A Better Kind of Violence

by Filip Palda

  A Better Kind of Violence

  The Chicago School of Political

  Economy, Public Choice

  and the Quest for an Ultimate

  Theory of Power

  Filip Palda

  COPYRIGHT ©2016 BY FILIP PALDA.

  All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief passages quoted in critical articles and reviews. Students may extract longer segments for school essays.

  Published by Cooper-Wolfling. None of the advisory board of Cooper-Wolfling are responsible for the opinions expressed in this text, which remain the responsibility of the author.

  Editor: Kristian Palda

  Typesetting and final design supervisor: Filip Palda

  Proofreader: Kristian Palda

  Cover design and typesetting: Filip Palda. Set in Minion Pro.

  About the cover: The cover is Apollo, a complex Greek deity representing both the quest for knowledge and the controlled use of violence.

  Palda, Filip, 1962–

  A Better Kind of Violence / Filip Palda.

  Includes bibliographical references.

  ISBN 978-0-9877880-7-8

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  About the author

  FILIP PALDA EARNED his Ph.D. in economics at the University of Chicago.

  Dedication

  TO MY WIFE MARIA, WHO HAS GIVEN ALL OF HERSELF WITH LOVE IN MY FIGHT

  Why

  THE RATIONALE FOR WRITING this book is to summarize for the first time the efforts of the two major schools of thought in economics vying to devise a complete theory of political power and to mention a third that is waiting on the sidelines. One is called Chicago political economy and the other is called public choice. The third is called mechanism design. This is not a survey of the whole of any of these fields but rather an overview of what unites them and the central principle that divides them, namely that governments evolve towards the efficient application of force, or, a better kind of violence.

  The origins of the book go back to early 1981, when my father was a visiting professor at Virginia Tech. He invited me for my February undergraduate break at Queen’s University in Kingston to have a look at a new type of scholarship developing called public choice.

  I was 18, a second year economics student and intrigued by anything that smacked of the application of economics to politics. I attended a seminar in a wood panelled house at which Murray Weidenbaum, then Ronald Reagan’s economic advisor, delivered a funny but serious lecture about the seemingly boring topic of regulation and the interests that guide it. To this day the memory brings to mind Lord Kenneth Clarke’s observation that in the Gothic period serious issues could be approached with a sense of play.

  Present were two figures of authority who after the talk introduced themselves to me as James Buchanan and Gordon Tullock. Their questions seemed so erudite and exotic that I knew this was a field I wanted to learn more about. It held the promise of understanding government by using economic tools. I then based my undergraduate thesis on a public choice topic and I published it in the journal Public Choice under Tullock’s guidance. Three years later I found myself starting my Ph.D. at the University of Chicago. Gary Becker had just published his 1983 article on interest groups and the struggle for power. It was the capping achievement in a field that would become known as Chicago political economy and which though similar to public choice would enter into conflict with it. Five years later I completed my doctoral dissertation with Becker by becoming the first to apply his model to campaign spending issues. Before leaving I told Becker that his article had provided me with what I saw as a complete theory of power and that I was astounded by its prediction that governments will tend towards efficiency. He shook his head in disapproval and lamented that this is not what his article said and that no one really understood it. It might have helped then if he had not written that “Political policies that raise efficiency are more likely to be adopted than policies that lower efficiency.”

  I thought about Becker’s cri de cœur on and off over the years that followed. Finally I returned to his article to see what he might have meant. What I found in re-reading it was a degree of nuance that allowed him to say that policy tends towards efficiency while at the same time identifying forces that can thwart it. Was this a profound piece of work or an overly complicated way of formulating the thought that in politics anything can happen? To help me and my students understand the issues better I wrote a short guide to Becker’s paper. In writing it I realized that Becker’s article, though simply written, was exceedingly difficult to grasp. It seemed to spring directly from the author’s head. Context was missing. To really understand it someone would have to first realize that Becker was building on the works of several economists before him. He was coming at the tail end of a debate with its genesis in the 1920’s. It would also help to know that Becker’s ideas were not universally accepted. They were considered pathological by prominent scholars in the public choice field, most notably Charles Rowley, former editor of Public Choice.

  Thus I conceived the idea of the present book. Becker’s article would not be at the center of the book but would be shown to be one in a sequence of works that has come to define what is now called the school of Chicago political economy. Because Chicago political economy and public choice use the same analytical tools and evolved in lockstep, public choice would assume a prominent role in this book.

  What is fascinating about Chicago political economy, and what merits attention is its unrelenting application of economics to politics and the realization of how many results and insights can be squeezed out of such a minimalistic theory. Economics is based on the existence of constraints within which individuals seek to maximize their well-being. The result of this striving is known as equilibrium. With these three principles (maximization, constraints, equilibrium) Chicago political economy is able to build a theory of power. This theory can be used to ask whether competition in election campaigns should be limited, whether increasingly efficient policies will encourage excessive government growth (the Leviathan debate), and it allows us to identify which groups in society are most likely to be preyed upon by other groups. It also allows us to compare the effect of different constitutions on the efficiency and size of government. It warns us not to judge the efficiency of a public policy by textbook economics but rather to compare the waste of a seemingly inefficient policy against the alternatives (a minimum wage may be the best way of redistributing money if the system of taxation is inefficient). At the heart of the theory is the prediction that government policies which are efficient have a good chance of displacing inefficient policies.

  Though the idea of politics tending to efficiency is the central idea of the book I do not allow it to overwhelm and ultimately bore the reader. Instead I want to tell a story of how an obscure academic spat over the question of whether governments should intervene to correct “market failures” led to the creation of the economic analysis of private institutions. Ultimately this field was transposed to the study of government institutions where, ironically, the conclusions of free-market thinkers about the efficiency of government converged with the views of interventionist thinkers from the school of cost-benefit analysis.

  I also want to show readers how the related field of public choice reacted with growing horror to what it viewed as a misapplication of market economics to politics. Particularly revolting to public choice scholars is the Chicago view that the efficiency of political markets
means that policy advice is irrelevant.

  I explore this claim in more detail than has been done in the literature to date. While I do not survey all of public choice I show readers what the field is about and focus my description of public choice on one of its central tenets, namely that governments will tend to grow like Leviathan and that the only way to combat this growth is induce inefficiency (yes I mean “inefficiency”) at the constitutional level.

  I could of course have made this book a sequential exposé of the ideas of Chicago political economy and public choice, but I find survey works to be tedious to any but non-specialists. I prefer to tell a story of the evolution and interaction of both schools of thought, with primary attention on Chicago political economy because it has always caught public choice scholars off guard and forced them into a reactive posture. I believe that the differences between the two schools are exaggerated and I show how closely they mesh. The analysis in my book is wholly original in the sense that no one has bothered to put Chicago political economy in its proper intellectual context and to emphasize its efficiency predictions as being among the most important ever made in the social sciences. I end the book with a look towards the future which may belong to a third field known as mechanism design.

  The above is a logical summary of the book but is perhaps not the last word on it. The economic search for a theory of power has electrified my thoughts for decades and I want to share some of that live current with readers. The book will present the reader with habits of thought that allow one to understand not just politics, but history, law (I will be relying on William McNeill’s prescient work Plagues and Peoples to demonstrate this latter point). Just as importantly, the book is an adventure through intellectual history. It is the first to trace a line from Pigou to Chicago political economy while paying due attention to the parallel but branching field of public choice.

  Levers of Power

  THIS BOOK IS ABOUT AN attempt to fuse economics and politics into a single theory of power. Karl Marx thought he had achieved this synthesis, as did thousands of intellectuals who devoted their lives to tidying his thoughts. The field was left to them for most of the 20th century. They seemed to be doing well until economists started looking into the matter.

  Economists are uniquely suited to creating a theory of power because of two great advantages they have over competing social sciences such as politics and sociology. The first advantage is mathematics. All terms must be defined and all relations between terms laid bare in equations. The grip of this logic admits no sloppy argumentation. Economics does not use mathematics for its own sake but rather to impose discipline on a train of thought.

  Writings in political science and sociology may be entertaining but they can quickly loose coherence because they lack a mathematical basis. A grand intellectual enterprise such as fusing economics and politics to create a total theory of power needs the help of mathematics to make sure thoughts remain consistent.

  The second advantage economists enjoy is a mastery of what one might call social accounting. Societies are groups of people bound to each other for some positive reason. Humans calculate whether they are getting more by staying in society than they are putting into it. If the balance is negative for too many people, a society crumbles.

  Economists inadvertently discovered how to calculate these social balance sheets when they developed the analysis of demand and supply. If you are going to develop a theory of power, you need to know the calculations people are making because everything is connected. If the economic balance sheets tilt in their minds so will the cohesion of different bands of people competing for dominance in society. Economics and group action, also known as politics, are inseparable.

  But how do you unite supply and demand, and politics even if you have all the economic tools at hand? The answer has come at the end of a road travelled for fifty years with no clear destination in sight. No economist sat at her desk, sharpened a pencil and scribbled out an ultimate theory of power in a bout of inspiration. Almost no great idea in any science springs like Athena from the head of her father.

  The rocky journey to an ultimate theory of power began in the 1920’s when Cambridge economist Arthur Pigou tried to break away from free market economics. The task took discipline because Pigou was of two minds. He was a master of free market thinking. He understood the ability of private markets to balance a multitude of needs and means without waste. Such “market efficiency” however could be impeded if the ledgers of social accounting started to get out of balance. An efficient exchange in a market was one in which at least one person was left better off and no one else was left worse off. The fancy term for this was Pareto efficiency. But sometimes exchanges produced collateral damage. If I buy paper from a pulp company that pollutes water, someone downstream who is not a party to our exchange will suffer material damage. The market exchange looks efficient, but when you factor in the costs of pollution social ledgers may tip into the negative. Pigou thought the problem lay in prices that misled buyers and sellers into socially harmful exchanges. A corrective tax to increase the price of paper would sensitize consumers to the costs they impose on others and they would cut back their consumption.

  Whether he intended to or not, Pigou outlined a theory of how government and the economy should interact and hinted of some unification between economics and politics. Yet, therein lay the conceptual limitation of the exercise. Government was seen as an impartial, all knowing, benevolent force intervening to benignly correct market imperfections. His followers began to write of a “central planner” who used demand and supply analysis to correct “market failures”.

  Few at the time noticed it, but these first attempts at fusing economics and politics were going astray. They confused what government “should” do with what government “would” do.

  This distinction was noticed by Ronald Coase of the University of Chicago. He believed that there was little need for direct government intervention in the economy provided that courts protected property. He saw incorrect market pricing not as a failure of markets but as a failure of government to protect the interests of property owners. Pollution would not be a problem if its victims could claim adequate compensation for damage to their property. Property rights were not a cure all. It is expensive for government to define and defend property. But Coase warned that the problems of leaguing to government the power to levy corrective taxes and provide services to the public could be greater than those attributable to market failure.

  Exactly how much worse would government be as a guardian of the economy than would an imperfect private market? Coase did not answer that question. It was left to his successors at the University of Chicago to pose it. What they found seemed a contradiction of everything Chicago free market thinking stood for: “Political policies that raise efficiency are more likely to be adopted than policies that lower efficiency.” Gary Becker wrote those words in 1983 in an article that would crown Chicago’s quest to produce a theory of power melding economics and politics.

  Nothing could have seemed further from the verbal whippings Milton Friedman was laying on governments in his contemporaneous book and television extravaganza for US public broadcasting entitled Free to Choose. Despite Friedman’s evangelical dislike of government, he had a scientific side open to what appeared to be Becker’s shocking repudiation of Chicago’s free market thinking. That was perhaps because he saw in Becker’s statement the inexorable, even ironic end-point of Chicago reasoning. If Pareto-efficiency was a driving force in private markets, why should it not be so in politics? Chicago thinking was catholic. That which moved a merchant could move a bureaucrat. Becker, building on the work of his colleagues George Stigler and Sam Peltzman showed how the worlds of politics and commerce could be reconciled and melded.

  Few noticed Becker’s article at first, but as with most of his writings it eventually sent shock waves through the social sciences. While the public may have heard of rock-star economists Thomas Picketty, author of C
apital, and Steven Levitt, co-author of Freakanomics, few outside academia know Becker. Inside academia he is a legend. Milton Friedman said that “Gary Becker is the greatest social scientist who has lived and worked in the last half century.” High praise coming from someone who was niggardly with it. Friedman taught many future Nobel Prize winners and in some cases made it clear he was less than impressed with them as students. But in the case of Becker, Friedman could write that he “has a brilliant, analytical mind; great originality … and a profound understanding of both the operation of a price system and its importance as a protection of individual liberty.”

  The quote is embarrassing in its superlatives. Yet Friedman was no lickspittle. Becker dazzled him. The source of Becker’s ability to impress others was not simply the power of his intellect. There is an armada of clever economists whose names are forgotten. Does anyone remember Lester Thurow, shooting-star economist of the 1980’s who wrote The Zero-Sum Society? Becker’s power lay in his relentless application of the three principles of Chicago reasoning. In his 1982 survey of Chicago thinking Melvin Reder called these “tight prior”. Chicago believed that individuals maximized their well-being, that they did so subject to material constraints, and that the mass interaction of individuals led to an equilibrium in which no one was willing to change his allocation of resources given the allocations chosen by everyone else. These were the anchors of Chicago thinking and almost no amount of contrary evidence could unmoor those who had chained themselves to these principles of markets.

  The logic behind Becker’s and the Chicago school’s analysis of politics was that crime and politics are intimately related. In both fields there are human predators and prey. But there is a twist. Predators gain less than the prey suffer. A lobby group that manages to get a million dollars from government benefits by a million dollars. But the businesses that pay this tax lose a million and may also go bankrupt and lose the work of a lifetime. This asymmetry in gains and losses from predation gives victims a built-in advantage. Victims will hire rival predators to protect them in exchange for a fee, much as did poor villagers in Kurosawa’s movie The Seven Samurai. So a “market” in protection services will arise in which predators who inflict less collateral damage will out-compete their more virulent rivals. Becker saw in such a process the emergence of increasingly efficient political systems. But the efficiency was tainted. It arose not from mutually benefiting exchanges, as occur in the private market, but from competition between bullies for domination of their victims.