the right to freedom of expression entails a right to spend. Sure. (Although in this era of the open internet, that premise is increasingly suspect). But to suggest that this link somehow mandates the protection of unlimited expenditures on the dissemination of such speech? In terms of logic, there is a huge gap in that progression of thought. In practice, this leads to the wealthy (and oversized corporations with huge lobbies are the wealthiest of all) enjoying the greatest capacity and thus the most power to spread their speech, which edges out and thus arguably compromises the protected speech of the non-wealthy. That wouldn’t comprise an explicit government ban on ordinary people’s speech, and thus wouldn’t be explicitly unconstitutional…but the majority, at this point, is hiding behind a (somewhat) technically defensible argument while enabling a gross disparity in power in the realm of political speech. I realize that this may be stuff for ivory tower law nerds like me, but come on…do those jerks think that we’re all idiots?

  4. […] The only question is: If financial reform is both politically and economically smart, why isn’t it a sure thing? To understand this one, consider that by some estimates the biggest four American banks now hold about half of the nation’s deposits and two-thirds of credit card balances. Then read my last entry. […]

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