"Arrow's result lowered the relative status of democracy. An outsider might suspect that James Buchanan would embrace such a result; that he would draw on Arrow's Theorem to emphasize the chaotic, untrustworthy nature of democracy.I often get flack on here for being an enthusiastic small-d democrat, and while I don't claim to have anything like the brilliance of a Buchanan to throw in the pot, I think the reasons why people react that way is because they have this despondent view of democracy.
Wrong wrong wrong. Buchanan saw Arrow's theorem as a reason to trust democracy even more. In his short essay Politics Without Romance, Buchanan said he saw the chaotic multiple equilibria of democracy as a strength not a weakness"
Arrow's contribution was still important, of course. Arrow was in the business of rigorously proving intuitions a lot of people had. He did it with intuitions about the efficiency of market allocation, and he also did it with intuitions about inefficiencies in political allocations. That's an important contribution.
But the fact that government has failures is no more an argument against governments in itself than the fact that markets have failures is an argument against markets. You still have to ask yourself why - despite these problems - we might find these institutions edifying.
This also gets to something that's been bothering me: it's very hard to draw good conclusions from public choice economics without also taking into account constitutional economics. Buchanan, I think, knew that. I hope to have a little more on this tomorrow if I get a chance to write a reaction to something from Kevin Currie-Knight on facebook.
If you just take a public choice view of democratic institutions you might apply the naive interpretation of the Arrow Impossibility Theorem. You need the constitutional economics view to understand why - despite the problems inherent in the Impossibility Theorem - people might still prefer democracy to something else.