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behaviour of destructive children.

Markets and communities are both inadequate for supplying merit
goods. Some merit goods are private commodities (personal
health), some are public goods (information about potential
pandemics), while others lie somewhere in between, involving as
they do externalities (information about the dangers of smoking).
Communities and markets ought ideally to be supplemented by
government measures when transactions involve merit goods. The
government can do that by taxing households and ¬rms and
providing the merit goods either by producing them or by
subsidizing their production in the private sector.

The equality-ef¬ciency trade-off
The allocations of goods and services realized in both markets and
communities are shaped by the assets households have inherited
from the past. It is a common complaint against markets that they
harbour vast inequalities in wealth. In Becky™s world that complaint

has become urgent as the gap between the rich and the poor has
increased greatly in recent decades. In the US, for example, the
richest 10% of households in 1978 enjoyed 32% of GDP, whereas in
1998 the corresponding ¬gure had risen to 41%. It is a complaint
too in Becky™s world that women suffer in the labour market relative
to men. Earlier we noted that communities can also be rough on
those who had the misfortune to inherit little and that they can be
rough on women too. Visitors to communities may not notice those
inequalities, but that™s because in rural parts of Desta™s world all
people are very poor. Differences in wealth are re¬‚ected in the
frequency and quality of their meals, the number of clothes they
own, the quality of their bedding and kitchen utensils, and the
durability of their homes (whether they are made of mud or brick).
And women are often discreetly out of sight. None of those
inequalities is quite as conspicuous as the ones visible in Becky™s
world today, but when households are desperately poor, small
differences can be a matter of life and death. Which is why it is

imprudent to wax lyrical about communities and rail against
markets at the same time.

The distribution of goods and services is therefore a matter of
government concern. However, if we revert to T. H. Marshall™s
three-way classi¬cation of well-being, it is an interesting fact that
people today regard it axiomatic that everyone has an equal right to
civil and political liberties, but don™t make the same claim over the
distribution of (inclusive) wealth. Why? It may be because generally
speaking respecting the civil and political liberties of others doesn™t
cost anyone anything directly, whereas redistributing wealth costs
those having to give up some of their wealth. The legal theorist
Charles Fried has remarked that such aspects of civil rights as the
right not to be interfered with in forbidden ways don™t have natural
limitations. (˜If I am let alone, the commodity I obtain does not
appear of its nature to be a scarce or limited one. How can we run
out of people not harming each other, not lying to each other,
leaving each other alone?™) It is possible to honour civil rights, but it
may not be possible to honour the right to health care: the economy

may simply not have suf¬cient resources. The point is that,
unlike wealth, democracy doesn™t have to be created, it has only
to be protected. The economist James Mirrlees was the ¬rst to
show convincingly why in deliberating over distributions of
wealth, we have to care about differences in individual talents
to produce, worry about incentives and the concomitant notion
of obligations (to honour agreements, not behave opportunistically,
and so forth), consider people™s needs, and take into account
the related matter of deserts. An excessive government zeal to
equalize wealth by means of taxes and subsidies could reduce
household incentives to produce wealth to such an extent that
everyone™s interest is hurt. This is the classic equality-ef¬ciency

Social well-being and democratic government
Market“community mediation
All societies rely on a mix of markets and communities. The mix
shifts through changing circumstances, as people ¬nd ways to
circumvent dif¬culties in realizing the bene¬ts of cooperation. That
communities help to make markets work should be a
commonplace. No legal contract is air tight. There are incomplete
speci¬cations no matter how wily are the lawyers who have been
called upon to draft them. A society that works well is a society that
has a reached a tacit understanding of what are reasonable
expectations about one another™s dealings. Communities can play a
big role in creating and sustaining reasonable expectations. They
form the institution where households are able to deliberate
matters and exchange information about the quality of market
products and public services. Communities are also a place for
political debate. They can discipline markets and government.

But they can also sti¬‚e the rise of markets. When ties are dense and
intense, exit from communities is very costly. Someone wishing to
˜buy™ his way out of his long-term relationships within his
community and leave for the market place elsewhere wouldn™t be
able to do so if he faced risk that the community would seek
retribution from those of his family he would be leaving behind. In

an opposite vein, the growth of markets can destroy communities
and make certain vulnerable groups worse off. If markets grow in
nearby towns, those with lesser ties in villages (young men) are
more likely to be able to take advantage of them and make a break
with those customary obligations that are enshrined in prevailing
social norms. Those with greater domestic attachments would
notice this and reason that the expected bene¬ts from complying
with agreements are now lower (Chapter 2). Either way, social
norms of reciprocity could be expected to weaken, making certain
groups of people (women, the old, the very young) worse off. To put
the matter in the language we have developed here, when people
take their engagements away from communities to markets, the
transfer gives rise to externalities. We don™t read much about them
in economic commentaries, because they are not run-of-the-mill
externalities like industrial production degrading the local
environment. But they are real externalities. One task of
government is to identify them and ¬nd ways to soften the blow on

those who get hurt by them.

In countries where the rule of law doesn™t work well, where of¬cials
regard the public sphere to be their private domain, where markets
are often absent, communities are what keep people alive. That™s
why many intellectuals today ¬nd them to be an attractive
alternative to (impersonal) markets. But we need to bear in mind
that communitarian obligations can check the growth of markets.
Moreover, personal obligations inherited from the past can prevent
public of¬cials from acting dispassionately. What appears as
corruption in Becky™s world could be social obligation in Desta™s
world. Similarly, one man™s civic association in Becky™s world is
another man™s special interest group. These differences in
perception are a source of cultural clashes that have led to societal
tragedies. It isn™t unusual in Desta™s world for communities to pit
themselves against one another, but rushing the streets with
weapons haven™t led to economic progress.

Democratic voting rules

In a well-ordered society civic education seeks to inculcate a sense
of citizenship in people. When shopping, we don™t need to know
who needs what and why. Markets help to save enormously on
information costs, permitting citizens not to worry about one
another when going about their daily business in the market place
(Chapter 4). But even ideal markets are effective only with regard to
transactions in private goods. Citizens should worry about one
another in the public sphere, which includes externalities, and the
supply of public and merit goods such as the distribution of wealth
and the rule of law. Civic awareness is to recognize and embrace the
dichotomy between the private and public spheres of our lives.

Social well-being and democratic government
On a day-to-day basis, the difference between the private and public
spheres depends on the reach of government. The concern someone
has toward the poor in a society where the state only maintains the
rule of law and protects citizens from foreign aggression “ the
Minimal State “ would be different from the concern she would
have in a Welfare State, of the kind now prevalent in Western
Europe. The reason is that in the Welfare State she faces additional
taxation to ¬nance redistribution; whereas, in the Minimal State,
redistribution can only be achieved by means of voluntary transfers.
She shouldn™t have to worry about the poor in the Welfare State (it
is the government™s task to enforce redistributive measures). In
contrast, she will be active on their behalf in the Minimal State.
Since the choices she faces in the two societies differ greatly, she
chooses differently.

In democratic societies, candidates standing for election represent
public policies. So, in voting for a candidate one votes for a public
policy, or more accurately, a set of probable policies. Since public
policies in¬‚uence the production and distribution of goods and
services “ we will call them outcomes here “ in voting for a
candidate one votes for probable outcomes. Presumably, citizens
differ in their interpretation of social well-being. If they do, they

would rank candidates differently and therefore vote differently.
But even if there was little disagreement among citizens over ethical
values, their personal interests would typically differ, and it is most
likely that they would differ in their beliefs about the way public
policies in¬‚uence outcomes. So citizens face the problem of
combining their beliefs into an aggregate. Voting rules governing
the selection of public of¬cials aggregate citizens™ ethical
preferences. Formally, a voting rule is a method for choosing from a
set of alternatives (for example, political candidates) on the basis of
voters™ rankings over those alternatives.

Why voters should insist on ranking all candidates
Over the centuries people have devised many voting rules “ majority
rule, plurality rule, rank-order voting, unanimity rule, approval
voting, instant run-off, and so on “ and their advantages and
drawbacks are not always apparent from casual inspection. Is there
an ideal voting rule? We will study this question presently, but we

should note at once that many national electoral systems are a far
cry from being ideal because voters are required to record only their
favourite candidate rather than rank them all. The problem with
those systems is that they suppress information on how voters rank
candidates who are not their favourite. If only two candidates
compete, this limitation obviously makes no difference, but with
three or more candidates, it can matter a great deal. To illustrate
this (see Table 3), imagine that there are three candidates “ A, B, C “
and that the electorate is divided into three groups.

Everyone in the ¬rst group, amounting to 30% of the electorate,
ranks A over B and B over C, which we will write as (A, B, C). Among
the second group, amounting to 36% of the electorate, the ranking
is (B, A, C); among the remaining 34%, the ranking is (C, A, B).
Consider an electoral system, such as the one governing French
Presidential elections, where the voting rule dictates that if no
candidate obtains an outright majority, the two candidates with the
largest numbers of votes would face each other in a run-off. We will
call the rule plurality run-off. In our example, B and C, with 36%

Table 3. Comparison of voting rules

Social well-being and democratic government
and 34% of the top vote, respectively, would move forward into a
run-off, where B would win easily because 66% of the electorate
prefer him to C.

There is something obviously not right about that outcome.
Candidate A commands an enormous majority: 64% of the
electorate prefer A to B, and 66% prefer A to C. Surely, A should be
elected. The underlying intuition here favours the simple majority
rule, by which I mean a rule that requires voters to submit their
rankings of all candidates and identi¬es the winner to be the one
who beats each opponent in head-to-head competition based on
these rankings.

The problem with the kind of reasoning I have just deployed is that
it is a prisoner of numerical examples. In some other situation,
involving a larger number of candidates and a wider range of voters™
rankings, perhaps some other voting rule would yield a more
intuitively appealing winner than simple majority rule. In view of
this, it would seem best to evaluate alternative voting rules in terms
of fundamental ethical principles that any voting rule should satisfy.
Kenneth Arrow originated this axiomatic approach to voting theory
in a 1951 monograph that stands today as one of the great

masterpieces in the humanities and social sciences. In what follows,
I shall consider a set of ethical principles that, although they are not
exactly the ones Arrow considered, are for our purposes here the

The impossibility of an ethically ideal voting rule
What are those ethical principles? One would be the consensus
principle, which states that if in everyone™s judgment candidate A is
better than candidate B, then B should not be elected. Another
important principle holds that all voters should count equally,
which can be translated as the ˜one-person one-vote™, or equal-
treatment principle. Economists call it the principle of anonymity,
because it insists that who you are shouldn™t determine your
in¬‚uence on the election.

A third principle has been named neutrality. It has two
components. The ¬rst requires that the voting rule should not be

biased in favour of any candidate (not even the incumbent!). The
second requires that the choice made by the voting rule between
candidates A and B shouldn™t depend on voter™s views about some
third candidate C. The ¬rst component is clearly appealing in the
present context, where the alternatives being voted on are
candidates. (In other contexts, such as making an amendment to
the US Constitution, the condition is violated because the status
quo (the Constitution) is favoured over all other alternatives.) To
see the force of the second component, consider the rank-order
rule. Under that rule, if, say, three candidates are competing, each
voter assigns three points to his or her favourite, two to the next
favourite, and one to the least favourite. The rule ranks candidates
according to the total number of points each receives. It is easy to
con¬rm that the rank-order rule satis¬es the consensus principle
and the principle of anonymity. But it runs into trouble with
the neutrality principle. To see how, suppose that in the
numerical example we have just studied, there are 100 voters. If
the rank-order rule is applied to the election, candidate A would
receive 230 points (30 — 3 + 36 — 2 + 34 — 2); B would receive

202 points (30 — 2 + 36 — 3 + 34 — 1); and C would receive 168
points (30 — 1 + 36 — 1 + 34 — 3). It follows that under the
rank-order rule the candidates would be ranked as, A over B
and B over C. But suppose the 36 voters who had earlier ranked
the candidates (B, A, C) had a second thought and ranked them
instead as (B, C, A). Candidate A would now receive 194 points
(30 — 3 + 36 — 1 + 34 — 2); B would continue to receive 202
points (30 — 2 + 36 — 3 + 34 — 1); and C would receive 204 points
(30 — 1 + 36 — 2 + 34 — 3). The candidates would now be ranked as,
C over B and B over A. Notice however that the 36 voters changed
their mind only over the relative merits of candidates A and C:
candidate B remained their favourite. Despite that, the rank-order
rule altered the relative placements of B and C. This shows that the

Social well-being and democratic government
rule can™t be guaranteed to satisfy the second component of the
neutrality principle.

In contrast, the simple majority rule satis¬es the consensus
principle, anonymity, and neutrality no matter what are the voters™
rankings over candidates. Unfortunately, the rule falls foul of a
fourth principle: transitivity. Transitivity requires that if a voting
rule ranks candidate A over B and B over C, then A should be ranked
over C. To con¬rm that simple majority rule is not always transitive,
consider the situation we have just discussed, namely, where 30% of
the electorate rank the candidates A, B, and C as (A, B, C), 36% as
(B, C, A), and 34% as (C, A, B). The simple majority rule ranks A
over B because 64% of the voters rank A over B and it ranks B over C
because 66% rank B over C. Transitivity says that the rule should be
required to rank A over C. But 70% of the voters rank C over A,
which implies that the simple majority rule is obliged to rank C over
A. We have a contradiction here, a possibility that was identi¬ed in
the late 18th century by the Marquis de Condorcet. The example is
now known in economics literature as the Condorcet paradox.

Is this pure theory or is transitivity violated by the simple
majority rule in real life? Political scientists have explored this
question by studying decisions reached in US Congress. To see

how they have gone about their investigation, let us return to the
above example, but now rename the alternatives as bills proposed
in US Congress. Say A is the bill being proposed in Congress and
B and C are amendments to the bill. Suppose that instead of
members of Congress being asked to rank the three alternatives,
the rule is to vote ¬rst on A and B, and then vote on the winner
of that contest and C. Under the simple majority rule, A would
win in the ¬rst contest (64% of the voters favour A over B); in the
second round, C would beat A (70% favour C over A).
Consequently C would be chosen. Now suppose instead that
members of Congress are asked ¬rst to vote on A and C and then
vote on the winner of that contest and B. Under the simple
majority rule, C would win the ¬rst contest (70% favour C over
A), but in the second round B would beat C (66% of the voters
favour B over C, remember). The outcome depends on the order
in which pairs of alternatives are presented to voters: the agenda
matters. It is easy to check that the agenda would not matter in

those situations where the voting rule satis¬es transitivity.
Political scientists studying outcomes of votes in US Congress
have discovered that the agenda does seem to matter on occasion.
When it does, it is a sign that transitivity is violated by the voting

The simple majority rule and the rank-order rule are but two voting
rules. The question arises whether there is some voting rule that can
be relied upon to satisfy the consensus principle, anonymity,
neutrality, and transitivity no matter what the voters™ rankings over
candidates happen to be. Arrow™s ˜impossibility theorem™ says that if
the number of alternatives exceeds two, the answer is ˜no™. The
theorem holds that if the alternatives number three or more, all
voting rules must sometimes violate at least one of the four ethical
principles. (If the alternatives are two, Arrow™s theorem doesn™t
apply. For example, the simple majority rule satis¬es all four ethical
criteria no matter what the voters™ preferences happen to be.
Transitivity doesn™t apply because the criterion has force only when
there are three or more alternatives.)

The result is both deep and depressing. There is no way out of the
dilemma but to drop one of the principles. Of the four, the
neutrality principle has come up for the greatest scrutiny among
economists. The principle insists that the only information a voting
rule should be allowed to use is each voter™s ranking of candidates.
However, no one has provided evidence of what additional
information could be made permissible at a polling station without
jeopardizing the electoral process. Making comparisons of voters™

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