Monday, August 30, 2010

Why political rivalry reduces voters' options

Simple economic theory tells us competition leads to increased choice. But as the election campaign showed, competition between the two main parties seems to be reducing the choice we're offered.

Before the election, many people complained about how unengaging the campaign was. It didn't seem to be aimed at people with brains. It seemed dominated by trivia. The two sides were locked in furious argument, but the policy differences between them seemed minor.

We were offered no real choice on climate change, industrial relations, the harsh treatment of boat people, the war in Afghanistan or economic management (the choice between a budget surplus in 2012-13 of $3.5 billion or $6.2 billion).

The main issues of genuine choice were the mining tax and the national broadband network. And even these didn't get a lot of attention. I'd like to believe the electorate's failure to decide which of the parties it wanted and its tendency to turn to minor parties and independents was a reaction to the unattractive choices we faced. Let's hope the pollies learn never to stage such an empty campaign again.

I don't deny the media's part in the campaign's superficiality. Every available diversion from serious discussion of policy choices was seized on. There was more "race calling" - Who won the leaders' debate? Which side won the week's campaigning? Who do the polls say is winning? - as politics was turned into a spectator sport rather than an earnest evaluation of policies.

One lesson from behavioural economics is that when consumers face excessive, confusing choice they tend to avoid making a decision. In this case, however, it seems it was lack of choice that caused voters to be so indecisive.

Most economists believe choice is a virtue in itself (true) and the more choice the better (above a certain point, not true). They love competition because their simple neo-classical model of markets predicts competition leads to wider choice.

So how come competition between political parties seems to be reducing choice? The simple market model rests on the assumption of "atomistic" competition: a large number of small sellers, none big enough to be able to influence the price, with each needing to give customers exactly what they want or be forced out of business.

In the modern world, few, if any, markets work that way. Much of our increased prosperity is owed to firms' pursuit of economies of scale. But this has created a tendency for firms to get much bigger and for many markets to be dominated by a small number of large firms.

Hence the real-world prevalence of "oligopoly". Clearly, under oligopoly - and duopoly, a form of it particularly common in Australia - there's only a small number of sellers and thus less choice, although each firm is likely to offer a full product range.

Under oligopoly, firms compete for market share, with increased share of the market being the main way they seek to maximise profits. But because each firm has a fairly big share of the market, each has the ability to influence the market price and thus affect the fortunes of the others.

This means competition in oligopolised markets takes on a form unknown in the basic market model: rivalry. Firms focus on each other and never make a move without first considering how their rivals may react to that move.

Here we're getting closer to competition in the political "market". Most people imagine governments, holding the reins of power, concentrate on deciding what to do and whether the voting customers are likely to react well or badly.

It's always a surprise to people to realise how much the behaviour (or expected behaviour) of oppositions influences the behaviour of governments. You and I may regard oppositions as largely irrelevant until the next election, but governments never do. That's rivalry.

Hugh Mackay says the key to competition is to focus on the customers and their needs, not your competitors and what they're doing. I think he's right, but it's tough advice to follow in an oligopolistic market.

The same goes for politicians. In their case, I think rivalry - obsession with your competitors - and the fear of taking a misstep help explain why both sides converge on the centre and adopt similar policies.

The market analogy takes us only so far. In a duopoly the two rivals share the market and fight for greater market share only at the margin. Politics, by contrast, is a winner-takes-all market. Lose the election and you get a zero market share.

Perhaps this all-or-nothing feature of political competition tends to make the parties more risk averse. Maybe it's the case that, just as oligopolists prefer to avoid competing on price, so the major political parties prefer to avoid competing on policy. In this campaign, both sides wanted to battle over perceptions of competence rather than my policy versus yours.

But this doesn't explain why the aversion to policy choice is relatively recent, why we now live in post-ideological times. I suspect the reason is the advent of what I call "scientific" politics, the rise of backroom specialists who use polling, focus groups and other market research techniques to peer into the minds of voters, particularly those judged to be swinging voters in marginal seats.

Knowing so clearly the likes and dislikes of key voters - chosen explicitly for their lack of ideological commitment - probably drives the major parties towards common ground, encourages pragmatism over idealism and prompts them to offer bribes rather than reforms.

Let's hope the hung parliament causes them to reconsider this form of scientific "progress".