Coase Encounters of the Third-Party Kind


What does the lowering of transaction costs by information technology imply for the two-party system in the U.S.? Ronald Coase knew, and Everett Ehrlich explains. (Hat tip: Will Wilkinson)

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  1. Two things trouble me if that is right:
    1) libertarians seem to be too individualistic and idealistic to organize well
    2) not surprisingly, the collectivists under green or red banners seem to be the strongest third party contenders.

  2. Interesting piece, but I don’t think the conclusion is correct. Until we adopt a parliamentary system or some kind of proportional voting or representation, the winner-take-all electoral system will force disparate faction into two functional “parties” contesting for votes.

    Of course, the identities and ideologies of the two parties need not stay consistent, and probably won’t.

  3. As much as I would like to hope that the internet will break the duopoly, I’m not optimistic. Here’s why:

    If we are only electing a single legislator from each district (unlike some countries which use proportional representation to elect several legislators at once) and we only have one vote (unlike the instant runoff system) then there are almost always only two major parties. (OK, England uses our system and has 3 major parties, but in most districts only 2 parties are serious contenders from what I understand.)

    Political scientists have formalized this observation and called it Duverger’s Law, but the basic idea makes sense. You only have one vote to cast, and there’s no second round (unlike the runoff systems), so if your only concern is electing the best of the available candidates in this particular election (unlike, say, voting third party to “send a message” and hoping the message will influence future elections), then find out who the two front-runners are and participate in that contest by voting for the lesser evil among the top 2. Voting for anybody other than one of the two front-runners will have no impact on the outcome, so you’ll essentially be sitting out this election (in a practical sense, even though in a theoretical sense you’re obviously still voting).

    (Yes, yes, I know, the lesser evil is still evil, hence I emphasized that this analysis is for people whose only concern is the outcome of this particular election rather than long-term reform by “sending a message”.)

    So, given that our system inevitably forces rational voters to pick from the top 2, and hence narrows down the field to only 2 competitive choices, you might ask whether the top 2 in one election could be different from the top 2 in another. Maybe in one place the top 2 will be the Green and the Democrat, in another the Democrat and Republican, in another the Republican and Libertarian, etc. etc.

    Well, let’s say we start from that sort of situation, with several competitive parties, and in each locale only 2 parties have a chance at victory. Just as in many industries consolidation and mergers are the norm, the same is often true in the marketplace of ideas. First of all, parties might be absorbed into one another by coalition building. Second, a party that succeeds in a lot of districts might use its name recognition and fundraising machinery to boost the chances of its candidates in other districts, edging out parties that are only contenders in a handful of districts.

    So the result is that we almost always get just 2 major parties.

    Now, I won’t even try to defend proportional representation here. I could, but the list of objections that I’d have to answer is longer than I care to deal with right now. Instead I’ll suggest that if we stick to single-member legislative districts we might consider either instant runoff voting ( or approval voting (

    Incidentally, I observed earlier that anybody who votes for a third-party candidate is choosing to sit out the “real” contest. (No criticism from me, I’ve done it myself.) For this reason I don’t get upset when the person with the most votes has a plurality rather than a majority. Say the contest is 48% GOP, 47% Dem, 5% Green (or, if you like, make it 48% Dem, 47% GOP, and 5% Libertarian). In all likelihood, without that 3rd party candidate the other guy would have won. But those people voting for him chose of their own free will not to participate in the main contest. In some sense they might as well have stayed home, and if they had done that the winner would have had a majority.

  4. I know this is a shameless plug, and tastelessly it’s for an article in a competing magazine, but I address the seemingly eternal conflict between libertarianism and the two-party system in my article for “Liberty” Magazine this month. Pick up a copy if you can.

    But don’t forego Reason to do it. This magazine (still) rules.

  5. As stated above, so long as we have single memeber districts, we will only have two parties running things. But, who’s to say that those two parties necessarily must be the Republicans and the Democrats.

    There were once other parties, you know, and some had platforms that were quite different from anything we have today.

    The Whigs, for instance, believed, very basicly, that there were two major threats to free “society”. The first being a moral collapse in the general population and the second being a government that overstepped it’s boundries.

    BTW, proportional representation stinks. Imagine a Senate as closely divided as ours is, and imagine what kinds of laws might get passed with a couple of Senators to right of any current Repulican Senator or to the left of any Senator in the Democratic party. No thank you.

    You know the French have Communist…I don’t think I gave that enough emphasis…COMMUNIST members of their parliment.

    Just because there will only be two parties so long as we don’t have proportional representation, doesn’t mean that the Libertarians won’t eventually replace one party or the other.

  6. Shultz-

    I agree, proportional representation has problems. One nice thing about bicameralism is that one chamber could be elected by PR (e.g. each state elects its House delegation by PR, except a few larger states might divide into multiple districts so that fringe factions can’t get elected), and the other chamber could be elected from single-member districts to moderate the influence of extremist factions (e.g. keep the Senate as is).

    I personally would reject any PR system that didn’t include bicameralism with one chamber elected from single-member districts, as well as any PR system that had districts much larger than 10 members.

  7. Nice idea Thoreau.

    If I were the king of the US for a day the second thing I would do is get rid of the 17th Ammendment. We’d go back to the way the Framers’ intended the Consitution to work.

    Prior to the 17th Ammendment, early 20th Century, Senators were chosen by State Legislatures rather than direct vote, much the way the Prime Minister in Great Britain is elected. Of course, this meant that Senators had to tow a party line; that is, the State’s party line. Their main directive was to preserve the power of their state legislature. The State Legislature, thereby, had a direct voice in the crafting of all federal legislation.

    It was the lynchpin of Federalism, and, I would argue, Federalism has been more or less a joke in this country ever since.

    I suspect that the New Deal and the Great Society wouldn’t have been possible without us having tinkered with the Constitution via the 17th Ammendment. I’m leery of further unintended consequences.

    P.S. The first thing I would do as King is make it so that all elections are held on the day you pay taxes.

  8. One thing to keep in mind in assuming a two party system. If say in a state like oh, California and lets say you lower the requirement for starting a campaign to 65 signatures and a nominal entry fee why you might even get 100+ people running for an office.
    My point is that while parties may coalesce around two major parties the system is rigged in such a way as to prevent any new parties from becoming one of the two dominant parties in the first place by such methods as increasing number of signatures and entry fees required to run as well as so called campaign finance reform.

  9. I think everyone is missing the point. This economic theory applies to everything, not just political parties, though I realize the article focused on its effect on the two-party system. I have thought about something like this before. It is sort of a variant of Marx’s idea of…drawing a blank ehh, should have studied more…you know that thing where Communism is a historical and economic eventuality. Looking at Coase, doesn’t it seem, with companies streamlining, bureaucracy diminishing and all that people will eventually see how non-heinus this is and assume it applies it to government. Thusly allowing libertarianism/anarchism to ensue.

    What do you think? Probably not in my lifetime (and I’m relatively young!), but maybe someday?

  10. Thoreau, you wrote:

    “Voting for anybody other than one of the two front-runners will have no impact on the outcome, so you’ll essentially be sitting out this election….”

    But this is an illusion, the voter’s illusion. Let’s say I voted for Al Gore in the last election. My vote didn’t get him elected. So in what sense did my vote have an impact on the election? It would have just tallied up in Gore’s column in my state. Whoopee. If I’d voted for the Libertarian candidate, my vote would merely have tallied up in the Browne column. Whoopee.

    Now, if I’d have voted for Bush, and since Bush won, I may (like many others) have pretended to have “done my part for Bush,” and thus helped him get elected. But my one vote didn’t do it, no matter what fantasy I may tell myself.

    And what if, in my state, Gore won the vote (say, by a mere 3,000 votes), but Bush nevertheless got elected. Should I feel that my vote nevertheless helped Bush? How?

    This talk of instrumental value of votes is almost always illusory. Voting is not like buying something with money, where the value of the money can be expressed (not without some good reason) in terms of the things the money obtains; the instrumental value of my vote, on the other hand, is almost always chiefly symbolic, no matter what I may think of it.

    This has implications for the two-party system, implications that neither you nor the Coasian writer linked to have explored.

  11. Just to point out this somewhat-related bit from Reason’s excerpts:

    August 1979

    The nature of the computer?s information revolution is the exact opposite of that of the steam engine?s Industrial Revolution. The steam engine made start-up costs for the individual entrepreneur larger and larger, so that today “there is no way an ordinary citizen could walk into a modern complex factory and use its facilities to construct something useful for himself.” But the data banks of tomorrow are going to be places into which every part-time enthusiast can telecommute. In all jobs connected with the use of information, start-up costs for the individual entrepreneur are going to grow smaller and smaller and smaller.

    — “Shrinking Government,” Norman Macrae

  12. “You know the French have Communist…I don’t think I gave that enough emphasis…COMMUNIST members of their parliment.”


    If there are people who are communists in the population of a country why should they not have representation in its parliament?

    And actually since the Communist party is fairly big in France it would probably be represented even with single member districts.

  13. Canada has first-past-the-post voting in its House of Commons, and it has 4 main national parties. Until a week or so ago, it was 5; two of them just merged. Liberals, Conservatives, NDP, and Bloc Quebecois.

    There’s no reason to think that third parties won’t ever make a dent in American politics just because they haven’t so far, especially because they do make a dent in other first-past-the-post systems.

    – Josh

  14. The only time first past the post works for a government is when a majority is denied any one party. That forces a so-called minority government, far more responsive to the electorate, lest they fall to a vote of non-confidence. Any majority government in this country is a virtual (or in the case of Johnny Crouton, actual) dictatorship. Sadly, too many of my fellow citizens are okay with that.

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