It is hard to have confidence when you don’t know who’s making the decisions

By Buttonwood

WHO makes the decisions in a democracy? Go back to ancient Athens and it was the adult (non-slave) males in a public meetings. In the modern world the decisions are made by elected representatives, who voters get the chance to dismiss every few years if we do not like the result. In the British system, the prime minister is the person who can command the support of a majority of MPs in the House of Commons. So for David Cameron to resign and be replaced by Theresa May, without the electorate being consulted, is an example of the system working normally; it happened in 2007 (when Gordon Brown took over), 1990 (John Major), 1976 (Jim Callaghan) and many times before.

These are not normal times, however. Public satisfaction with politicians is low. Representative democracy has always had an innate conflict, best described by Edmond Burke back in 1774

Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion.

adding that

government and legislation are matters of reason and judgment, and not of inclination; and what sort of reason is that, in which the determination precedes the discussion; in which one set of men deliberate, and another decide; and where those who form the conclusion are perhaps three hundred miles distant from those who hear the arguments?

But the modern public is suspicious about politicians using their “judgment”; the fear is that they may be guided by self-interest or the interest of those who fund their campaigns.

So representative democracy sits alongside two other models. The first is direct democracy, where the people decide matters by referendum. It is democratic, certainly, although there are only a limited number of questions that can be reduced to a Yes/No answer. Scottish independence was an example. Brexit was less clear-cut since the consequences of a Leave vote were not obvious. That helps explain the recent mess in British politics with the new PM being someone (albeit nominally) on the Remain side, as the various Leave candidates have sabotaged each other (and themselves).

A third model is that representatives are guided, not by the people as a whole, but by the members of the party they represent. The leader of the Labour party, Jeremy Corbyn, and his supporters see MPs as “delegates” of the party view. Hence, he has refused to stand down even when almost 80% of the Parliamentary party lost confidence in him. He may well be re-elected by the membership in another vote, putting MPs in an impossible position. On the Conservative side, it was possible that Andrea Leadsom, who withdrew today from the race to be Conservative leader, might have been elected by the members, even though most MPs backed Mrs May.

After a long period of dwindling membership, you can see why British parties have brought their members into the voting process. Party members are more likely to pound the pavements at election time if they feel they have a say. Labour membership has soared under the new rules. But party members are not the same as the electorate; they tend towards the extremes on right and left. The person selected by the party to lead may not have broad-based electoral appeal.

In the US, party members used to realise this and tended to edge towards the most electable candidate through the primaries (Romney not Santorum, for example). That didn’t work this time with the Republicans and Donald Trump. However, the whole electorate gets to decide on Mr Trump’s merits in November. In Britain, voters may have to wait until 2020 to express their opinion of Mrs May.

For businesses and investors, these different modes of democracy only add to the air of uncertainty. It is hard to make investment decisions when politics is so up in the air. Think of what has happened in recent months. Spain has had two general elections without a clear winner emerging; Australia called a surprise snap election and ended up close to deadlock; Austria’s tight Presidential election is being re-run (which could lead to the government falling). When governments fall quickly (or govern with the help of minority parties), policy-making becomes a bit of a lottery. There was a bit of a rally in UK assets today because it at leat became clear who will be prime minister; but the nature of the UK's post-Brexit arrangments are still unclear.

Political uncertainty is all the more important when monetary policy has played most of its cards (helicopter money is still to play, if politically possible). Governments could take a strong lead with fiscal policy by, for example, borrowing at record-low rates to fund infrastructure projects. But it’s not clear that any politician is confident enough to take this route, perhaps because they won’t be in charge for long. We know that, in the US, Congressmen in safe seats are reluctant to compromise with the opposition for fear of being unseated in a primary.

Sometimes, of course, businesses and investors like gridlock because it means that governments aren’t likely to muck things up. This is not one of those moments. As the competing models of democracy battle it out, economies are becalmed.