Economic Theory and the Rise of Extreme Politics

The rise and successes of extreme politics (on both right and left sides) flies in the face of economic theory. Mainstream economic theory predicts that moderate politicians, threading the middle ground, tended to get elected. In theory, politicians who swing further right (or left) and away from the middle lose votes.

However, this has not been the case in recent times. Donald Trump and the right-wing movement of the Republican Party picked up adequate votes to win the 2016 US Presidential election.

Described by CNN as “leading the most far-right government since the fascist era of Benito Mussolini”, Giorgia Meloni won the 2022 general election, installing her as Italy’s Prime Minister.”[1] Other successful extreme-right politicians include Andrzej Duda of Poland, Victor Orbán of Hungary and Jair Bolsonaro of Brazil.

This phenomenon is not only confined to right-leaning movements. We also witnessed the rise of the Progressives in the US, most notably Bernie Sanders, Alexandria Ocasio-Cortez, and Elizabeth Warren, as well as extreme left-wing politicians such as Evo Morales of Bolivia.

Nash Equilibrium, Hotelling’s Law and Ice Cream Vendors

Mainstream economic theory in this area draws on two key concepts, as described below:

Nash Equilibrium

Named after Nobel laureate John Nash, featured in the movie A Beautiful Mind, Nash Equilibrium is defined as an outcome in a non-cooperative game whereby all players’ positions can no longer be improved by changing their respective strategies. As such, it represents the end game where all players have the best outcomes under the circumstances.

Hotelling’s Law

Harold Hotelling’s work explains why competitors often cluster together.

This is best illustrated by an example.

Take the hypothetical situation of two competing ice cream vendors at a 1km beach. All else being equal, the location of the vendors along the beach will determine their respective market share and profitability. So, where should the ice cream vendors be located?

The best solution from society’s perspective is for both vendors to divide the beach equally between them and plant their ice cream cart right in the middle of their respective half of the beach. In this case, A at 250m and B at 750m. This is the socially optimal solution as it minimises the distance beachgoers need to walk to buy ice cream – the maximum distance being 250m. Any change to their positions will mean longer walks for some beachgoers. Please see Diagram A.

While both share the market equally, this is not the optimum solution from the vendors’ perspective. If A moves closer to the middle of the beach, A can attract some beachgoers at the edge of B’s territory given the beachgoers shorter distance to A. Please see Diagram B.

Both vendors will creep towards the middle to steal market share until both vendors are located right in the middle of the beach. Once both are in the middle of the beach, the vendors will have no incentive to move away from their positions as they risk losing part of their market – if they move, some beachgoers in their territory will end up being closer to their competitor.

With both vendors in the middle of the beach, this outcome is the Nash Equilibrium, whereby both vendors can no longer improve their positions. However, it results in a worse social outcome as the maximum distance beachgoers need to walk to buy ice cream has increased to 500m. [2] Please see Diagram C.

Applying Economic Theory

Hotelling’s Law shows that there is a natural tendency for competitors to move towards common middle ground. The Law obviously applies in the spatial sense and explains the clustering of restaurants, retail shops, car dealerships and petrol stations in close proximity to each other.

However, it also applies in non-spatial ways, where competing products move towards middle ground in product characteristics and minimise product differentiations. For example, mobile phones, cars and whitegoods at the same price points look the same and have similar features. Competing airlines tend to schedule flight departure times for the same destinations close to each other. Also, McDonalds and Burger King’s menus are very similar and, arguably, even taste the same.

The theory has also been applied to politics. If we regard beachgoers as voters, Hotelling’s Law asserts that politicians tend to move toward the middle of the political spectrum. Politicians will get as close as possible to competitor’s policies while maintaining their party’s identity. This supports the success of moderate politicians such as Kevin Rudd, Malcolm Turnbull, Bob Hawke, Joe Biden, Barack Obama, Tony Blair and Bill Clinton.

This is also consistent with the Median Voter Theory as expounded by Duncan Black in 1948, which uses voter preferences to show that the politicians most aligned to the median voter will get the most votes, thus winning elections. This intuitive concept has been popular with mainstream political parties and is widely quoted by political commentators.

However, there has been a steady stream of politicians with more extremist views winning office lately, outcomes which are contrary to economic theory.

While some have pointed to gerrymandering and low voter turnouts as possible explanations for the successes of extreme politicians, there may well be other changes in market environment that weakened the economic theory.

Possible Explanations for Theory Misalignment

Hotelling’s Law failure to explain extreme political movements may be due to two main reasons, as follows:

Nash Equilibrium x 2

There is a two-step process to winning elections, as described below:

I.?????????Party nomination – Politician appeals to the party base to get the party nomination, competing against other potential nominees within his/her own political party.

II.?????????General election – Politician appeals to the broad voting public and gather the most votes among competing candidates in a general election.

The two steps have different Nash Equilibriums given the different target markets, as shown in Diagram I and II below:

In line with Hotelling’s Law, politician needs to be at the ideological centres in both steps. Initially, he/she is at his/her party’s ideological centre to win the nomination. Thereafter, he/she moves towards the middle to appeal to the median voter in the general election.

In the past, politicians were able to ‘obscure’ their true (extreme) political leanings within their party rooms while efficiently navigate their moderate public policy stances. However, politicians in modern times may find it more difficult to conceal extreme views. The increasing ease of information flows in the advent of 24/7 news, mobile devices and the internet pin down politicians’ stances for all to see.

This may explain left/right-leaning candidates (and the lack of moderates) being nominated by political parties. ‘Teal’ independent candidates in recent Australian elections were effectively frustrated moderates, who were unable to gain nominations from the Liberal Party. They, however, found success in general elections given their middle ground convictions.

Pride, Prejudice & Misinformation

It is a truth universally acknowledged, when economic theory is inconsistent with the real world, it must be due to deficiencies in assumptions. In this case, the culprit is the implied assumption of perfect information, which presupposes that all participants have all necessary information to make rational decisions.

This ostensibly innocuous assumption, so prevalent in economic models, seems reasonable as voters have easy access to all relevant information (policy stances, ideologies, politician’s background and track record), facilitated by modern technology.

However, the failure of Hotelling’s Law in the political arena may be attributed to selective information dissemination and the growing role of click-driven social media, search engines and news media.

Information is now channelled through social media and search engines, which aim at maximising clicks (and profits), with little regard to accuracy, quality or balanced viewpoints. Once their algorithms identify user’s area of interest, they push more of the same content, creating ‘echo chambers’ of same viewpoints.

News organisations, such as Fox News, have pretty much abandoned impartial reporting in pursuit of clicks, viewership and profits. This was highlighted in the defamation lawsuit brought on by Dominion Voting Systems for deliberate airing disinformation to play to their conservative audiences, which Fox eventually settling for US$787.5 million.[3]

A lot has been written on the roles played by social media, search engines and news organisations in misinformation.[4] Suffice to say that viewpoints get distorted and reinforced with narrow, biased information and misinformation. There is little scope to air alternative viewpoints or balanced discourse. Voters then decide based on distorted information fed by these sources.

This will likely be exasperated as recent advances in artificial intelligence, such as ChatGPT, deliver the ability to effortlessly generate fake articles and contribute to ‘content farms’, thus spreading more misinformation and false narratives.[5]

Conclusion

While the kneejerk prescription is to regulate social media companies and search engines, it is more complicated to formulate appropriate regulation. After all, social media and search engines are built to gather users’ preferences so that they provide useful information, eg. restaurant recommendations based on user’s interests in cuisine, location and budget. As such, their built-in prioritisation of information can be both useful (in the case of restaurant selection) and harmful (in the case of politics).

Perhaps there should be questions asked about market failure within the news and media industry. As mentioned earlier, it appears that some news organisations (such as Fox and Sky) lurched away from the middle ground to cater to conservative audiences. It is interesting to note that Fox News is the market leading cable news network in America.[6] Surely it would be more lucrative to have customers from both left and right but it does not appear to be the case.

The oligopolistic market structure of the news and media industry may have facilitated behemoth players to establish barriers to entry, thus blocking competition. Perhaps the underfunding of national broadcasters, such as ABC and BBC, caused them to kowtow to the government of the day and weaken their ability to compete effectively.

More research needs to be undertaken but it seems clear that the economist’s handy assumption of perfect information can no longer be taken for granted. Imperfect information flows in the modern era of social media echo chambers and the existing news and media industry lead to warped outcomes which deviate from economic theory. More importantly, it causes more society harm in the longer term.

Resource

This TED-Ed video provides an animated explanation of the competing ice cream vendor example.?https://youtu.be/jILgxeNBK_8

This Time article provides a concise precis of the origins of ‘left’ and ‘right’ in politics. https://time.com/5673239/left-right-politics-origins/

Endnotes

[1] https://edition.cnn.com/2022/09/25/europe/italy-election-results-intl/index.html

[2] As an aside, Hotelling’s Law and the ice cream vendor scenario also illustrate that decisions made by individuals in pursuit of his/her own self interest is not necessarily the optimal solution for society. This refutes Adam Smith’s notion of the Invisible Hand but this is a discussion for another time.

[3] https://www.theguardian.com/us-news/2023/apr/18/fox-dominion-settle-us-defamation-lawsuit

[4] A case in point is the docu-movie The Social Dilemma. Please see also the role of Fox News in spreading misinformation - https://iview.abc.net.au/video/NC2103H029S00

[5] https://www.theguardian.com/technology/2023/may/02/chatbot-journalists-found-running-almost-50-ai-generated-content-farms

[6] https://www.statista.com/statistics/373814/cable-news-network-viewership-usa/

I am indebted to Dr. Alan Duhs, my University of Queensland economics lecturer, who introduced me to the aforementioned economics theory.

The views and opinions expressed herein are solely my own and do not necessarily reflect the views or opinions of any entities I am associated with.

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KY Wong sits on the Advisory Board of the School of Economics of the University of Queensland and is a member of the Economics Society of Australia (Victoria). He is also a Board Director.