The politics of greed
5 January 2015
SUGGESTED
Tax and Fiscal Policy
Tax and Fiscal Policy
6 January 2015
Government and Institutions
Many associate markets with self-interest and greed whilst associating politics with other-regarding, publicly-interested behaviour. Perhaps nowhere is this view more prevalent than in the speeches and writings of politicians who continually emphasise the importance of government for protecting citizens against the greed of markets. As Vince Cable, the UK Secretary of State for Business, Innovation and Skills said in a speech in 2010:
‘Markets are often irrational or rigged. Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them? I want to protect consumers… and keep prices down and provide a level playing field for small business.’
The implicit assumption in this and similar quotations is that people in politics are not subject to the motivations that characterise people operating in markets. If they were, giving power to politicians to interfere in markets would not be guaranteed to lead to an improvement. While markets are inherently self-serving and unfair, politics is presumed to be the opposite. Politics, it is assumed, is able to rise above the narrow short-sightedness of markets in support of the longer-term public interest. Nothing could be further from the truth and basic economics can explain why.
Economics is the study of purposive human action whenever there is choice. The need to engage in choice is the direct result of scarcity, which exists because there are more human wants than resources available to satisfy these desires. Given limited resources, decisions need to be made regarding how to best allocate them among an array of alternative uses. To illustrate this, think about your own life. There are 24 hours in a day. Each person, no matter their level of wealth or education, has to decide how to best allocate their scarce time each day. Should you spend your time with your family, working, or resting? This same logic applies to all other scarce resources.
The key implication of the prevalence of scarcity in our daily lives is that there is always competition. Most people associate competition with markets and profits, but this is far too narrow an understanding of the concept. Competition exists whenever, and wherever, there is scarcity and choices have to be made. The reality is that we can never avoid competition and the process of deciding how we would best like to allocate our scarce resources. This logic applies to entrepreneurs, humanitarians, and, even supposedly ‘publicly spirited’ politicians and bureaucrats. The late James Buchanan won a Nobel Prize for his insights into the workings of competition in the political process.
Recognising that self-interest and competition is ubiquitous has important implications for the way we think about politics. While politicians are fond of saying that they are motivated by the desire to protect consumers from the self-interest and greed of markets, the reality is that their policies are the result of a competitive political process. It is true that this competitive process is different than that which occurs in markets. In markets, entrepreneurs must constantly compete for the scarce income of consumers. They do this by attempting to offer a good or service that consumers value. In politics, in contrast, competition occurs for the control of policy and budgets. Politicians make an appeal for votes and campaign contributions by offering policies that will favour certain interests or groups of voters over other interests or groups of voters. In the UK, for example, Conservative politicians tend to offer land-use planning policies that favour current home owners over those who cannot yet afford to buy their own home. Labour politicians offer policies that tend to favour public sector trade union members over taxpayers. There are two undesirable outcomes.
Groups will invest significant resources to lobby politicians with the goal of influencing policy to achieve their own self-interested goals. This competitive, dog-eat-dog lobbying is zero-sum (or negative sum) in nature. When one group secures part of the budget for their pet project or policy, another group cannot secure that same part of the budget. Lobbying can be can be found in all political systems and is clear evidence of the competition and self-interest inherent in political systems. Consider the trends for lobbying in the US for the 1998-2008 period as illustrated by Figures 1 and 2.[1]
Figure 1: Total lobbying expenditures in the US ($ billions), 1998-2008
Figure 2: Total number of unique, registered lobbyists in the US, 1998-2008
Figure 1 shows that lobbying expenditures more than doubled over the ten-year period from $1.45 billion in 1998 to $3.3 billion in 2008. Figure 2 shows that the number of registered lobbyists increased from 10,406 in 1998 to 14,193 in 2008. A similar dynamic exists in the UK. According to a 2007 study, the UK government lobbying industry employs approximately 14,000 people and is valued at £1.9 billion. These figures suggest not only that political competition exists, but that it is a thriving and profitable industry.
A second, and related, outcome of competition in politics is that citizens often end up being harmed. This is counter-intuitive to many people precisely because they are used to associating politics with the ‘public interest’. To understand how average citizens can be harmed by political competition, consider a scenario in which government declares that it will pass new regulations to protect consumers. The industry subject to the regulation will incur the full cost of the new laws, while the benefits will be dispersed among many consumers. The result is that the affected businesses have an incentive to lobby the government to influence the specifics of the regulation. Economists call this ‘regulatory capture’ which refers to situations where a regulatory agency is influenced and controlled by the parties they regulate. This can lead to the regulation not fulfilling its intended purpose and, also, the industry will often lobby for the regulation to raise costs to potential competitors to the benefit of incumbent firms.
The main point of this analysis is straightforward: competition is an unavoidable part of life. Politics does not, and cannot, transcend the realities of scarcity and competition. Since competition cannot be avoided, focus must be placed on the institutions and rules that channel competitive behaviour into positive-sum outcomes. The competitive market free from political manipulation and influence satisfies this criteria better than the alternatives. In markets, competition is driven by the incentive to satisfy consumer wants and demands. Whilst consumers can discipline businesses by going elsewhere, it is very difficult to discipline politicians. Elections are fought infrequently on a huge range of issues and individual voters have a tiny chance of influencing the outcome compared with the lobbyists. Not only does self-interested competition exist in politics, but it often makes consumers worse off and threatens the entrepreneurial dynamism of the market system by fostering cronyism: that is the uncomfortable lesson for Vince Cable.
This article was originally published in the Autumn 2014 issue of EA Magazine.
‘Markets are often irrational or rigged. Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them? I want to protect consumers… and keep prices down and provide a level playing field for small business.’
The implicit assumption in this and similar quotations is that people in politics are not subject to the motivations that characterise people operating in markets. If they were, giving power to politicians to interfere in markets would not be guaranteed to lead to an improvement. While markets are inherently self-serving and unfair, politics is presumed to be the opposite. Politics, it is assumed, is able to rise above the narrow short-sightedness of markets in support of the longer-term public interest. Nothing could be further from the truth and basic economics can explain why.
Economics is the study of purposive human action whenever there is choice. The need to engage in choice is the direct result of scarcity, which exists because there are more human wants than resources available to satisfy these desires. Given limited resources, decisions need to be made regarding how to best allocate them among an array of alternative uses. To illustrate this, think about your own life. There are 24 hours in a day. Each person, no matter their level of wealth or education, has to decide how to best allocate their scarce time each day. Should you spend your time with your family, working, or resting? This same logic applies to all other scarce resources.
The key implication of the prevalence of scarcity in our daily lives is that there is always competition. Most people associate competition with markets and profits, but this is far too narrow an understanding of the concept. Competition exists whenever, and wherever, there is scarcity and choices have to be made. The reality is that we can never avoid competition and the process of deciding how we would best like to allocate our scarce resources. This logic applies to entrepreneurs, humanitarians, and, even supposedly ‘publicly spirited’ politicians and bureaucrats. The late James Buchanan won a Nobel Prize for his insights into the workings of competition in the political process.
Recognising that self-interest and competition is ubiquitous has important implications for the way we think about politics. While politicians are fond of saying that they are motivated by the desire to protect consumers from the self-interest and greed of markets, the reality is that their policies are the result of a competitive political process. It is true that this competitive process is different than that which occurs in markets. In markets, entrepreneurs must constantly compete for the scarce income of consumers. They do this by attempting to offer a good or service that consumers value. In politics, in contrast, competition occurs for the control of policy and budgets. Politicians make an appeal for votes and campaign contributions by offering policies that will favour certain interests or groups of voters over other interests or groups of voters. In the UK, for example, Conservative politicians tend to offer land-use planning policies that favour current home owners over those who cannot yet afford to buy their own home. Labour politicians offer policies that tend to favour public sector trade union members over taxpayers. There are two undesirable outcomes.
Groups will invest significant resources to lobby politicians with the goal of influencing policy to achieve their own self-interested goals. This competitive, dog-eat-dog lobbying is zero-sum (or negative sum) in nature. When one group secures part of the budget for their pet project or policy, another group cannot secure that same part of the budget. Lobbying can be can be found in all political systems and is clear evidence of the competition and self-interest inherent in political systems. Consider the trends for lobbying in the US for the 1998-2008 period as illustrated by Figures 1 and 2.[1]
Figure 1: Total lobbying expenditures in the US ($ billions), 1998-2008
Figure 2: Total number of unique, registered lobbyists in the US, 1998-2008
Figure 1 shows that lobbying expenditures more than doubled over the ten-year period from $1.45 billion in 1998 to $3.3 billion in 2008. Figure 2 shows that the number of registered lobbyists increased from 10,406 in 1998 to 14,193 in 2008. A similar dynamic exists in the UK. According to a 2007 study, the UK government lobbying industry employs approximately 14,000 people and is valued at £1.9 billion. These figures suggest not only that political competition exists, but that it is a thriving and profitable industry.
A second, and related, outcome of competition in politics is that citizens often end up being harmed. This is counter-intuitive to many people precisely because they are used to associating politics with the ‘public interest’. To understand how average citizens can be harmed by political competition, consider a scenario in which government declares that it will pass new regulations to protect consumers. The industry subject to the regulation will incur the full cost of the new laws, while the benefits will be dispersed among many consumers. The result is that the affected businesses have an incentive to lobby the government to influence the specifics of the regulation. Economists call this ‘regulatory capture’ which refers to situations where a regulatory agency is influenced and controlled by the parties they regulate. This can lead to the regulation not fulfilling its intended purpose and, also, the industry will often lobby for the regulation to raise costs to potential competitors to the benefit of incumbent firms.
The main point of this analysis is straightforward: competition is an unavoidable part of life. Politics does not, and cannot, transcend the realities of scarcity and competition. Since competition cannot be avoided, focus must be placed on the institutions and rules that channel competitive behaviour into positive-sum outcomes. The competitive market free from political manipulation and influence satisfies this criteria better than the alternatives. In markets, competition is driven by the incentive to satisfy consumer wants and demands. Whilst consumers can discipline businesses by going elsewhere, it is very difficult to discipline politicians. Elections are fought infrequently on a huge range of issues and individual voters have a tiny chance of influencing the outcome compared with the lobbyists. Not only does self-interested competition exist in politics, but it often makes consumers worse off and threatens the entrepreneurial dynamism of the market system by fostering cronyism: that is the uncomfortable lesson for Vince Cable.
This article was originally published in the Autumn 2014 issue of EA Magazine.
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