People who hold political power must convince the masses that they have the legitimate authority to exercise it. They use patriotism and propaganda to persuade citizens that they have a duty to their fellow citizens to obey government mandates. The elite argue that the obligation to comply with the government’s rules amounts to a social contract, even though that term is reserved for academic use. This chapter uses social contract theory to explain how the messaging of the political elite creates citizen compliance, and how the elite are able to use this to their advantage. Social contract theory depicts the social contract as a way to escape from a prisoners’ dilemma, making everyone better off. This chapter uses that framework to show how the elite benefit from propagandizing the masses to believe that they have an obligation to abide by the rules designed by the elite.

Chapter 2. A “gold standard” means a monetary system in which a defined mass of gold coin or bullion is the unit of account in which prices are posted and accounts kept, and gold coin or bullion is the medium of redemption that ordinary currency and bank accounts promise to pay. Once modern banking developed, the vast majority of money was held and spent in the form of banknotes and deposit transfers, not coins. A monometallic gold standard with bank-issued money avoids problems created by legally imposing bimetallism. A series of supply-and-demand diagrams explains how a gold standard works to determine the quantity and purchasing power of money. The diagrams show how market forces stabilize the purchasing power of gold in response to various shifts in money demand and supply. A major gold discovery can change the purchasing power of gold by altering the supply from mining, but large discoveries were historically rare. The resource costs of a gold standard, the expenditure of labor and capital to extract and coin gold, have been over-estimated by economists who assume away the role of the banking system in economizing on the amount of gold used for transactions.

If the goal of the political elite is to amass power, this chapter examines policies that maximize political power. Power maximization does not have specific policies associated with it, but is a process by which the elite encourage the masses to give them more power. Political platforms tend to be vague, offering the message that things are not as good now as they could be, but if you give me more power, I will make things better. People see problems and demand that the government should do something, which gives more power to those who already hold it. The chapter discusses the appeal of populism, which is based on the idea that the system is run for the benefit of the elite, and if the populist politician is given power, things will change to benefit the masses. However, the result is to replace one set of elites with another. Policies that maximize political power are those that create dependence on the political elite. This can occur by expanding the welfare state; by giving regulatory, tax, and other benefits to rent-seekers; and by creating apprehension about potential domestic and foreign threats to people’s well-being.

While the policy preferences of the masses are purely expressive, the political elite actually make public policy, so the preferences they act on do have instrumental effects. If the masses adopt the policy preferences of the elite, that points to the question of what public policies the elite advocate to the masses. In the same way that economists simplify the motivations of firms to say that firms are profit maximizers, the political elite are power maximizers. That motivation starts with the recognition that politics is adversarial. In elections, some people win while others lose. The same is true in public policy issues. Some win while others lose. The motivation of the political elite is to keep the power they have, and to gain more. In most societies, the political elite is not a monolithic entity. Rather, there are competing members of the elite, with competing public policy ideas. Thus, the masses have a choice of anchors, but once they choose an anchor, most of their policy preferences are derivative of their anchors.

For most of human history, societies were divided into the rulers and the ruled. Citizens were subjects of their governments and were obligated to obey the orders of their rulers. Enlightenment ideas changed the way that citizens viewed their relationship to government. The view that citizens were subjects of their governments and obligated to serve their governments was reversed, so people increasingly thought that government should serve its citizens rather than the other way around. Democratic political institutions that increasingly were adopted as a result can act as a constraint on those who hold government power, but they also convey legitimacy to the exercise of that power. Democratic political institutions create the illusion that the political elite are accountable to the masses. Meanwhile, the masses, who have an incentive to be rationally ignorant about public policy measures, adopt their public policy views from those offered them by the elite.

A reading of the literature on cognitive hierarchies leaves the impression that a subject’s type is predetermined before she comes into the lab so that the distribution of types is exogenous and immutable across games. In this chapter we view the choice of a person’s cognitive level as endogenous and explain it by focusing on subject’s ’expectations about the cognitive levels endogenously chosen by others. We run a set of experiments using the two-thirds guessing game where subjects receive public advice offered by a set of advisors. We discover that certain types of public advice, those that are commonly interpreted as meaningful, are capable of shifting the distribution of observed cognitive types, indicating that the distribution is endogenous.

This chapter asks and attempts to answer a set of questions we have not dealt with previously. More precisely, in all of our previous chapters (except for Chapter 9 on social learning), people had no choice as to what information they received before they made a decision. They just received advice. We now ask whether there are other types of information they might prefer. We have also never asked whether people have preferences over who gives them advice. Are there types of people that are perceived as good advisors and other types that are perceived as unreliable? If so, who are those “good advisors” and what characteristics do they share? The ... first question is important because it asks how important advice is to decision makers. If people consider advice only when they have no other source of information, then its influence will be diminished when they are given access to alternatives. However, if advice has an inordinate sway over people, if they seek it out, then we need to understand why advice is so desirable or persuasive. The second question is also important because, if certain types of people are considered good advisors, then this perception may confer rents on them which may or may not be warranted. To answer these questions, we set up a market for advice and advisors. In general, we find that subjects bid significantly more for data than they do for advice, i.e., they prefer information that they can use to make their own decision rather than having an advisor offer them advice. We also ... find some evidence for “perception rents” for economics majors, whose price is elevated in the market, and a certain amount of support for what we call the ”chauvinistic bias,” meaning that subjects tended to bid more for advice from people sharing the same major as themselves than for people of other majors.

This chapter turns to the comparison of cases. By analyzing the discontented cases, a clear pattern emerges. The positive cases share few characteristics save one: democratic discontent that arose when sharp economic contractions intensified the imperfections and contradictions of the political status quo. This argument is made using paired comparisons of the positive and negative cases (Canada with the USA/UK, Portugal with Spain, Uruguay with Brazil/Chile) to evaluate competing explanations. The second section of the chapter analyzes how discontent was avoided during the Great Recession by looking for shared features of the three negative cases. It finds that escaping the initial pain of a crisis was not a necessary condition for avoiding discontent. Instead, the key to maintaining democratic legitimacy lay in the political response to the crises, and in the adaptability and health of left-wing parties. In all three negative cases, center-left parties recognized crises as indictments of neoliberalism, rejected its calls for austerity. By responding to popular demands for help in difficult times, these parties deprived cultural conflicts of the oxygen needed for them to rage and avoided major upsurges of discontent.

This chapter turns to the dynamics of democratic discontent when it seizes power, focusing on Trump but referencing other cases where relevant. It analyzes the influence of Trumpism on the left and finds a mirror image to the dynamics in Spain, where the rise of left-wing populism provoked a populist backlash among the radical right. In the United States, extreme disgust with Trump’s agenda drove many further to the left, increasing leftist Democratic discontent. The second section analyzes the final months of the Trump presidency, as its response to the Covid-19 crisis faltered and Trumpism degenerated into an arcane morass of conspiracy theories. Using experiments and observational data from the PSAS, the chapter argues that pro-Trump conspiracy theories served as a coping mechanism for his followers. As the Covid-19 crisis ravaged both the lives and livelihoods of America, and as it became increasingly clear that Trump would not be reelected, the anxiety his followers felt, regarding a situation that their loyalty to the populist prevented them from accepting, became intolerable. Conspiracy theories allowed the followers to escape anxiety and embrace resentment by giving them targets for their rage.