Lemon Law

How crappy used cars explain the chaos in Thailand and Egypt.

Haven't we seen this movie before? Here's the plot: a democratically elected government tries to enact controversial new policies, protests ensue, the military gets involved, and soon the government is at risk of being forcibly removed. It's happened in Egypt, and now it may be happening in Thailand. But why?

A cynical observer might conclude that in both cases, the military was taking advantage of protests by a minority to hand power back to its favored elites. Yet there's a chance that the protests in Egypt and Thailand have actually represented the opinion of the majority. After all, plenty of Egyptians who voted for the Muslim Brotherhood were outraged by its attempts to consolidate power, just as many Thais who supported Prime Minister Yingluck Shinawatra were appalled by a proposed amnesty for corrupt politicians -- including her brother, the former Prime Minister Thaksin Shinawatra.

Perhaps voters just didn't get what they expected. But rather than wait for the next elections, they poured into the streets to demand immediate change. In Egypt, with the help of the military, they got it. Given the recent precedent, they may get it in Thailand as well.

This series of events bodes ill for democracy in both countries. Fortunately, at its root is a very familiar problem.

Imagine you're buying a used car. Some used cars are good and some are lemons, but you can't tell with certainty which are which. As a result, you'll never be willing to pay a seller the full value of a good used car; there will always be some chance that it's a lemon. And since no seller will be able to get full value for a good used car, only lemons will be for sale -- and no one will want to buy them.

This is Nobel laureate George Akerlof's market for lemons. Because of the asymmetry in information about cars between buyers and sellers, the market breaks down. The same can be true for politicians.

That's because elections suffer from an asymmetry of information, too. Voters can never be completely sure what politicians will do once in office, so there's always a chance that they'll disappoint voters in some way. This isn't a huge problem for democracy in itself; plenty of American voters were angered by George W. Bush's wars and Barack Obama's failure to chase down wrongdoers from the global financial crisis, but no coups or revolutions ensued. Yet when governments are more fragile, the electoral "market" can begin to break down.

In elections, politicians are the sellers of their own time and effort. They offer this effort in exchange for the power to implement their agendas. The trouble starts when that power can be easily taken away. Thai politicians have known since 1976 or earlier that they could be removed from office through means other than elections, and Egyptian politicians have learned it more recently. With only a tenuous grip on power, neither Egyptian nor Thai politicians will ever get "full value" for winning an election. As a result, Akerlof's model predicts that only lemons -- in this case, bad politicians -- will enter politics in Egypt and Thailand.

How can this problem be solved? One way is to protect elected governments. Rather than appearing to submit to the will of protestors, the military would back elected leaders to the hilt. But in countries lacking robust systems of checks and balances, an unconditional guarantee of security for elected governments might give them a license for all sorts of abuses.

Akerlof proposes some alternatives in his original paper. One is a warranty: if you're disappointed by the product you've purchased, you can get a new one or your money back. In politics, the closest thing to a warranty is the ability to impeach leaders or dissolve the government through a vote of no confidence (which, incidentally, Yingluck recently survived). Failing either of those mechanisms, frequent elections at least ensure that voters have a chance to pick new leaders on a regular basis.

Frequent elections have their drawbacks, though. Recently, the two-year cycle of national elections in the United States has come in for criticism, given the almost constant campaigning that has resulted. Some pundits have even suggested that the Chinese system, where politicians essentially have a ten-year mandate, is superior. Yet the Chinese and American models can both be viewed as fixes for the market for lemons.

In China, the government -- albeit not an elected one in a way Americans would recognize -- has a strong grip on power for a set period of time, offering "full value" to politicians. In the United States, mistaken "purchases" by voters can be quickly corrected. China puts the sellers first, while the United States favors the buyers.

Which group would you choose?



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