Fred Foldvary ffoldvary@scu Santa Clara University, California Santa Clara CA 95053 USA

1. Small-group, Multi-level, Bottom-up DemocracyDec. 2008, Economics and Democracyhttp://foldvary.net/works/celdemau.dochttp://foldvary.net/works/democ2/ppt Fred Foldvary ffoldvary@scu.edu Santa Clara University, California Santa Clara CA 95053 USA

2. Objective A constitutional-economics comparative-systems approach to public choice, examining the incentives for voters and policy makers, and the impact on “rent seeking, for mass democracy vs. small-group democracy.

3. Public Choice The branch of economics consisting of theory applied to collective decisions and their processes and outcomes.

4. Rent seeking (transfer seeking) Offering and making payments to office seekers and holders and their political parties in order to obtain privileges such as transfers of funds and protection from competition.

5. Why rent seeking succeeds * Concentrated benefits and spread-out costs. * Rational voter ignorance (not worth knowing better).

6. Methods to limit rent seeking • Federalism • Branches of government • Constitutional constraints • Democracy

7. Constraints have failed • Courts stretch interpretations, e.g. inter-state commerce. • Grants of funds are conditional. • Intra-party collusion. • Voters are rationally ignorant and apathetic.

8. Remedies have failed • Campaign finance restrictions can be circumvented. • Government financing of campaigns entrenches the major parties and does not prevent outside spending. • Extreme restrictions limit free speech.

9. Presidential Campaign 2008 Candidate Total Raised Obama, Barack $640,000,000 Clinton, Hillary $221,600,000 McCain, John $370,000,000 source: www.opensecrets.org

10. Top 10 donors since 1989 AT&T Inc $40,468,000 American Fed Govt Employs $40,050,000 National Assn of Realtors $34,344,000 Goldman Sachs $30,262,000 Am. Assn for Justice (trial lawyers) $29,587,000 Intl Electrical Workers $28,898,000 National Education Assn $28,623,000 Laborers Union $27,213,000 Service Employees Union $26,842,000 Carpenters & Joiners Union $26,159,000

11. Top Industries Giving to Congress, 2008 Cycle Rank Industry Total Dem% GOP% Top Recipient • 1 Retired $124,277,528 55% 45% Obama (D) • 2 Lawyers/Law Firms $119,000,136 78% 22% Obama (D) • 3 Real Estate $58,583,102 57% 43% Obama (D) • 4 Securities/Invest $58,553,173 65% 35% Obama (D) • 5 Health Professionals $52,832,341 60% 40% Obama (D) • 6 Education $33,465,984 88% 12% Obama (D) • 7 Business Services $29,854,447 72% 28% Obama (D) • 8 Misc Business $28,131,359 67% 33% Obama (D) • 9 Insurance $27,689,770 51% 49% McCain (R) • 10 Misc Finance $25,346,934 54% 46% Obama (D) http://www.opensecrets.org/industries/mems.php FEC, Nov. 17, 2008.

12. Incumbent Advantage 2006 Senate Type Total Raised Number Avg Raised Incumbent $318,615,165 31 $10,277,909 Challenger $141,290,839 96 $ 1,471,780 Open Seat $ 80,312,338 32 $ 2,509,761 Grand Total $540,218,342 159 $ 3,397,600

13. Incumbent Advantage 2006 House Type Total Raised Number Avg Raised Incumbent $460,140,185 424 $1,085,236 Challenger $131,928,472 604 $ 218,425 Open Seat $122,949,896 259 $ 474,710 Grand Total $715,018,553 1,287 $ 555,570

14. Campaign costs are increasing Presidential Candidates, Total Receipts Year Total (current, millions) 2008 $1,634 (up 86%) 2004 $880.5 (up 66%) 2000 $528.9 (up 24%) 1996 $425.7 (up 29%) 1992 $331.1 (up 2%) 1988 $324.4 (up 61%) 1984 $202.0 (up 25%)

15. Restrictions on rent seeking treat the symptoms, rather than the cause: mass democracy.“Mass”: an electorate so large it is too costly for candidates and office holders to meet face to face with most voters.

16. Consequences of mass voting • There is an inherent demand to use the mass media to communicate to voters, and thus an inherent demand for campaign funds. • Special interests exploit the demand by supplying funds in exchange for either privileges or to prevent “milking.”

17. The alternative "where possible, collective activity should be organized in small rather than large political units.” Buchanan and Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962).

18. Cellular democracy • Just as a biological body is divided into cells, so too the political body can be based on small cells as the foundational political unit. • Size of a cell: small enough for face-to-face contact, large enough for contested elections.

19. A comparative systems analysis • Constitutional economics: the branch of public economics that studies the choice of constraints rather than choice within constraints (James Buchanan). • A comparative systems approach: contrast the incentives and constraints of mass democracy with cellular democracy.

20. Elements of cellular democracy • Small-group voting only • Bottom-up multi-level governance • Each council level elected from next lower level council members • At-will recall of representatives

21. Models of cellular democracy 1. Plain cellular democracy 2. Cellular democracy with secession 3. #2 plus decentralized public finances 4. #3 plus demand revelation

22. Small-group voting (SGV) • Each neighborhood cell elects a council, including an alternate member. • Citizens who are not council members do not vote for any other offices. • Council members may be recalled by a petition calling for a new election.

23. Multi-level governance • A group of 20-40 neighborhood councils elect, from their members, representatives to the next higher-level council. • Level zero is the citizen voter; level 1 is the neighborhood council, and level 2 is the council elected by level 1.

24. Bottom-up democracy • The level 2 councils elect from their members, representatives to level 3. • And so on to the highest level h. • A recall of a representative recalls him also from all higher-level offices. • In each council level 2 or higher, voting is per population.

25. Multi-level structure

26. Comparative voting incentives • In SGV, the probability of affecting the outcome is much greater. • The knowledge needed to make an intelligent choice is much lower. • Face-to-face meetings enable the voter to know the candidates.

27. Comparative voting incentives In a small group, with personal contact, the voter is less likely to vote capriciously. In mass democracy, voters react to the order of candidates on the ballot, the physical appearance of candidates, slogans, etc.

28. Office-seeking motivation • Most people avoid political entrepreneurship. • The cost of campaigning for level 1 office is low. • Those with ambition can seek level 1 office and then work their way up.

29. Incumbent advantage • With SGV, incumbents still have an advantage (which can be beneficial), but they do not have as much of a financial advantage.

30. Comparative rent seeking • Money can be spent for level-1 posts, but can be countered with personal contacts and low-cost distribution of information. • Therefore the demand for campaign funds is greatly diminished for small-group voting.

31. Rent seeking with SGV • Rent seekers have to campaign in many tiny jurisdictions. • Mass media can still be used, but competes much more with local communication. • Political parties may still be powerful, but independents and minor parties can have a greater voice.

32. Top-down vs. bottom-up federalism • Top-down federalism depletes the power of the lower levels. • With bottom-up federalism, level i monitors level i+1 and is monitored by level i -1. Voter knowledge increases with personal contact, less costly monitoring, and voter power: level i+1 can be recalled by level i.

33. Separation of powers • Each level i council elects a leader, e.g. chair, mayor, governor, president. • Cellular democracy thus has no separation of powers between the executive and legislative branches, but this is replaced by bottom-up controls.

34. Model 2: secession • Each level i jurisdiction may secede from level i+1 or level i except from level h. • Secession can be partial, e.g. for schooling and its financing. • A new level i jurisdiction elects its own representatives to the council. • Secession from i+1 creates a new i+1.

35. The exit option complements the voice option. • Greater incentives for efficient provision, as unhappy citizens may secede. • Less scope for rent seeking, since taxpayers may withdraw funding. • Minority interests are better served, lest they secede.

36. The tyranny of medianocracy • The rule of the median voter.

37. Secession reduces TM • Without secession, minority interests, on the tails get, get suppressed. • The two-party system caters to the median, reducing political diversity, dampening debate. • Secession gives minorities greater clout and reduces majority rent seeking.

38. Model 3aDecentralized public revenue • All public revenues are sent to level-2, representing about 30,000 persons, on an equal per-capita basis. Many services, e.g. police, have economies of scale at that level. • Revenues flow down to level 1, and from 2 up to level 3 and then up to h.

39. Consequences of bottom-up transfers • There are no top-down transfers other than from level 2 to level 1. • The power of funding enhances the power of voting. • Power becomes more decentralized.

40. Model 3bOnly level 1 may tax * All levels > 1 obtain revenues from i-1. * With Model 3a, taxation of income and sales must be at level h or h-1 to prevent tax competition and secession. * With Model 3b, income and sales taxes are repealed due to tax competition and secession.

41. Model 3b: consequences • Public revenues require a non-mobile source: land. • Land-value taxation replaces taxes on sales, income, and buildings. • Revenues are transferred up only if they enhance efficiency (principle of subsidiarity).

42. Model 3b: implementation Locally levied land-value taxation with funds transferred to higher-level governments requires assessments by boards represented from all levels, otherwise the incentive is to under-assess.

43. Model 4: demand revelation • Voting for propositions in addition to candidates. • The Condorcet voting paradox. • Marquis de Condorcet (1793-94) • Suppose 3 outcomes: A, B, C

44. Condorcet voting paradox Group 1 2 3 % 35% 45% 20% 1st choice A B C 2nd choice B C A 3rd choice C A B A > B, B > C, C > A • Not transitive, not consistent

45. Arrow’s impossibility theorem Rules for a good democracy: • 1. If all want X, we get X. • 2. Transitivity. • 3. Independence from irrelevant elements. (A > B independent of C.) • 4. No dictator.

46. An arrow shot through the heart of democracy. • Kenneth Arrow: no voting system can satisfy all these criteria. • Alternative: demand revelation. • Suppose a public good G is proposed.

47. Demand revelation • Each person states the maximum he would be willing to pay for G. • Each person is also assigned a cost. • If the total stated values > the cost of G, then it is done. Otherwise, not.

48. Demand revelation • If anyone’s stated value, relative to his cost, changed the outcome, he causes a negative externality, and compensates the group for the net social cost (the Clarke tax). • The incentive is to tell the truth.

49. Demand Revelation Tideman, T. Nicolaus, and Gordon Tullock. 1976. "A New and Superior Process for Making Social Choices." Journal of Political Economy 84, 6 (December): 1145-59

50. Consequence of DR • Special interests may sway opinions and values, but participants will not exaggerate. • Demand revealers are more aware of their costs. Those who don’t “vote” are counted as voting their cost. • Participants have a greater incentive to obtain the relevant knowledge.