A Better Kind of Violence

by Filip Palda

  It is important to use the qualifier “may” when claiming that Chicago political economy predicts increasing efficiency. The basis of this claim is that victims have a built-in advantage. They suffer more than predators gain. But if that were the only force in play, victims would crush their oppressors. Predators need to be endowed with some special advantage of their own. One such advantage is that small groups with concentrated interests in gaining government favor are more easily mobilized than the large groups they prey upon. A few thousand molasses farmers gain tens of thousands of dollars from US government laws that restrict the importation of foreign sugar, whereas millions of consumers suffer a price increase costing each of them perhaps no more than a few dozen dollars.

  The asymmetry in per-capita benefits from political action gives certain interest groups a stronger “power function”, that is a raw ability to influence government with given resources than others with a weaker power function. In Chicago political economy, a political “equilibrium” is reached when some sort of balance is struck between the advantage victims feel due to the asymmetry of gains and the advantage that predatory groups enjoy due to stronger power functions. The level of government efficiency that results depends on the importance of both these forces in the final equilibrium. Put differently, government does not attain the greatest level of efficiency possible in the use of resources, but rather the greatest efficiency possible for the power functions that are in play. This could mean that a great deal of efficiency is achieved, or if the power functions are very strong, that efficiency is very low. So, the Chicago view has in mind a wide spread of possible efficiency outcomes.

  Why Chicago political economy is important

  CHANGES IN EFFICIENCY in the Chicago model arise when either of several things happen. The power functions of predators and victims change, or the economy changes in such a manner that the inbuilt advantage of victims increases. That is when the real action starts.

  You could call these changes “political revolutions” that shift the balance of power between groups. A clear example is the fall of Bronze Age nobilities who had monopolized the few sources of tin and copper needed to make edge-taking weapons from the resulting alloy. The monopoly was lost when metallurgists discovered how to mine and smelt iron, which is one of the most abundant minerals. Inexpensive swords and armor flooded the weapons’ market. With their enhanced power, large groups with iron weapons challenged bronze-based nobilities in wars that lasted centuries. Much damage resulted from the conflict. Ultimately leaders who taxed more efficiently, and at reduced rates, came to dominate. Thus, shifts in the power function led to both harm and increases in efficiency. The theory does not specify which is larger.

  Yet to speak of political revolutions as the sole motor driving change in government efficiency is to ignore the manner in which the economy is tightly wound into the balance of power.

  It is possible that the collateral damage from predation will rise as an economy develops. Economic development happens when new, cheaper ways of doing old expensive things are discovered. The fall of trucking and air regulation in the US during the 1970’s can be attributed in part to innovations in transportation. Cheaper ways of providing these services were being discovered but regulation restricted who could enter the market, thereby profiting existing producers and workers’ unions. Despite their highly developed political power functions they lost their bid to keep out competitors. The gains being suppressed by regulation, that is, their collateral damage, became so large that victims were galvanized into action. A similar pressure for change was felt by Soviet Bloc countries. By the late 1980’s citizens of these countries became aware of the growing rift in wealth between themselves and the West. Even though the authorities had the guns, “people power”, the intrinsic advantage of victims, prevailed. The more general principle at work in the cases of regulation and the Soviet bloc is that stifled economic development can lead to productive political upheaval.

  Coase and the structure of power

  STUDYING POWER FUNCTIONS and collateral damage can give researchers an idea of how politics and economics evolve towards the good as these functions change. The study of both sides of political equilibrium can also help us understand how political institutions evolve and how this evolution influences power and efficiency. This is the most difficult strand of Chicago thinking to understand. It is rooted in the work of Ronald Coase. He believed economists were too fixated on abstractions such as supply and demand. He suggested that to understand how free markets allocate resources through voluntary consensus we need to study the institutions that make them run. The institutions we see have evolved to minimize the “transaction cost” of doing business. He argued that firms exist because they limit contracting costs. Workers in a firm cooperate on a voluntary basis with each other. No contracts need to be drawn up between them for the millions of cooperative acts needed to make a company run.

  Chicago thinking took Coase to the next level by using his analysis of market institutions to ask what sort of political institution minimizes the costs of determining the allocation of resources through the coercive decision mechanism of government. Referenda and citizens’ initiatives are democratic institutions that allow large groups of voters with diffuse interests to counter the concentrated interests of small, heavily vested groups. Devolving government power to the lowest administrative level is also an institutional change that evens the playing field between large and small groups. By limiting political predation and the collateral damage it entails, the evolution of democratic institutions such as decentralization and direct democracy could be seen by Chicago scholars as a quest for greater efficiency in government.

  The dragon’s den

  ANY BRANCH OF economics claiming to explain the evolution of government and the structure of political institutions would seem to be of vital importance to policymakers. If you know the ingredients of good government, then a society can build its own and enjoy the benefits. In fact, this is the approach taken by current pop-historians and global visionaries such as Francis Fukuyama. In his book Political Order and Political Decay he produces a shopping list of five conditions for a modern, functioning “nation state” to master the intricacies of power. All of this comes after several hundred pages of examples from which he distills the essentials of state influence. He is an exponent of a tradition of list makers stretching back to Edward Gibbon’s 18th century oeuvre Fall of the Roman Empire.

  If a nation follows Fukuyama’s to-do list will it benefit from the exercise? Chicago political economists says “no”. Their reasoning derives from the efficient markets hypothesis which says that stock prices immediately integrate all information relevant to company performance. This means there is no useful information in prices that will allow you to predict future prices. If there were, then someone would already have used that information and the result would be then reflected in the price.

  When applied to government this reasoning leads to the conclusion that there are no “big bills left lying on the sidewalk”, to use the phrase coined by Mancur Olson. Even if you see a nation rich in natural resources, where the people are impoverished, there is nothing you can do to advise them on how to improve their condition. If such an improvement had been possible it would already have been implemented. US advisors in Afghanistan learned this lesson the hard way. Despite being endowed with over twenty trillion dollars’ worth of mineral resources and receiving close to a hundred billion dollars of US aid, Afghanistan’s resources might as well be on the moon. Its political equilibrium includes groups with power functions that overwhelm the intrinsic advantage of victims. What appears like wealth for the taking is more like gold in a dragon’s den. Though those outside the den may be dressed in rags, they are living as efficiently as they can, given the constraint imposed by the dragon.

  Public choice

  SOME PEOPLE DO not fully agree with Chicago political economy. They belong to a field called public choice. They apply economic
reasoning to political phenomena. In most ways, they are like scholars from Chicago political economy. What chafes public choice scholars is the claim that politics has a compass pointing towards efficiency. Even more odious in their view is the nihilistic conclusion that policy advice is irrelevant. To Charles Rowley, former editor of the journal Public Choice, Chicago’s “… interpretation of the political process emanates from a fundamentally flawed application of … microeconomics to the political marketplace … while the Journal of Political Economy publishes papers that defend the U.S. federal farm program as an efficient mechanism for transferring income to poor farmers, there is justifiable cause to worry whether CPE [Chicago political economy] scholars and their journal editors ever look out from their ivory towers and survey the real world.”

  To Chicago political economists there is no mystery about why big bills are lying on the sidewalk but somehow society cannot pick them up. Chicago sees these unattainable bills as simply a result of the existing reality of power relations. There is no point in fretting over their presence. Being unobtainable they are not in fact lying on the pavement.

  Public choice scholars take a more pro-active view. They believe that big bills on the sidewalk result from poorly conceived “rules of the political game” such as constitutions, and from what they see as the great awkwardness of satisfying individual needs through group decision processes. Those who should be proposing rules and limiting government incursions into private affairs are none other than public choice scholars. In this way, public choice researchers embed themselves into their own research agenda. They are active participants in the political phenomena they study.

  While Chicago remains agnostic, public choice scholars yearn for a creed to solve the world’s problems. To James Buchanan, the prominent exponent of public choice, the creed of public choice is to restrict “Leviathan”. According to Hobbes, Leviathan was an oceanic creature that grew without bound. To public choice it is a metaphor for a government that seeks to maximize its revenues with little concern for the wellbeing of its subjects. Along with Jeremy Brennan, Buchanan argued that politics is a “two-stage” game. In the first stage rules should be written that restrain the ability of governments to tax as they please. Such “tax constitutions” might tie the hands of politicians in the second stage of the political game. Without the ability to follow the advice of economists for creating taxes that are efficient, in the sense of minimizing disruption to economic activity, the Brennan-Buchanan restriction might appear retrograde. However the benefits of these restrictions is that they avert an even greater damage to society. There is no guarantee that in the second stage of the political game politicians will follow the advice of economic technocrats. They may instead become part of struggles between interest groups trying to bend the tax system to their own advantage. The efforts expended are known as “rent-seeking”. Such rent-seeking costs may far exceed the efficiency gains from leaving politicians free to possibly create an efficient tax system.

  Brennan and Buchanan championed an inefficient tax system stitched into the DNA of the constitution because they had little hope that politics would ever strive for efficiency. Political “markets” are riddled with intractable inefficiencies due to the need to mobilize large numbers of people to make collective decisions. The cost of being informed about policy is high and the benefits to voting are low. In even the most democratic countries, pathologies abound which make it impossible for collective decision making to efficiently satisfy the needs of citizens.

  The one hope that Brennan and Buchanan held onto was for a people to create a built-it system of harm-reduction right at the start of a political system. It was an idealistic stance of the sort which is absent from Chicago political economy.

  Mechanism design

  WHILE JOUSTS WITH public choice take place within the shared analytical framework of classical economics, there lurks a faction plotting not only to subvert but to overthrow everything that Chicago political economy and public choice stand for. Its influence is still not widely felt, but it poses a challenge. It is called mechanism design. It is conflict politics in the style of Machiavelli. Personal, cynical, and full of wiles and strategies.

  Its application to politics arose out of the works of political scientists at the University of Rochester in the 1960’s but its deeper origin lies in a branch of mathematics called game theory. Economics explores how individuals maximize their wellbeing subject to the constraint of personal budgets. It is impersonal in that people have no control over their environment. Prices and incomes are determined by equilibrium conditions arising from monolithic relations between masses of people. Individual choice takes place in a setting where mass relations are determined by impersonal institutional arrangements which cannot be tampered with or influenced. First year economics students know these institutional arrangements as supply and demand equations.

  Game theory is about how individuals dispute a prize in a struggle where the constraint is the intellect of the opponent. Such a constraint is malleable. What I think can influence what the other thinks which influences what I think and so on. Game theorists discovered that this sort of interaction between people may produce a solution to the game called Nash equilibrium. It is a state in which no one wants to change his or her strategy given what they anticipate the strategies of others will be. Some games produce Nash equilibria which truly represent the best use of resources. Strangely some equilibria are perversely inferior. All participants realize that a different outcome could benefit all contestants but no one seems able to negotiate the path to this better outcome. Game theorists extend these thoughts to politics and conclude that the pathologies of power struggles can be palliated by the application of something called mechanism design. Some also call this reverse game theory. It is about bribing or fining people to abandon conflicts and align their interests with each other---also known as the search for “incentive compatibility”.

  Mechanism design sounds like the public choice and Chicago notions that higher order rules should be found that minimize the collateral damage from lower level struggles for influence. But there is a fundamental difference. By basing its analysis on the behavior of masses both public choice and Chicago political economy can be tested. There is ample information on mass behavior and a certain regularity to it. Mechanism design isolates itself from empirical verification by relying on what are basically highly mathematized stories of irreproducible one-on-one interactions. It is a manifestation of the Platonist notion that some very smart people can devise rules to herd people into behaving in the herd’s own interests. It is one of several new creeds of government interventionism but rises above all others by its ability to tell a story. It is dazzlingly creative and possessed of an impeccable logic. Its basics need to be grasped to see how Chicago’s incomplete treatment of inferior Nash equilibria can be rounded out.

  A roadmap to this book

  AT THE START of this chapter I wrote the vague phrase that this book is about an attempt to fuse the sciences of economics and politics into a unified theory of mass behavior. Several pages later the objective remains unchanged but the path to take is clear. This book will focus on Chicago political economy.

  Recently its importance has been recognized in citation indexes. According to Kim and colleagues the three foundational articles of Chicago political economy were written by George Stigler, Samuel Peltzman, and Gary Becker. These articles rank respectively 14th, 27th, and 44th among the most cited in economics over 1970-2005. Despite these impressive numbers we are far from knowing who the winner is in the contest for the best theory of power.

  The public choice of Brennan and Buchanan is a powerful contender and mechanism design bides its time on the sidelines. Yet like a star athlete who commands attention from opponents everywhere on the field, drawing them to him, Chicago political economy must be the focus of this vitally important clash of ideas. Behind its seeming nihilism one senses a probing method of thought that heightens our senses and
enables us to spot hidden truths. The basis of the method is to keep in mind that the skilled redistributor of resources keeps collateral damage to a minimum. Thus, Chicago thinking goes, if power goes to those who wield it efficiently, history can be deciphered as the march towards the measured use of violence in society. Great states rise on their abilities to extract monies from their subjects in a minimally intrusive manner. Taxes, constitutions, criminal law and civil law, monies for the poor, bridges and roads may seem like great enterprises in the public good. In fact, they are devices for capturing and redistributing wealth. The public good plays a subservient but supporting role in the rise of the modern state, which itself is the result of a competition among predatory groups.

  Chicago thinking also allows us to probe what appear to be mass pathologies lasting for generations. A dictator who gasses innocent villagers and represses democracy may be a monster. But would a civil war be preferable in which a hundredfold more might perish? Chicago political economy exhorts us to look beyond these shocking pictures of groups in turmoil.