A Better Kind of Violence

by Filip Palda

  The classic article by Vito Tanzi and Ludger Schuknecht (1996), showed that after 1960, the governments of developed countries became feeding troughs. Spending on infrastructure and other traditional government tasks with minimal redistributive consequences faded. Cash gifts expanded. Governments grew in a manner that would have amazed the Pharaohs.

  Deadweight and rent-seeking loss are the crux

  IN THE CHICAGO school view, the 20th century governments of Western countries grew in part because they could. Falling deadweight losses per dollar taxed, sapped the incentive of ratepayers to resist. This of course is a gross simplification of epic fiscal events and an outrage to those who believe government to be an inherently poor manager of resources.

  Becker’s model however, when carefully studied, provides a restorative does of nuance. It is true that he believed the fruitless damage from deadweight loss propelled interest groups to seek efficient means of extortion. Yet he also emphasized that the incentive to seek efficiency could be overshadowed by the raw ability of predators and prey to exert influence through their pressure function. If you are really good at imposing your will by force, then rising deadweight costs may not deter you from leaving a trail of economic mayhem in your quest for booty.

  Becker was also proposing another loss that had nothing to do with the deadweight losses from takings which were abstractly encapsulated in Harberger’s analysis. The second loss was the collateral damage from conflict. When peasants beat their plowshares into swords and go to war they kill one another. They also leave their fields fallow and raid the crops of enemies. To Jagdish Bagwhati, these diversions of talent from producing wealth towards its redistribution “represent ways of making a profit (i.e., income) by undertaking activities which are directly unproductive; that is, they yield pecuniary returns but do not produce goods or services that enter a utility function directly or indirectly via increased production or availability to the economy of goods that enter a utility function. Insofar as such activities use real resources, they result in a contraction of the availability set open to the economy”. His term “directly unproductive profit seeking activities” is too lumbering to have been taken up by economists. Instead they use the public choice term “rent-seeking” which is equally infelicitous but seems to have stuck.

  The cost of rent-seeking includes the value of all resources thrown into political battle. This is very different from deadweight loss. It is not a by-product of blocked exchanges. It is the direct cost of tussles of over resources. When lawyers flock to capital cities to aid in the fight over a fixed level of resources they generate rent-seeking costs. They could have bent their minds to becoming physicians, carpenters, or pursued any other career in which something new is produced that helps the customer without harming anyone else. That is how wealth gets made. By choosing the mercenary career of counsel to interest groups lawyers impoverish society.

  So what is Becker saying?

  THE AMBIVALENCE THAT creeps through Becker’s model is of the sort that tends to make economists look like wafflers. “Too bad” he would retort. His model started with the simplest assumptions and generated many possible outcomes. The purpose of models was not to nail down absolute truths but to suggest competing views of politics. Which view was right then came down to what the data said. You could not start scrabbling through the data unless you had some idea of what you were trying to find.

  Yet something greater than the analysis of mass behavior emerges from Becker’s model. By clarifying the issues, he invites us to interpret politics. To Becker the efforts predators make to reduce deadweight losses is a current of efficiency that clearly runs through politics. The efficiency is tainted however because it speeds the path to predatory activities. One could argue that by attempting to reduce the deadweight losses from their takings, predators are cooperating with their prey. Much study has been devoted to deals that conflicting interest groups strike in order to minimize costly conflicts. Romans paid bribes to barbarians to prevent them from plundering. While perhaps avoiding excessive collateral damage these types of interactions can hardly be seen as cooperative exchanges in the spirit of Coase.

  A less contrived search for cooperation lies in asking what sorts of constitutions, or rules of the game would induce all parties to limit rent-seeking costs. One such a rule would be to limit campaign spending. Limits would save all parties the expense of buying competing advertisements that only serve to cancel each other out. Such Coasian deals benefit all interest groups. Their evident benefit would encourage a society to embed them in its constitution. Conflicts that cannot be resolved by mutual agreement are left to daily politics

  Policy impotence

  DESPITE THESE INTERESTING ideas for reform, Becker like other protagonists of the Chicago school is agnostic about the path politics should take to attain efficient use of public resources. In the Chicago view all obvious gains from cooperating in the creation of rules that limit rent-seeking have already been exhausted by competing interest groups. There are no big bills left lying on the sidewalk. Explicit policy advice by economists is likely useless. Governments are behaving as efficiently as they are able under the stresses of competing interest groups. In this manner, governments are implicitly striving towards norms of efficient intervention prescribed by Pigovian cost-benefit analysis.

  Summary

  ONE OF THE most contentious ideas to emerge from the so-called Chicago school of political economy is the view that all political conflict is nothing but an attempt by pressure groups to grab each others’ wealth. This represents a very different form of social calculus from the one put forth by Pareto. He believed that markets would encourage people to exchange their produce until all opportunity for mutually beneficial exchange was exhausted. This provided a form of distribution of wealth that promised societal stability by ensuring that no one would be harmed under the rules of commercial exchange. Markets however have never existed as anything less than an adjunct to governments. Governments by definition specialize in the forced redistribution of resources. Interest groups vie for influence in political battles for the produce created in commercial markets. The social calculus of such predation became the focus of Chicago political economy.

  George Stigler who helped found Chicago political economy was astounded that anyone could believe in the benevolence of government, which amounted to believing that government was a free good. Why should we expect valuable resources to be redistributed at no cost to the public in manner that mimicked Pareto efficiency? In other words, why should government be anything but a means by which warring interest groups attempted to divide a fixed pie of public wealth?

  Stigler’s colleague Gary Becker brought nuance to this stark view in his celebrated 1983 article. He suggested that clashes between interest groups over public resources impoverish society in two manners. Taxes discourage some exchanges from happening between producers and consumers. The value these exchanges would have created is lost to them as well as to society. This deadweight loss is the first harm from political predation. Provided predatory interest groups do not kill the market completely with taxes or other forms of extraction, such as regulations, there is still a fixed pie of wealth to be fought over. The efforts interest groups expend in trying to get their hands on this pie is another waste of resources. Instead using their minds to create new wealth these groups simply dissipate wealth in the contest to grab government booty. These sorts of losses are known as rent-seeking costs.

  This dichotomy of costs was well catalogued before Becker by Gordon Tullock in his 1967 paper. But what Becker realised is that there were forces that could lead to their eventual diminution. Deadweight costs by definition benefit nobody. That means predators get nothing out of them. But their victims become increasingly outraged by every further imposition of deadweight cost. Drawing on Harberger’s analysis of taxation, Becker noted that deadweight losses suffered by victims tend to rise exponentially while the tax gains to predators rise only linearly. This asy
mmetry of gains and losses meant that victims had a built-in advantage. Their gains from investing in the political fight rose faster than the gains to their predators from extracting further dollars. Intelligent predators would then seek to extract resources by means which minimized deadweight losses. This is why Becker felt politics could tend towards efficiency.

  What about that second cost, the one called rent-seeking? Becker said you had to think of deadweight and rent-seeking costs as being determined at two different stages of a political “game”. The first stage, call it a constitution, takes place before the game starts. Players agree on rules of the game that would lessen the dissipation of their resources in the contest for government favor. Becker mentioned rules that limit campaign spending as an example of a pre-game rule that holds down rent-seeking costs. In the second stage, call it elections, the game starts and groups begin to look for ways to extort money from others. The most successful will be those who keep down their deadweight costs.

  What Becker was saying in a more general sense is that the quest for Pareto-efficiency can be present even in a non-cooperative setting such as politics. This quest attenuates the worst excesses of predatory groups. Because these groups ultimately rely on the threat of government force to get their way, the search for lower deadweight costs can be thought of as the search for a “better kind of violence”. But this efficiency and lessened violence are tainted. They are the by-product of a conflict to divide resources which ultimately impoverishes society.

  What is most fascinating in Becker’s article is the manner in which it merges supply and demand, good traditional economic concepts, with political concepts such as functions that show the return to spending money on lobbying. Such a merger of ideas allows the reader to speculate on the future of the world.

  During periods of great market flexibility, such as we saw for two hundred years leading up to the last quarter of the 20th century, the deadweight losses from taxation were bound to be very large. Flexible or “elastic” demand and supply mean prices and quantities react sharply to disturbances such as taxes. Thus there is a strong incentive for potential prey to protect themselves from predators. Markets were allowed to function freely and wealth exploded in a manner never before seen. The article by Tanzi and Schuknecht shows how taxes never rose above ten percent of GDP in the 19th century.

  If demand and supply become rigid, say through the application of constraining regulations that limit competitive entry to the market, then people cannot flee taxes by going to other markets. Thus the tax does not discourage exchanges and deadweight losses are small. But small deadweight loss robs victims of their inbuilt advantage. The field now becomes dominated by predators who fixate on dividing the fixed spoils found in the market. The advantage of predators is that they have excellent “power functions”. They are good at taking as Mancur Olsen elaborated in his The Logic of Collective Action. This society of rigid markets and broadening rent-seeking gradually impoverishes itself. Can this be why per-capita incomes in the west have either stopped growing or shrunk? Will such a deviation from Pareto efficiency upset the accounts that keep society unified? Chicago political economy may not have the answers, but it provides a slide rule for helping to calculate them. Of course, not everyone agrees, and to these skeptics we now turn in the following chapter.

  Further reading

  Bhagwati, Jagdish N. (1982). “Directly Unproductive, Profit-Seeking (DUP) Activities.” Journal of Political Economy. 90:988-1002.

  Becker, Gary S. (1983). “A Theory of Competition Among Pressure Groups for Political Influence.” The Quarterly Journal of Economics. 98:371-400

  Coase, Ronald H. (1960). “The Problem of Social Cost.” Journal of Law and Economics. 3: 1–44.

  Harberger, Arnold C. (1971). “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay.” Journal of Economic Literature. 9:785-797.

  Keegan, John. The Mask of Command. Penguin Books. 1987.

  Olson, Mancur. The Logic of Collective Action: Public Goods and the Theory of Groups. Harvard University Press. 1965.

  Olson, Mancur (1996). “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor.” The Journal of Economic Perspectives. 10:3-24.

  Pigou, Arthur C. The Economics of Welfare. First edition 1920. Fourth Edition 1932. Palgrave MacMillan. 2013 Kindle Reprint.

  Stigler, George G. (1971). “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science. 2:3-21.

  Tanzi, Vito and Ludger Schuknecht (1996). “Reforming Government in Industrial Countries.” Finance and Development:2-5.

  Tullock, Gordon (1967). “The Welfare Costs of Tariffs, Monopolies, and Theft.” Western Economic Journal. 5:224–232.

  Public Choice

  THIS CHAPTER EXPLORES THE VIEWS of a school of thought, known as public choice, which has been a stern critic of Chicago political economy. Both schools share the methodology of applying economics to political phenomena. Both view politics as consisting of politicians (often call “agents” in the economic jargon) and their subjects (often called “principals”). Both groups seek to maximize their own welfare, subject to monetary and constitutional constraints. Chicago believes that political competition creates efficiency in government by aligning the interests of agents and principals and that this efficiency emerges no matter what the political context nor the advice governments receive from experts. Dictatorships, oligarchies, democracies all converge to efficiency and there is no point in having academics either encourage or discourage this tendency. It happens independently of intellectual musings. Public choice believes that there are powerful forces preventing the emergence of political efficiency and that academics can influence its emergence.

  Background to a conflict

  CHICAGO POLITICAL ECONOMISTS wish to encapsulate in a consistent, mathematical form, a unified model of politics and economics. Their central conclusions are that a society in which people seek their own wellbeing converges toward an efficient equilibrium. Economists can study and model this spectacle but because efficiency is woven into human behavior, armchair advice from professors dabbling in public policy is superfluous. People do not leave large bills lying on the sidewalk. Mancur Olsen wrote in 1996 that if these ideas

  … are largely true, then the rational parties in the economy and the polity ensure that the economy cannot be that far from its potential, and the policy advice of economists cannot be especially valuable. Of course, even if economic advice increased the GDP by just 1 percent, that would pay our salaries several times over. Still, the implication of the foregoing ideas and empirical assumptions is that economics cannot save the world, but at best can only improve it a little. In the language of Keynes’ comparison of professions, we are no more important for the future of society than dentists.

  Not everyone agrees with Chicago political economy. Public choice, which has evolved in parallel contains a faction, known as the Virginia school, and a sub-faction known as constitutional political economy. Its members cannot not help but think of Chicago with repugnance. Charles Rowley, editor of the Encyclopedia of Public Choice, captures the general sentiment in the following excoriation:

  When Gary Becker (1976) remains willing to defend in-kind transfers as carrying lower excess burdens than lump sum transfers of income, when George Stigler (1992) argues that all long-lived trade protection tariffs are efficient, while William Landes and Richard Posner (1987) defend U.S. tort law as being economically efficient, and 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 scholars and their journal editors ever look out from their ivory towers and survey the real world.

  Warming to his theme, Rowley concludes “Specifically, Becker suggests that interest groups redistribute wealth efficiently, minimizing the deadweight costs to society. Groups that impose high deadweight excess burdens
, in this view, are replaced by more efficient alternatives. This Panglossian view has its advocates, mostly from the University of Chicago. The public choice evidence almost universally refutes the predictions of the model.”

  We have studied the Chicago school in depth in previous chapters. What is this public choice school that calls into question Chicago’s central conclusion of tendencies towards efficiency in politics? The reasoning and methods of the two schools are so similar that to an outsider disagreements seem contrived. The difference arises not so much in the tools used by both schools but rather in a metaphysical posture.

  Chicago scholars see models as impartial means for making sense of a jumble of facts. Within data lie behavioral relationships such as the manner in which people react to prices and changes in their incomes. These may sound like trivial pursuits until one realizes that from an understanding of these fundamental reactions a comprehensive picture of the economy emerges. Chicago’s belief in market efficiency undercuts the notion that economists have anything useful to say to governments.

  Public choice scholars view themselves as integral to the models they formulate. To them ideas matter. It is the role of the public choice scholar to inject these ideas into politics as inoculation against harmful policies. Their most complex and important assertion is that politics should be seen as a two-stage “game” between coalitions of voters. The second stage of the game is politics as most people know it: elections, lobbying, interest group competition. To keep down the conflicts in this second stage, a polity should have a first stage in which a constitution is written which limits the size of government. People will then find it more profitable to focus on voluntary market exchanges as a way of determining resource use.