State Legitimacy as Status Quo Bias

The Behavioral Economics of Democratic Decline and Why Letting a Thousand Nations Bloom Can Solve it

by guest blogger

It’s an old yarn to point out that there seems to be something mystical, religious, ‘irrational’ about the allegiance of many to the modern State. Herbert Spencer wrote of the “divine right of Parliaments,” Randolph Bourne scorned Americans’ “pure filial mysticism.”

The increasingly popular work in ‘behavioral economics’ has studied the ‘irrational’ foundations of economic decisions: in other words, the degree to which people’s actual decisions deviate from the predictions of ‘rational-choice’ models traditionally used in social science. Behavioral economics is widely co-opted as a wholesale criticism of markets, but few bother mentioning that many of its findings equally apply to political decisions. (A notable exception is Bryan Caplan’s wonderful book Myth of the Rational Voter).

One of the strongest findings in behavioral economics (and a favorite of ‘libertarian’ paternalists) is a bundle of irrationalities termed “status quo bias.” This bias, put simply, is the tendency — as the difficulty of making a decision increases — for people to opt for the ‘default’.

Behavioral economists find that merely shifting the phrasing of a questionnaire from a ‘neutral framing’ (no default option) to a ‘status quo’ framing (an arbitrarily chosen default option with the possibility to switch) yields a significant preference for the ‘default’ option. This finding is corroborated in various ‘field experiments.’ For example, when choosing a bundle of stocks to invest in for their retirement, people are quite likely to choose whichever bundle was the ‘default’ option. Behavioral economists call this “framing effects”, when the mere structure of the decision (i.e. the presence of a default) biases a choice.

Behavioral scholars argue that this bias arises from the cognitive failings of human beings: our ‘bounded rationality’ is not without its costs.

People prove themselves as ‘risk averse’ in these experiments; they will forsake uncertain future gains for the status quo because it is difficult to understand the probabilities and possibilities of the outcomes. In the case of the retirement example: as it becomes more difficult to compare stock bundles, their future returns, and their risks — people are significantly more likely to opt for the status quo option. Unless people have a strong emotional attachment to an alternative, they will be prone to the status quo bias of the ‘frame’ even in the presence of ‘rationally’ obtainable gains from switching.

But of course all political decisions, whether votes or a penchant for revolution, are likewise made with an implicit framing – the status quo or ‘default’ institutional arrangement under which a person has lived.

If one accepts that imagining and evaluating the costs and benefits of alternative political arrangements is difficult (‘cognitively costly’) it becomes clear that preferences for political institutions likely suffer from framing effects, leading to status quo bias. Unless a person has a particular reason for strongly favoring an alternative arrangement, they are significantly more likely to opt for the status quo. If a person has any emotional attachments to the status quo or even merely has difficulty imagining the outcomes of an alternative, they will also opt for the status quo.

Where does this leave modern democracy?  Consider Mancur Olson’s theory of democratic State growth. Olson’s dynamic, familiar to many Thousand Nations readers, is that the inexorable logic of democracy tends, over time, to bring ever-greater redistribution to concentrated interests from the dispersed whole. This growing ‘capture’ of the economy leads to societies like today’s economically unstable, stagnating Western democracies.

But Olson’s process is as psychological as it is economic. The end of democratic State growth is one of tremendous uncertainty. The economic patterns of society become ‘fuzzy,’ as distribution is severed from its natural, procedural pattern (factor payments) to methods captured by organized interests and prone to the vicissitudes of political bargaining (subsidies, rents, regulations).

One’s own position in the overall ‘churn’ becomes difficult to decipher. As explained by political philosopher Anthony de Jasay, if any citizen’s net position

can be ascertained, [it] will be submerged under large flows of gross gains and gross losses impinging on much the same people… Not all can, let alone will, see through this and recognize their net position, if indeed a net position has objective meaning. Since economic policy causes prices and factor incomes to be other than what they would be in a policyless capitalist state, and since it may in any case be inherently impossible to “know” the ultimate incidence of the total set of directives, incentives, prohibitions, taxes, tariffs, etc. in force, a subject need not be stupid to be mistaken about where the churning around him really leaves him.

The behavioral outcome of this uncertainty, in the words of de Jasay, is “false consciousness,” “illusions,” and “downright mistakes by both the state and its subjects.” The mounting ‘cognitive costs’ of deciphering the interventionist mire become prohibitive and citizens become behaviorally irrational.

Political scientists have shown the costs of status quo bias in simple acts of political reform. Even mutually beneficial reforms like free-trade, which also has broad support by economists, will fail a popular vote in the presence of uncertainty as to the gains and losses to individual voters themselves. In the words of two game theorists, “uncertainty regarding the identities of gainers and losers can prevent an efficiency-enhancing reform from being adopted, even in cases in which reform would prove quite popular after the fact.” People opt instead for the seeming certainty of the status quo.

Thus we end with the disheartening spectacle that democracies contain both the economic incentives to stagnate and the psychological effects to reinforce allegiance to these same declining regimes. The Public Choice logic of Mancur Olson meets the biases of the behavioralists.

Fortunately Olson explains that his destructive process can be turned back. But unfortunately, this typically requires a massive exogenous shock to the system, like a natural disaster or the widespread destruction of a nation like Japan and Germany during World War II.

However, projects like Free Cities and Seasteading potentially provide a run-around past ‘Olsonian Shock Therapy,’ while achieving the same end. The phrase “one Hong Kong is worth 1000 policy papers” has a behavioral foundation. A Free City within the bounds of a society captured by Olsonian interests massively lowers the cognitive costs of imagining and calculating the cost and benefits of alternative institutions. The alternative is not far away: it’s inhabited by people much like the onlooking citizen of the host nation. Likewise, a Free City or a Seastead offer the spectacle of an ‘uncaptured’ society, where members are rationally opting-in to the arrangement based on the clear benefits to themselves. They are psychological laboratories to escape the ‘churn’ and to imagine a better life outside the bounds of demosclerosis.

The arguments of Public Choice have behavioral foundations, rendering the prospect for internal reform of many societies even more unlikely. While societies are increasingly captured by special interests, the psychological costs of considering alternative governance become prohibitively high. States crowd out the decentralized institutions that demonstrate the benefits of pluralism in one’s daily life. States also obscure the cost/benefit analysis of allegiance to a given political system through continuous and ever-growing acts of intervention.

People thus become wedded to the ‘status quo’: addicted to often self-defeating redistribution and ‘risk averse’ to challenging the structure itself. But to break this vicious cycle, we need not wait for tragedies like bombs and earthquakes: we need only to tip the world towards letting a thousand nations bloom. A few good seeds can swing the behavioral scales in our favor.