Economy vs Democracy

Here’s a quick one for you.

The foundation of Economics is Adam Smith’s idea that the monetary system works well because everyone works in their own self-interests.

Our current form of Democracy is representative. We vote for people who will then represent the wants, needs and culture of their electorate. So they are meant to be working in the interests of those that they represent.

It sounds like the current form of Democracy is incompatible with the current form of economics.

As an aside. Adam Smith’s concepts are incomplete. According to the Nash Equilibrium, the best outcome occurs when everyone works in their own self-interests AND for the interests of the group. e.g By letting others know what they want to do, those other people can adjust their strategy for the best outcome and let the others know, until eventually everyone has the best strategy for both the group and each person.

Another thing, Adam Smith made the religious assumption that we are all made in God’s image, and are thus have infinite capacity for reasoning. This have been proven to be completely incorrect, not only are we irrational, but in a lot of circumstances we are predictably irrational. This is important as it is the basis for the ‘invisible hand that guides market forces‘. If humanity was just irrational the chaos would likely cancel itself out. The market would be driven by a shaky hand, but averaged out it would be relatively still. This is not the case.

Not only is the invisible hand not nearly as capable as Adam Smith thought, but because we are predictably irrational, it is clumsy and unable to perform certain actions without fumbling what it was trying to do. The invisible hand is broken and can not perform certain tasks.

It will be an important requirement that any new economic system being developed will need to cope with these issues.

PS : If you are interested in human’s predictably irrational behaviour, I suggest you check out the works of behaviour economist Dan Ariely. You can read his books, watch the TED talks, or for those so inclined, check out the original white papers.

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