The Electoral College — the Financial Economics Perspective

Every economy is a Financial Economy. A true Financial Economy is, however, characterized by presence of private markets. It is normative, of course, that private markets function on basis of price. The study and practice of a true Financial Economy is referred to as Financial Economics.

Politics consists of leadership arrangements whose sole focus is mediation of Financial Economics, that is, facilitation, enhancement, and mediation of people’s attempts at generation of income, assets, and resources in economies that inherently embed some risk.

Clearly, if Politics is structured such that those who already have an advantage at generation of income, assets, and resources maintain an unequivocal advantage, we arrive at Politics that does not embed either of a genuine Democracy, or opportunity for upward mobility. If, for instance, a great education is, on basis of the price of education, available only to the rich, Politics would have engendered Financial Economics that is inimical to each of Democracy and upward mobility, clearly, a non-desirable outcome.

Politics is inextricably intertwined with Financial Economics.

Financial Economists focus on understanding and pricing of risk. The goal is to price risk in such a manner as to negate emergence of the risk that is priced. Since risk always portends adverse outcomes, pricing of risk such that risk is mitigated or minimized always is desirable, always is good for society.

For illustration, whenever an entrepreneur secures venture capital, there exist two feasible outcomes: the project turns out unsuccessful, or the project becomes successful. Due to the highly positive probability that a project can turn out unsuccessful, venture capitalists (VCs) demand large ownership stakes in exchange for their infusions of capital and expertise. There exists, however, the risk that, for keeping of all of the benefits of success, the VC can attempt to mischaracterize success as failure. This risk is referred to as the risk of moral hazard. For mitigation of the risk, the venture capitalist agrees, in writing, that both himself (or herself) and the entrepreneur will exit the project at exactly the same time. Since both parties will exit at exactly the same time, and since parameters of the business at that time will be visible to all, the VC no longer has any incentive to attempt to characterize success as failure. Whether the project fails or succeeds, both exit at the same time on basis of exactly the same parameters. In the willingness to give up a large chunk of ownership, the entrepreneur pays the price that induces the contractual provision of simultaneity of exit from the project. You see then that pricing of the risk serves for mitigation of the risk.

Within context of IPOs, the risk always is that the companies know something that investors do not know. If the companies are unwilling to divulge such information, such information only can be adverse, not beneficial to investors’ interests. To protect themselves, investors demand a discount from issuers that is a function of the estimated value of the issuer. Suppose the issuer is estimated to be worth US$100 million. Conditional on the severity of the risk that there exists adverse information of which they are unaware, investors demand a discount of x%. If this discount turns out to be 10%, investors pay US$90 million for the asset that, on basis of all of the favorable information, is estimated to be worth US$100 million. The discount mitigates the probability that investors lose money from investment in the IPO, this because subsequent to the IPO, previously hidden adverse news materializes. Pricing serves for mitigation of risk.

Financial Economics is about pricing of risk, and accompanying clauses that mitigate emergence of the risk that is priced. Absent such pricing, financial economies are unable to thrive.

The risk that subsists in context of an ‘Electocracy’ — a Democracy that is actualized in context of free and fair elections — is that the will of a larger swath of homogeneous people will overwhelm the economic welfare of a smaller swath of homogeneous people.

Absent the Electoral College, large states, such as Texas, Florida, and California are focus of presidential candidates, and focus of sitting Presidents seeking reelection. But due to their size, Texas, Florida, and California already send a larger number of delegates to the House as Representatives. For instance, while the state of Vermont has only one Representative, the state of California has 53 Representatives in the House. We have then that with states as markers for homogeneity of political interests, larger swaths of homogeneous persons have a larger number of persons looking out for their economic welfare. Absent the Electoral College, not only would Florida, Texas, and California have more people looking out for their interests at the Federal Level, the President of the United States also would have an incentive to focus on courting Florida, Texas, and California. At end of the day, the objective of Democracy is defeated, for all of the attention at the Federal level is focused more on large homogeneous swaths of political interests, with outcome small homogeneous swaths are, in the grand scheme of things, overlooked.

However flawed some may deem it’s implementation, the Electoral College is designed to ensure that the voices at the Federal Level are not only the voices of the large homogeneous swaths. In the allocation, on a relative scale, of greater importance to the small states, there is attempt at ensuring that small homogeneous swaths of people have a say in Federal affairs of the United States.

In the pricing of the risk of neglecting of small states — that is, weighing of electoral college votes in favor of small states — there is an attempt at mitigating the risk that small swaths of homogeneous people will lose their say in federal affairs of the United States. The pricing of the risk attempts to mitigate emergence of the risk.

If the United States of America indeed is a Democracy, the Electoral College is part essence of that Democracy.