Pantouflage

Openness and extent of not only the greed but (of course) of the utter corruption. It never ceases to amaze (and disgust) me what a permanent non-issue this is. Hey, no problem – the people who write the laws 1) receive enormous bribes from profit-making entities but it’s okay because they are ‘campaign contributions’ and 2) do the revolving door thing but it’s okay because – er – because – um – because – oh hell, because we’re too busy watching tv to give a shit, that’s why. Don’t bother us.

Billy hasn’t changed careers at all- all he ever did _in_ politics was sell himself to the highest bidder. Washington has long since achieved levels of open corruption reminiscent of the late Roman Empire, and new baroque variations are constantly being invented.

I suppose that around here, it’s politically incorrect to point out that if the government had its fingers in fewer pies, there would be less opportunity for grafting. Some of you seem to harbor a basic confusion (which, to be fair, is encouraged by Republicans and other lower forms of life as a smokescreen for their Tauzinesuqe predilections) of rent-seeking behavior with the operation of real markets.

Oh, those evil, evil businessmen, wanting to make a profit. Let’s go back to a Neolithic agricultural economy, dammit!

That’s about as accurate a characterization of your position, as yours was of mine. Everyone knows (even Republicans, they just pretend otehrwise for gain) that a strong legal and regulatory framework is essential to enforce transparency and honest transactions in a market economy. But people who want more and more government regulation of everything, and then turn around and complain about the inevitable corruption that results from concentrating so much power in the hands of a small number of greedy politician, are hereby sentenced to reread “The Road to Serfdom” until it starts to sink in.

No, my point is not that wanting to make a profit is evil – I’m just striving for precision. Those entities are usually in such contexts called either industry or corporations, but both of those terms leave too much out.

I’m not at all convinced that it’s the size of the US government that explains its corruption. Do Sweden, the UK, Canada have the same level of corruption? I don’t think so. No; other countries don’t carry on most of their political campaigning via paid advertising on television. That’s the wide-open door that bribery strolls through. TV advertising is grotesquely expensive; the candidates gotta pay for it somehow. Oh look, how nice, here’s that nice lobbyist from the insurance/tobacco/pharmaceuticals/auto industry, with a suitcase full of cash. What luck.

Well ‘Washington’ is pretty vague and ‘special interests’ is almost meaningless. That’s why I try to be specific. I’m not talking about vague special interests, I’m talking about bribes paid to Congressional representatives and presidential candidates by profit-making entities in exhange for which they get legislation written in ways they want. Unfortunately everyone does not say that, and even more unfortunately, however usual it is to point out the corruption, nothing is done about it and it apparently never registers very high on most people’s list of priorities. What can anyone do but go on mentioning it?

Good question. Yo, people in other countries – help us out here!

One thing though, they spend much less. Much, much, much less. Because they advertise on tv much less (if at all). I think most people in Other Countries think our way of electing people is pretty odd – and I agree with them – because it’s so sub-rational as well as because of the bribery issue.

So political candidates in OCs need much less money to get elected, because they don’t have to spend millions on tv ads. They still need money of course, but not millions upon millions, which can only come from interested parties who want something in return.

Ours is a really terrible system. Baaaaaaad.

“Maybe, but note that in the cases Henry discusses the COMPANIES by and large want MORE regulation that insulates them “unfair” competition. So, it’s not really fair to put the blame on all those lefties.” If you reread my messages, I saved most of my venom for _Republicans_, who specialize in goodies for big business. Anyway the tired old categories of “left” and “right” only serve to obfuscate the real workings of contemporary American politics.

“Ironically, the folks who mostly propose new regulations (often well-meaning though not always well-thought-out) are Democrats, while the folks who are really shrewd at profiting from them are the Republicans like good ol’ boy Billy.”

Is this in fact ironic, or is it evidence against your thesis? There was no lack of government corruption in the late 19th century.

Not that the Democrats aren’t good at the revolving door game too…

But seriously, the idea that government interference with the economy is the cause of the problem it totally unconvincing. Most of the budget is entitlements and defense. Lobbyists don’t get so much out of entitlements–well, until the ^&%^$ Medicare bill–and libertarians generally don’t want to cut defense. Without government regulation, there’s a greater risk of monopoly, and monopolists are especially good at renting Senators. Privatization, which AFAIK libertarians generally like, makes campaign contributions a very good investment.

etc.

Ugh, make that “absence”, not “absense.” And if you want evidence for the first claim, here is a good place to start, or any of the other libertarian websites stating an opposition to the current war and a drastic reduction (if not elimination) of defense spending.

And for the evidence of the second and third claims, see nearly anything written from the perspective of public choice theory.

um, you’re going to have to get a little more specific than that.

You claimed that “Without government regulation, there’s a greater risk of monopoly, and monopolists are especially good at renting Senators.”

But what good does a rented Senator do without regulation?

Suppose there were no anti-trust laws and a business is so successful that it gains considerable market share to the point of becoming a complete monopoly. How does it maintain this monopoly? How does it keep new competitors from entering the market and offering consumers a better deal? (Note: economists’ objection to monopolies is that they harm consumers. But if the monopoly is able to remain a monopoly solely because it is able to offer a vastly superior product relative to its competitors, there is very little objection)

The traditional answer is that the firm can maintain this monopoly through predatory pricing. First of all, note that predatory pricing is good for the consumer. But of course, critics argue that this is only in the short term. Once the firm has run its competitors out of business, it will be free to once again raise prices and harm consumers in the long run.

But again, as soon as the firm raises prices above what would otherwise be normal profits, what can it do to prevent new competitors from entering?

In fact, the argument is even stronger. From David Friedman’s online economic textbook, Price Theory: chapter 10:

I therefore decide to drive out my competitors by cutting prices to below average cost. Both I and my competitors lose money; since I have more money to lose, they go under first. I now raise prices to a monopoly level, calculated as if I were a natural monopoly (marginal cost equals marginal revenue). If any new firm considers entering the market to take advantage of the high prices, I point out what happened to my previous competitors and threaten to repeat the performance if necessary.

This argument is an example of the careless use of verbal analysis. “Both I and my competitors are losing money . . .” sounds very much as though we are losing the same amount of money. We are not. If I am selling 90 percent of all petroleum, a particular competitor is selling 1 percent, and we both sell at the same price and have the same average cost, I lose $90 for every $1 he loses.

My situation is worse than that. By cutting prices, I have caused the quantity demanded to increase; if I want to keep the price down, I must increase my production–and losses–accordingly. So I must actually lose (say) $95 for every $1 my competitor loses. Worse still, my competitor, who is not trying to hold down the price, may be able to reduce his losses and increase mine by reducing his production, forcing me to sell still more oil at less than production cost, and so lose still more money. He may even be able to close down temporarily and wait until I tire of throwing my money away and permit the price to go back up. Even if he has some costs that he cannot escape without going permanently out of business, he may be able to reduce his total losses by temporarily closing his older refineries, running some plants half time, and failing to replace employees who move or retire. If so, for every $95 or $100 I lose, he loses (say) $0.50.

But although I am bigger and richer than he is, I am not infinitely bigger and richer; I am 90 times as big and presumably about 90 times as rich. I am losing money more than 90 times as fast as he is; if I keep trying to drive him out by selling below cost, it is I, not he, who will go bankrupt first. Despite the widespread belief that Rockefeller maintained his position by selling oil below cost in order to drive competitors out of business (predatory pricing), a careful study of the record found no solid evidence that he had ever done so.

as to monopoly—Standard Oil?

From the same chapter mentioned above:

There is one more sort of monopoly worth discussing–the artificial monopoly. An artificial monopoly is a very large firm that has no advantage in production efficiency over smaller firms but nonetheless manages to drive all of its competitors out of business, remaining the sole producer in the industry. A typical example is the Standard Oil Trust–not the real Standard Oil Trust as it actually existed in the late nineteenth and early twentieth centuries but the Standard Oil Trust as it appears in many high school history books. In the optional section, I discuss that case along with the general problem of maintaining a monopoly position without either a natural monopoly or a government grant of monopoly power. My conclusion there is that the artificial monopoly is largely or entirely a work of fiction; it exists in history books and antitrust law but is and always has been rare or nonexistent in the real world, possibly because most of the tactics it is supposed to use to maintain its monopoly position do not work.

I really do love when people mention Standard Oil as an example of monopoly, as it is one of the worst examples possible when used to support anti-trust law. What was at one point a boon to consumers (as Standard Oil was able to maintain its dominant market share by offering much lower prices than its competitors) later became a state-sanctioned cartel. How? Through anti-trust regulations.

From this excellent article on Microsoft and other “monopolies” :

The government’s victory against Standard Oil had a long-term effect on the oil industry that is seldom discussed by those who see parallels with the Microsoft case. Only six years after losing the antitrust case, Standard Oil dramatically changed its attitude toward Washington, moving from hostility or avoidance to a very warm embrace. Company chief A.C. Bedford served as chairman of the War Services Committee, an agency created to mobilize the nation’s supplies of gasoline and diesel fuel for military use during World War I. After the war, federal control never retreated, transforming what economist Dominick Armentano has called “a virtual textbook example of a free and competitive market” into “what had previously been unobtainable: a governmentally sanctioned cartel in oil.” The legacies of this transformation include higher prices for consumers and the “energy crisis” of the 1970s. Deregulation in the 1980s finally restored some measure of competition to the industry.

The Standard Oil case teaches some important lessons about competition, innovation, and antitrust law. We see the difficulty antitrust has dealing with highly innovative companies. We witness the vagueness of antitrust law, which allows prosecution on the basis of alleged intent rather than specific actions. And we see how the Standard Oil case ultimately failed to benefit consumers or investors. Instead, it laid the groundwork for collusion between industry and government, bringing about many of the very ills the “progressive” proponents of antitrust said they were fighting.

Although the article doesn’t mention U.S. Steel, it does mention Alcoa (previously The Aluminum Company of America). The failure of anti-trust law to actually help the consumer, but rather, to help competitors who could not compete legitimately in the marketplace, is revealing.

When privatization is done through sale of valuable assets or lucrative contracts, this is worrying, but we must consider a few issues. First, this only occurs because the government owned assets that it shouldn’t have owned in the first place. Second, once the assets have been removed from government hands, they will tend to move to their most efficient use. If Hallibruton or Bechtel is not using them efficiently, there is an opportunity for investors or other firms to buy the assets of the inefficiently operated firm.

But when you mentioned privatization earlier, I did not have in mind temporary and partial government contracts; instead, I was thinking more along the lines of complete privatization of the kind experienced in Britain. True, the transition can be difficult, especially when what were once state assets are auctioned off to private bidders who may be able to influence things through the use of campaign donations, but this is the price we must pay for having the government place its hands where they never should have been in the first place.

The naive idea that political corruption won’t happen as long as we have the right regulations and the right politicians in place is cute, but not very realistic. The more influence the government has, the more interest there is to influence the government.

Ophelia,

There are other factors involved as well. Adam Smith wrote that in order for division of labor to take place, markets must be of sufficient size. I suspect the same is true of political influence and corruption. In order for various interests to become concentrated and powerful enough to corrupt the political system, the political system itself must be sufficiently large. If we take the numbers I mentioned earlier in this thread, government spending at over $1 trillion and total campaign spending at over $1 billion, this would be a good comparison to other countries. Do other countries have this much government spending? What is the ratio between absolute government spending and absolute campaign spending in other countries?

One trouble with all this, Micha, is that you make it sound like a mechanical, automatic process – an Invisible Hand type thing, a law of nature type thing. But I think that makes it all sound more inevitable than (I think) it really is. I think it’s largely a product of deliberate human decisions, and could be different. I think people who have the power to do so have decided that things are going to be this way and the rest of us haven’t stopped them. I simply don’t believe the situation is inevitable. It’s political – the opposite of inevitable.

I certainly agree that corruption is a product of deliberate human decisions, but these decisions are greatly influenced by incentives, and the incentives in the political process, like in other areas where large amounts of money are at stake, are very influencial.

It is extremely naive to think that if only the right regulations were in place (“right” defined as whatever the particular proponent supports) and if only the right politicians were in power, then political corruption would not occur. The Republicans believe this is true with regard to Democrats and the Democrats believe this is true with regard to Republicans. It would all be very humorous if it wasn’t so shameful.

It’s interesting to note, though, that after the last few threads on poverty, in which the left-liberal position has been to deny that poverty is “largely a product of deliberate human decisions” and is rather a result of a corrupt economic system, on the topic of political corruption, left-liberals all of a sudden reject any hint of determinism. Funny, no?

The naive idea that political corruption won’t happen as long as we have the right regulations and the right politicians in place is cute, but not very realistic. The more influence the government has, the more interest there is to influence the government.

Although privatisation works for things like paying a bribe to get your phone connected faster, working on the regulation is the only incentive-changing option available in the non-privatisable areas of government. Emphasising individual greed distracts attention from the structural changes that could really make a difference.

working on the regulation is the only incentive-changing option available in the non-privatisable areas of government.

True enough, unless you believe, like I do, that all areas of government are privatizable. But even if you don’t go that far, reducing the size and influence of government is one way to reduce the amount of political corruption. The less there is to capture, the less incentive there is to spend money on political donations.

Emphasising individual greed distracts attention from the structural changes that could really make a difference.

The intent is not to distract, but to point out an additional cost of all government regulation that rarely gets noticed.

Micha – seems to me that you’re arguing a somewhat simplistic and politically loaded version of public choice theory – I think that other versions of economic theory don’t make the same kinds of heroic assumptions that many public choice economists do, and thus get a rather better picture of the interaction between politics and the markeplace. First, let’s take monopolies. The particular line that you’re arguing is a rather controversial one (unless you’re a freshwater economist) – the empirical evidence suggests that it’s grossly mistaken, and the more interesting modelling work out there (game theoretic work on monopolistic behaviour) gives a more nuanced, if also less determinate outcome (Kreps, _passim_ ). Second, there is room for a well-grounded take on corruption and other behaviour under institutions that is compatible with Ophelia’s take on things (and indeed is much more compatible with Ophelia’s take than yours). Specifically – incentive driven models of human behaviour do _not_ have to rest on assumptions about the determinate force of particular institutional settings. See Gary Miller and David Kreps (below). Finally, you seem to me to be resting a lot of your case on the usual libertarian claim that the root problem is government authority (and in this case firms trying to get government to regulate rather than deregulate). Without rather more substantial evidence to back it up than libertarians have come up with to date, this is a (reasoned out) statement of faith, rather than an empirically justified argument. And appealing to public choice theory isn’t much help – as I’ve said, I (or Ophelia) can appeal to equally well-grounded economic arguments that support our arguments rather than yours. There is no good ex ante reason to believe that ‘political’ authority will be any fairer or more efficient if it is privatized – indeed, in many areas, the opposite is the case. I dunno if you’ve read any of the following – you may find them interesting – and I think that they give some grounds for a theory of what’s going on that matches the argument that I’ve been making, as well as Ophelia’s take.

Jack Knight, Institutions and Social Conflict (Cambridge 1992)

Gary Miller, Managerial Dilemmas: The Political Economy of Hierarchy (Cambridge 1990)

David Kreps’ various takes on game theory and monopolistic behaviour, as well as his discussion of culture and economics in his chapter in James Alt and Ken Shepsle, eds 1990, Perspectives in Positive Political Theory.

Henry, I don’t see how my explanation of public choice theory is in any way simplistic or politically loaded – well, no more so than public choice theory is politically loaded. One of the primary issues public choice theorists focus on is regulatory capture.

Perhaps I should have been more clear: my citing of public choice was only in regard to regulatory caputure, and not in regard to monopolies. Open up any contemporary intro to micro and you will see a similar analysis to the one provided by David Friedman. Artificial monopolies are largely a myth, and the empirical evidence supports the argument that when such monopolies did exist, they existed only so long as they provided a much better product at a much lower price than any of their competitors, as was the case with Standard Oil. Similar to what is taught in non-economics classes about the Great Depression, most of what is taught about the “Gilded Age” is also historically inaccurate.

Without rather more substantial evidence to back it up than libertarians have come up with to date, this is a (reasoned out) statement of faith, rather than an empirically justified argument.

How much more evidence would you like? Of course, I agree that no amount of evidence could ever satisfy those who believe that if only the right people were in charge, and if only the right regulations were in place, corruption would scarcely exist, but it seems to me that this argument relies on much more faith than mine. I am certainly willing to change my views given sufficient evidence, but it seems to me that regardless of whether Democrats or Republicans are in charge, when the government is this involved in the economy, it simply pays to purchase a significant level of influence.

There is no good ex ante reason to believe that ‘political’ authority will be any fairer or more efficient if it is privatized – indeed, in many areas, the opposite is the case.

Well, we were discussing, as per the topic of the thread, political corruption through campaign contributions, so yes, I think it is fair to say that this kind of corruption would disappear in the absence of government control and regulation. Your question of whether private authority, whatever you might mean by that, is any fairer or more efficient relative to state authority is a separate issue, but as someone much wiser than me said a few days ago, “I consider the ability to steal and kill somewhat more threatening than the ability to offer me a free web browser or disrupt my dinnertime with a telemarketing call.”

I am but a lowly economics undergraduate student, so I do not have your expertise or the expertise of those you cite, but from my (admittidly limited) experience, it seems that faith in anti-trust regulations is a dwindling, minority view among mainstream economists.

I will try to look into the authors you cite if I get a chance.