I am dubious about the advantages of limiting campaign contributions. This is because I interpret democracy not simply as extending the right to vote, but also in good part as competition among interest groups for political support. Interest groups compete in many ways, such as influencing voters indirectly to favor particular points of view, and they also compete through campaign contributions.
The McCann-Feingold Law of 2002 and previous campaign finance "reforms" attempt to restrict the competition of interest groups for political influence. I believe these restrictions are as undesirable as restricting who can run for office. Indeed, restrictions on campaign contributions do skew the political playing field toward rich individuals like Steve Forbes, Jon Corzine, Michael Bloomberg, John Kerry, and others who spend large amounts of their own monies. This is hardly a push toward greater "democracy".
Despite the McCann-Feingold law, campaign expenditures in the 2004 presidential and congressional contests amounted to at least $4 billion, up from almost $3 billion in 2000, and a little over $2 billion in 1996. This is a lot of money in an absolute sense, but it is small relative to the over $2 trillion spent by the federal government, and also relative to the approximately $200 billion spent annually on advertising of products and services by private companies. As Posner points out, advertising, including campaign contributions, have something of an arms race character in the sense that spending by some groups partly offsets spending by other groups. Yet the amount "wasted" (if it is wasted-see my later discussion) in this way through political campaign spending is not huge.
This conclusion on the relative unimportance of campaign contributions is supported by the many scholarly studies of the determinants of who wins elections. This literature generally finds a tiny effect of spending on the outcomes of election. For every Bloomberg or Corzine whose spending seems to have been decisive in their winning, there are many more Forbes', Kerry's, Michael Huffington's, and others who failed despite spending large amounts of their own money. Still, it is a weakness of the laws restricting campaign contributions that they skew viable political candidates toward rich persons who are willing to spend a lot of their own money.
Political incumbents have many advantages over challengers because they get publicity while in office, and can use their position to steer legislation toward projects that help their constituents. Effective limits on campaign contributions make it harder for newcomers to challenge incumbents by raising funds to gain the recognition among voters that enable them to compete against incumbents. For a variety of reasons, the incumbency advantage has grown over the past several decades. The movement to restrict contributions is not the main force behind this growth, but it does work toward a greater incumbency advantage.
Perhaps the most common reason for trying to restrict campaign contributions is the fear that otherwise rich and well organized interest groups, such as the oil industry or trial lawyers, will have an undue influence over legislation by helping candidates who they hope will push their interests. Some groups clearly have influenced legislation, in part through provision of financial and other support to particular candidates. But there are also many more "unfair" influences over election outcomes and public policies that have little to do with campaign contributions.
A comparison of Europe and the US offers instructive evidence on this issue. For various reasons, Great Britain, German, Italy, and France spend a lot less on political campaigning than the US, yet it is far from clear that they get more desirable candidates or legislation. Entrenched economic groups like unions play a much more important role in countries with sharp limits on campaign spending. It is also much harder for political outsiders to enter the political arena to run for important offices.
Part of the hostility to campaign contributions reflects a general hostility to advertising found among intellectuals in all spheres, including many economists. This hostility greatly underestimates the importance of advertising in providing information, in helping new products or candidates to compete against the establishment, and in entertaining and providing other satisfactions to those affected, be they consumers or voters.
I believe that competition among advertisers of products and services usually leads to better, not worse, outcomes to consumers. The arguments behind this conclusion appear on the whole to hold with equal, if not greater, force in the political arena. If so, the many and continuing attempts in the US to restrict such contributions is largely misguided, and I suspect has worsened political outcomes, although probably not by a lot.