Democracy and Infomediaries

D emocracy is inefficient, because voting is a collective decision process. Your one vote has so little effect on you personally that unless you are public-spirited, you have almost no incentive to spend time studying the issues so as to vote more intelligently. Economists call this a “free-rider” problem: if you spend time on voting, the community benefits without paying you, thus getting a free ride on your efforts. As a result, we spend less time and effort on intelligent voting than is socially optimal, and the quality of our democratic decisions suffers. Our monitoring of elected representatives’ performance is similarly hampered by the free-rider problem. The resulting inefficiencies, and special interest power structures that result, are addressed by a broad political science literature exemplified by Lohmann (1998) and Zywicki (1999). Because of this difficulty in decision-making by large groups of people (and the dangers of giving a few people power over everyone else), political and economic systems have evolved toward privatisation. The basic principles of private property and voluntary exchange tend to give decision-making authority to the minimum number of people primarily affected by each decision. Ideally, each individual or family decides how much to work, what to buy and how to use their possessions, subject to voluntary exchange by the counterparties involved. But decision-making by large groups persists in two settings: civic and corporate. Civic democracy governs decisions with broad social effects and no practical means for voluntary individual participation: national defence, the legal system, natural monopolies in infrastructure, support for the poor, etc. Ongoing debate over such issues as education vouchers will determine which functions are included in this civic sphere. Corporations jointly owned by many investors have arisen in the private sphere in businesses where the inefficiencies of group decision-making are outweighed by the benefits of economies of scale and risk-sharing. Voting by citizens and voting by corporate shareowners have several features in common. Day-to-day executive decisions of