Rent-Seeking, Public Choice,

and The Prisoner's Dilemma

Mankind soon learn to make interested uses of every right and power which they possess, or may assume. The public money and public liberty...will soon be discovered to be sources of wealth and dominion to those who hold them; distinguished, too, by this tempting circumstance, that they are the instrument, as well as the object of acquisition. With money we will get men, said Caesar, and with men we will get money. Nor should our assembly be deluded by the integrity of their own purposes, and conclude that these unlimited powers will never be abused, because themselves are not disposed to abuse them. They should look forward to a time, and that not a distant one, when a corruption in this, as in the country from which we derive our origin, will have seized the heads of government, and be spread by them through the body of the people; when they will purchase the voices of the people, and make them pay the price . Thomas Jefferson, Notes on Virginia, 1784 [color added] From 1999 through 2005, the USDA [Department of Argriculture] "paid $1.1 billion in farm payments in the names of 172,801 deceased individuals.... 40 percent went to those who had been dead for three or more years, and 19 percent of those dead for seven or more years." One dead farmer got more than $400,000 during those years. John Stossel, "Dead Men Farming," quoting a General Accounting Office (GAO) report, The Freeman, November 2007, p.37. The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics. Thomas Sowell If something cannot go on forever, it will stop. Herbert Stein (1916-1999), "Herb Stein's Law" If you rob Peter to pay Paul, you've already got half the vote. And if Peter suffers from liberal guilt, you can tell him about his "white privilege" and get his vote also. Τηλεπατητικός (Telepateticus) [note]

No actions of the United States Government in recent history have been so unpopular as the protection and bailouts, not just of banks, but of other financial institutions, like brokerage houses, and even simple industrial corporations, after the housing mortgage collapse of 2008 and subsequent "great" recession. Despite being told that outfits like Goldman Sacks and General Motors were "too big to fail," and that their bankruptcy could bring down the whole economy, public opinion polls consistently showed opposition to bailouts, and loud objections on both the Right, in the Tea Party, and on the Left, in the Occupy Wall Street protests, were voiced against such things. Nevertheless, the bailouts happened. Even worse, the Dodd-Frank law that was then passed, supposedly to address the misconduct that had brought on the mortgage collapse (misconduct that had been promoted by the very sponsors of the bill, Christopher Dodd and Barney Frank), institutionalized the "too big to fail" reasoning, allowing the federal government to protect and support businesses judged to be "systemically" important to the economy. All of this simply reeks of rent-seeking and crony capitalism -- i.e. Mercantilism. The People and the whole political spectrum may have been against it, but the Ruling Class of politicians and their pals was for it. In the 2012 election, Mitt Romney was enough of a "moderate" and was himself sufficiently compromised by the system, that he didn't even make an effort to voice popular discontent. Meanwhile, the Democrats passed ObamaCare (patterned on RomneyCare in Massachusetts), in great measure because of the (rent-seeking) support of Insurance Companies, which were promised a captive audience of consumers required by law to buy their insurance -- and protected by the law from financial losses they might suffer from the irrationalities and diseconomies of socialized medicine. The folly and wickedness of all this, at one level so blatant and shameless, leaves one not knowing whether to laugh or cry. Probably both. But the government was also ungrateful for help it received at the time of the mortgage collapse. After the Bank of America was urged by the Feds to buy up two insolvent financial businesses (Merrill Lynch and Countrywide Financial), it was subsequently sued by the Justice Department as being liable for supposed frauds committed (i.e. federally guaranteed mortgages sold) by the businesses -- this resulted in a $16-17 billion fine in "settlement" of the case. Thus, the United States Government sends the message that businesses will be protected from incompetence and competition but that they exist at the arbitrary and capricious mercy, sufferance, and condescension of the government (the principle of all totalitarian states for all citizens) -- a doctrine openly voiced by raving Leftists like Elizabeth Warren [ ] and implied by Obama's famous "you didn't build that" speech. People like these are happy to attack business and finance in line with radical politics, but they always subsequently act in line with the corporatist and crony capitalist system that benefits them, i.e. millionaires like Warren and Obama, more than the (unemployed) "workers" that they ostensively champion. Ἐγκλινοβάραγγος (Enklinobarangus)

Adam Smith divided income into three types: profits, wages, and rents. The essential feature of profit is risk: capital is ventured in the hope of a return, and there may be a very great return, or little, or none. There is no guarantee of a profit in any enterprise, which is why businesses, both large and small, go bankrupt all the time -- unless, like Chrysler, they have enough political influence to get bailed out by the government. Profits ultimately represent the real growth of wealth in an economy, for the profits of one enterprise do not always come out of the profits for another. Say's Law is that supply creates demand, that a successful business adds to the productive capital of society, which increases the goods, and the profits, available for everyone. If the "profit motive" is rejected by governments because it is selfish or evil, and enterprises are conducted without concern for profitability, then what actually happens is that they will need to be subsidized, and the subsidies will have to come, if not out of profitable enterprises, then out of the stock of capital itself. This means that the economy will gradually consume itself, just as a starving person lives off their own tissues, until there is too little left to sustain life. That is what happened to the economies of the Soviet Union and Eastern Europe, and to countless, ill-advised Third World countries.

Wages, on the other hand, represent no risk, except that their source might (illegally) default or (legally) go bankrupt. Wages are a fee for a service, naturally discounted by the market mechanism for the absence of the kind of risk germane to profits. Market wages are otherwise proportional to productivity, and productivity is proportional to the capital investment in the person (education, honesty, diligence, etc.) and in the job (machinery, computers, etc.). Capital value in the person ("human capital") comes from natural endowments (talent, intelligence), upbringing (honesty, conscientiousness, reliability, etc.), and education (training and knowledge). Most of this belongs to people before they ever go to work, but employers may invest in workers further through on the job training or additional education. Labor intensive work means low skills, low productivity, low wages, and so a larger, less wealthy work force to produce a given amount of goods. Capital intensive work means higher skills, higher productivity, higher wages, and so a smaller, wealthier work force to produce a given amount of goods. People fear and hate being thrown out of work by mechanization and automation, but that is the only way that life gets better for most people. The labor that is not needed after productivity increases is then available to produce new kinds of products, further enriching life for everyone. The best example of this kind of shift is that for most of human history over 90% of the work force was necessary just to produce food (still 85% in Tanzania). By 1840, the United States for the first time had less than 90% of the population living in rural communities (of less than 2500 inhabitants). By 1880, the United States for the first time had less than 50% of the work force in agriculture. Now only about 1.6% of the work force is engaged in agriculture full time. No one thinks that the solution for unemployment is for people to go back into agriculture. The only real solution is for new products and new industries to arise. For this to happen, however, someone must risk some capital, with the hope of profit, in order to attempt to increase productivity or attempt to produce something new. Those attempts often fail, which is why profit involves risk. Also, some of them must fail, or many useless and uneconomic activities will continue to burden the economy (as in the Soviet Union, the U.S. Federal Government, etc.).

Rents are the easiest kind of income. A rent is money paid for the use of a capital asset, whether land, a building, an office, a car, a bicycle, or whatever someone might want but cannot or does not want to own. The owner who rents out his assets need only worry about (illegal) damage like vandalism, theft, etc. and about (inevitable) depreciation, where the capital value of the asset declines in time through ordinary use. Loaning money is a kind of renting, where the asset may depreciate through inflation and where there is considerable risk that the borrower may default or go bankrupt. The element of risk introduces an element of profit, but a careful lender can see to it that borrowers have the assents to cover any defaults: and the legal right to recover capital distinguishes renting from a straight investment for profit (where the whole capital can be lost without legal, moral, or any other recourse). Like banks in that respect, most renting enterprises mix rents with profits: they invest for profit by running a business where they collect rents.

Because rents are the easiest and most secure kind of income, it is natural for people to want income from rents rather than principally from profits or wages, and to want rents that involve the least risk and labor as enterprises. This motive is called "rent-seeking," and there is nothing wrong with it. Indeed, those who collect rents in an economy serve the valuable function of seeking to maintain and preserve capital assets [note]. It becomes wrong when rent-seeking means trying to collect rents off of capital that is not the rightful possession of the rent-seeker. This can be legally accomplished through the means that secure the rights of property in the first place: politics and the law. Through political influence people can be given ownership of things that are not their property, or should not be anyone's property. The theory of rent-seeking began with the economist Gordon Tullock.

A government that grants a monopoly in a certain enterprise cannot determine a market-clearing price and so is either going to victimize a company by not allowing a high enough price or is going to victimize the public by mandating or engineering prices that are too high: those prices then include "monopoly rents," the amount of money the company makes over the profits of a competitive market. The rent comes from the "ownership" of the monopoly market. Similarly, on the other side of the coin is labor law, which tends to vest workers with property rights in their own jobs. Since that is how feudalism worked ("livings," like property, were bestowed on people, and these consisted in collecting feudal rents), and it does contain the attraction of job security, there is a powerful historical and emotional pull to such rent-seeking, although it is contrary to the flexibility (albeit insecurity) for growth that the free market provides. The seduction is the thought that workers are better off with their monopoly rents and security, when in fact workers in general are far better off that the free market allowed the growth of wealth and erased the kind of peasant life (with security, apart from plagues, invasions, the droit de seigneur, etc.) that most people had under feudalism.

Since sterile and inappropriate rent-seeking is possible through political means, this brings us to the issue of Public Choice theory, centered on the Virginia School of Public Choice and the Nobel Laureate economist James M. Buchanan (b. 1919). Buchanan and Gordon Tullock collaborated in creating the theory of both rent-seeking and Public Choice. Nevertheless, the basic insight of both rent-seeking and Public Choice theory is already evident in the Thomas Jefferson quote in the epigraph of this essay. Public Choice theory is about the different incentives and processes that operate when goods are sought through political means rather than through purely economic means. The essential point is about the distribution of costs and benefits. The political appropriation and distribution of goods is attractive because it concentrates its benefits and disperses its costs. Many people can be taxed only a small amount and then a small number of people can be given large sums. This means that the many hardly notice the wealth that they have lost, while the few become active partisans of their own benefits. Politicians hear nothing from the many and a lot from the few, who also have some money to contribute to the politicians, money that may actually be, or be freed up by, the benefits they receive -- like the money teachers' unions get from compulsory union dues, from the money paid by the government to teachers. Thus, constituencies and interest groups are created for each particular political benefit program, and it becomes nearly impossible to get rid of them. The rent-seeking aspect of this is that the beneficiaries receive rents on the basis of their participation in the interest group. They benefit because of who they are, not because of what they do or what they own in a more conventional sense.

Individually, these political rents are not damaging to the whole -- in the 2012 election we just heard about how little "Big Bird" costs individual taxpayers, who are forced to support the Public Broadcasting System, which is actually used as a front for the Democratic Party -- but each group of people which sees another obtain benefits then seeks to create some program for itself. Such things are hard for politicians to resist, since it holds the promise of a group of dedicated voters beholden for their own program. The process then continues, piling one interest group upon another, until the many small taxes for each program begin to amount to a very large cumulative total: the many then begin to notice that they are damaged by the overall burden. Considerable anger and discontent will be generated, but the object of the anger is diffuse, and the many will have trouble identifying the source of their discontent. It is then in the interest of politicians to scapegoat someone whom they can blame for the whole problem (like "the rich") but who actually is not a serious constituency, or who actually won't be harmed by whatever kind of pseudo-solution the politician proposes. The former case occurs with illegal aliens, who cannot vote and who thus are not a constituency at all (except through voter fraud).

The latter case occurs with respect to welfare, which for decades has been unpopular with most Americans. Welfare is actually a relatively minor expense and involves a relatively small number of people, compared to massive swindles like Social Security, Medicare, or Farm Subsidies; but Americans as a whole are particularly offended by it and are aware of the perverse incentives it creates that have resulted in the breakdown of inner city families and the spawning of several generations of sociopathic criminals and gangsters. The Clinton Administration "solution" for this in 1993, with tough rhetoric (the "end of welfare as we know it") was a classic case of misdirection: a job training program, which is the kind of thing that was seen to fail with its very first implementation in the Great Society, and then a Federal jobs program for those who don't get real jobs, which always creates meaningless, make-work button-sorting. The "solution" thus does nothing but provide for the same kind of unproductive dependency that angers people about welfare in the first place. In a classic Public Choice strategy, however, this may mollify the many, even while continuing to provide the political rents for its own constituency, a constituency that includes everyone who sympathizes with the "compassion" of welfare, even if they are not on it [note].

The economic distribution of benefits works in a fashion opposite from political rents. The benefits go to the many and the costs are concentrated on the few in the free market. The successful business provides goods or services that a large enough fraction of the public finds preferable that the business is able to turn a profit. The unsuccessful business, not providing anything relatively preferable to the other options available to the public, goes bankrupt and removes itself from the competition, also in the process freeing the capital and the labor that it had tied up in a relatively unproductive fashion. This is the very process that swept away subsistence agriculture, horses and buggies, whaling for lamp oil, slide rules, and countless other ancient, obsolete, and inefficient industries. The cost falls entirely on the owners and participants of those industries. They may be hurt and be mad as hell about their personal fate, but their loss is actually an unalloyed gain for everyone, including them.

It is ironic that businessmen are often morally condemned for their "greed" at seeking profit, even though, as I have noted, profit is necessary if the wealth of a society is to grow and life is to get better, and profit cannot be obtained unless, in a free market, something is offered that people actually want. It is correspondingly ironic that labor unions and businesses (e.g. Lee Iaccoca's Chrysler, or the Chrysler and GM of the 2008 financial collapse) that seek to protect themselves and preserve obsolete, uncompetitive, and unprofitable industries, in the name of the jobs that they provide, are rarely accused of "greed" themselves, even though what they want is a benefit for themselves that must be directly withheld from the public, which is obliged to pay the monopoly rents created by protectionism (or by the bailouts of 2008/2009 that were universally unpopular with the public, spawning both the Tea Party and "Occupy Wall Street" movements, but were supported by both Republican and Democrat politicians, pretty much without apology). Because a few people retain their jobs, the quality of life of the many is degraded in order to support the few in the manner to which they have become accustomed. If this trick could work for everyone, it might even be unobjectionable; but of course it cannot work. Not everyone can collect monopoly rents without ultimately destroying those profitable sectors that produce the wealth in the first place. Just as rapacious dictators (e.g. Ferdinand Marcos) destroy the wealth of their own countries by letting their cronies steal too much of it, a democracy can just as easily destroy itself when everyone gets the idea that they can acquire wealth and easy living through political means instead of through their own hard work and enterprise (as in 2012 we see most acutely in Greece and California).

This all creates what in Game Theory has been called the "Prisoner's Dilemma." The basic idea is that if you are a prisoner planning to escape with some fellow prisoners, you have the choice of being faithful to them and benefiting from their plan, or you can betray them and earn what may be a very considerable reward from the authorities. You also must consider that this choice will have occurred to the others, which means that you stand in danger of special retribution if you are betrayed first. This kind of problem can be abstracted into a little game.

A,B B, Keep

Faith B, Betray A, Keep Faith 3,3 0,5 A, Betray 5,0 1,1

Game Theory was developed by the great mathematician John von Neumann (1903-1957) [note]. To von Neumann, the Prisoner's Dilemma was a paradox that all but destroyed what he hoped Game Theory would accomplish: there did not seem to be a strategy that would benefit both parties to the extent that they would not want to betray each other. Instead, it seems that the best strategy for a player is to continually devise a way to sucker an opponent into Keeping Faith while being Betrayed. A familiar example of this is the famous recurring piece in the comic strip "Peanuts," where Lucy over and over fools Charlie Brown into trying to kick the football she holds, even though every single time she pulls the ball away and he falls painfully on his back. The benefit for both them of getting the football kicked is obviously less than the benefit Lucy enjoys at Charlie Brown's humiliation. Lucy has a very large score, while Charlie Brown still has zero [note].

Public Choice theory gives rise to a serious Prisoner's Dilemma. The largest benefits with the least effort come from political rent-seeking, and those who fail to participate in the political process will have their wealth drained away with no corresponding return. Even if it is obvious to all that not everyone can live off of the wealth of everyone else (1,1), and that the best mutually beneficial course is for everyone to give up political rent-seeking (3,3), it is obvious that the best course for each individual group is to get everyone else to give up rent-seeking while they alone covertly continue to collect their monopoly rents (5,0). The fear that others will pursue such a strategy is easily sufficient motivation not to give up rent-seeking. No one, of course, blatantly advertises their rent-seeking in terms of their own self-interest. Instead, there are always high sounding, moralistic slogans and rationalizations, arguments that special benefits are necessary because of poverty, compassion, discrimination, racism, the environment, greedy insurance companies, greedy businessmen, etc. Whatever the arguments, the significant question to ask is whether they can be translated, as P.J. O'Rourke says, into "Give me a dollar."

The solution to the dilemma is simple, but it does not sound like it will directly provide any obvious benefit: the Classic 19th century Liberal principles of (1) the Rule of Law, (2) the Sanctity of Private Property (including self-ownership), and (3) the Freedom of Contract. The Rule of Law, in its proper meaning, completely erases political rent-seeking by the limitation of the power of government; and the other principles are simply those that guarantee the growth of wealth through the economic distribution of goods in the free market. The Freedom of Contract is the most easily misunderstood, since it is the principle that any agreement which is not an agreement to commit a crime and results from mutual consent is valid. "Mutual consent" does not mean, however, that both parties have to particularly like their agreement. It is simply the one that, in the absence of other options, they would prefer over nothing. Not liking the options you may have is actually a powerful motive of political rent-seeking.

One may ask, "What if we prefer to pursue our self-interest through political rent-seeking, with its self-serving moralistic rhetoric, rather than renouncing that for a Liberal economic order that can only benefit us much less directly?" Then we will have to face the consequences of the sequel to the Prisoner's Dilemma; for it turns out that there really are TWO Prisoner's Dilemmas, one for the short term and one for the long run. This circumstance emerged in 1980 when Robert Axelrod, a professor of political science at the University of Michigan, invited computer program entries for a computer "tournament" of a Prisoner's Dilemma game like the numerical one above. The tournament goes on for many turns, and one particular entry won easily, both the first time and later when Axelrod had published the results and asked for new entries to challenge the first winner. The champion entry was called "TIT FOR TAT" and was one of the simplest possible. It only contained two rules: (1) start with Keep Faith, and (2) do the next turn what the opponent did on the last turn. Any entry willing to Keep Faith with TIT FOR TAT will consistently do well. Any entry trying to Betray TIT FOR TAT will not be able to betray it more than once in a row, and a particularly treacherous entry will consistently be Betrayed itself, accumulating little. A consistently Faithful entry will do fine with TIT FOR TAT, but it will of course get wiped out by the treacherous entries, so its overall score will be lower.

These results contain a stunning moral and political lesson. The two rules clearly can be translated into three traditional moral injunctions: (1) be honest (rule one), (2) an eye for an eye (rule two), and (3) forgive (rule two). We can say that the results demonstrate that the honest will prosper while thieves will not. Furthermore, we can say, with F.A. Hayek, that the Liberal capitalist economic order will surpass in prosperity and overwhelm any system based on theft or political rent-seeking. This can even explain why evolution by natural selection results in altruism and social cooperation, since the cooperative can ultimately do better than the uncooperative and be naturally selected. However, this still leaves the difference between the Prisoner's Dilemma as a matter of one turn and as a matter of many. Someone might think that the virtues that emerge over the long run are not relevant when making decisions about a unique case. Of course, when faced with betraying someone for the greatest gain, one does not know for sure that it is a unique case. Furthermore, someone who thinks that it is simply wrong to betray an agreement will not have to worry and plan about doing that, and will also be properly prepared for the long run. Part of the simplicity of TIT FOR TAT is that it relieves one of the necessity of constantly looking for the best way to betray the good faith of an associate. Instead, the problem is simplified, and a person can focus all their energy on the most productive forms of cooperation. Those who waste their time looking for a dishonest angle devote themselves to an enterprise that is essentially sterile. Without trust and cooperation no truly great enterprise can be undertaken, while the fruit of such enterprises is wealth beyond the dreams of narrow chiselers.

Political Economy

Ethics

Home Page