Some economists view lobbying outlays in political markets as a manifestation of free speech – and that is just fine if one is prepared to stretch the meaning of a word or two. Surely the sweet sound of large dollar bills moving from the coffers of well-endowed interest groups into the coffers of well-endowed political parties and well-endowed individual policians is a manifestation of Amazing Grace:
Amazing grace! how sweet the sound,
that saved a wretch like me!
I once was lost but now am found,
was blind but now I see.
Through many dangers, tolls, and snares,
I have already come;
’tis grace hath brought me safe thus far,
and grace will lead me home.
(John Newton, 1779)
Well grace, surely lubricates the wheels of politics, ensuring that those who give also shall receive the fruitful bounty of political harvests. Grace, of course, has nothing in common with the free lunch, even though it manifests itself on many a breakfast, luncheon or dinner table across this generous land. Grace has something to do with markets, but it surely does not make them free. Grace is the dirty oil that introduces grit into the free market process, grit that builds up and builds up until eventually it transforms laissez-faire into state capitalism and destroys the wealth of a nation.
Grace comes to politics in two forms – rent seeking and rent extraction -the former marginally less malign than the latter. Neither form is in any way beneficial to those who strive to make their living outside the Forbidden City. Let me explain.
Rent seeking is a concept introduced into economics in 1967 by Gordon Tullock, and named for what it is by Anne Krueger in 1974. Rent seeking is the rationale for the emergence and existence of special interests – organizations designed to generate, via politics, concentrated benefits for their constituents while imposing dispersed costs on the wider community. The concentrated benefits are viewed as rents because they are returns in excess of opportunity cost, available only through politically-imposed monopolies, rather than through free competitive markets. These rents are purchased through lobbying outlays.
Rent seeking is socially undesirable because it wastes scarce resources in pursuing redistributive outcomes that are themselves destructive of wealth. In the limit, when the market in rent seeking is sufficiently competitive, rent seeking may well dissipate the total expected value of the monopoly rent that is sought through wasteful lobbying competition. The winner’s rents will be exactly offset by the negative rents of those who lose out in the competitive battle.
How can such a negative activity survive under conditions of democracy, you may well ask? Why would it not be eliminated by political market competition? The answer to that question, in a nutshell, is that political markets do not work like private markets. Political markets are handicapped by high levels of rational ignorance among the electorate that stem from the irrelevance of the individual vote. It simply does not pay voters to inform themselves about destructive political behavior because, individually, voters are helpless to do anything about it.
So when you notice the movement of grace from Wall Street behemoths like Goldman Sachs into the coffers of Democratic members of the Senate Financial Committee, do expect that that grace will be returned in a multiplied form to such donors, even if in plain brown envelopes slipped under the table by faceless Democratic Party bagmen. Rent seeking is an X-rated movie, unsuited to the eyes of innocents. For those old enough to watch, the game can be tracked. Simply follow the money, and the political responses to the movement of that money, and you understand the charade.
Rent extraction is the hard core pornographic movie of political life, much more difficult to discern, sometimes impossible to follow. Rent extraction defines an activity that, at first sight, is simply unbelievable: the movement of grace from special interests in return for nothing! As Fred McChesney demonstrated in 1987, however, money for nothing is a widespread phenomenon in political markets. Even when the political waters appear to be still, powerful forces are at work beneath the surface. The fact that a dog does not bark in the night may well be worthy of investigation.
Consider, for example, Citicorp, one of the country’s largest banking institutions, whose registered lobbyists spend most of their time and money heading off legislation that could harm any one of its multiple financial service operations. Even to the keenest eye, such outlays induce no political response. Indeed, that is the precise intent.
Rent extraction is the political equivalent of protection racketeering on the part of Cosa Nostra. ‘We are really worried that your house might burn down. If you are willing to remunerate us appropriately, we can ensure that such an event does not come to pass.’ Politicians, desirous of loading up campaign coffers, threaten to legislate against the interests of a target unless said target persuades them not so to do. Bills of this kind are referred to among the cognoscenti as Milker Bills. The milk in question is not the healthy opaque white liquid produced by mammals. Rather, it is that old-time unhealthy grace that we have just been talking about: the mother’s milk of politics.
So as we cast our sights from rent seeking to rent extraction, we re-focus our analysis from politicians as dishonest agents who broker policies in return for money to politicians who engage in a much more distasteful process: issuing threats to cause harm in order to be ‘persuaded’ not to implement said threats. Well, few people now argue that the process of politics is pleasant. I suspect that few really understand just how filthy the process has become. Maybe attending the current public hearings of House and Senate Committees on the regulation of financial markets would open eyes and ears. Of course such meetings are unsuited to the eyes and ears of those under the age of eighteen years. The meetings that go on behind closed doors are suited only to the irremediably depraved.
Even Amazing Grace cannot save such lost wretches.
Gordon Tullock, ‘The Welfare Costs of Tariffs, Monopoly and Theft’. Western Economic Journal (1967)
Anne Krueger, ‘The Political Economy of the Rent-Seeking Society’, American Economic Review (1974)
Fred McChesney, ‘Rent-Extraction and Rent Creation in the Economic Theory of Regulation’, Journal of Legal Studies (1987)