INSIGHTS: VIRTUOUS CAPITALISM
By Guest Columnist Fred Smith:
Founder, Competitive Enterprise Institute,
(Reprinted with permission. Full paper available online)
Fellow, Competitive Enterprise Institute
On its surface, this paper is about rent-seeking—private parties’ use of government to secure special favors. In today’s political environment, the question to ask is not why there is so much rent-seeking, but why so little? The federal government spends about $100 billion per year on corporate welfare, yet lobbying is only a $3 billion per year industry. Given rent-seeking’s incredible returns on investment, why is the lobbying figure not higher?
Public choice theorists call this question the Tullock Paradox, in honor of the late economist Gordon Tullock, who is widely credited with developing the modern concept of rent-seeking. Tullock’s economic analysis offers several convincing answers for why there is so little rent-seeking. Those answers are valid as far as they go, but in explaining capitalist vice, they do not go far enough in accounting for another important factor in play: virtue. The purpose of this essay is to convince social scientists to consider ways to incorporate morality and virtue in their analysis of Homo economicus.
Homo economicus is only one part of human nature. We urge social scientists to study the whole human being as best they can. While we confine our analysis to rent-seeking, our larger point—that morality and virtue deserve a place in economic analysis—has much broader implications.
We begin by analyzing Tullock’s “big four” economic explanations for why there is less rent-seeking than one would expect. His first theory is the lottery model of rent-seeking. If the government offers a million-dollar subsidy, a company could potentially spend nearly that much to secure it. But if 10 companies chase that subsidy by spending $100,000 each on lobbying, the winner reaps an astronomical profit. But the nine losers’ combined losses strongly diminish the total returns on rent-seeking as an investment.
Tullock’s second theory involves vote-trading, also known as log-rolling. If a Member of Congress wants to do a favor for a rent-seeking constituent, he must negotiate support for that favor from other politicians, who will ask for their own favors. Since each negotiation eats away at the return on rent-seeking investment, rendering the favor—or “rent”—far less lucrative by the time the Congressman buys majority support for his proposal.
Tullock’s third theory concerns the need to build cover stories. Most people view naked cash grabs like bailouts and subsidies as unseemly. Therefore, companies construct cover stories to make their cash grabs look like something else. Cover stories are not free, and reduce rent-seeking returns. Cover stories can range from multi-million-dollar national advertising campaigns to hiring lobbyists and public relations professionals. General Motors draped itself in Old Glory when it was bailed out by taxpayers, appealing to patriotic nostalgia about American manufacturing. Renewable energy companies paint their considerable rent-seeking activities in environmentalist green. Established companies often also seek non-cash rents such as barriers to entry, licensing requirements, and other preferential regulations. These are harder to trace than simple cash transfers, hence their ubiquity, but they have much the same effect.
Tullock called his fourth theory the transitional gains trap. Existing rents often require upkeep, which over the long run reduces the rate of return. For example, New York City taxicab medallions secured very nice rents for their owners for a long time, but now that they face viable competition in the form of ride-share services like Uber and Lyft, those rents are going away. Medallion owners are fighting reform because even though they could thrive on a level competitive playing field, giving up their rents would require a very large upfront cost. They are trapped in a bad place, and will continue to waste resources seeking ever-lessening rents.
Having gone through traditional economic explanations for low rent-seeking, we conclude with morality-based explanations, and present several ideas for further research.
Most—but not all!—businessmen, we argue, have a sense of decency or an implicit code of honor that causes them to refrain from rent-seeking behavior, or at least do less of it than one would expect. This virtue defies quantification, which may be why many economists defy incorporating it into their analysis. We seek to encourage public choice economists and other social scientists to gain a fuller picture of humanity than they do now.
A second point we wish to make is that entrepreneurs deserve praise, not just criticism, where due. Economists are quick to condemn unethical behavior like rent-seeking, and rightly so. But they rarely take the time to praise virtue or to recognize the value of cultural restraints on unethical behavior. If abstention from rent-seeking were more widely praised, there might be more of it. To the extent economists focus on rent-seeking while paying little attention to virtuous behavior, they tell only half of the full human story.
We invite academics, students, think tank analysts, and educated lay readers to join this conversation.
ON THE ECONOMY: THE GREAT PRETENDER
By John Dunham:
Managing Partner, John Dunham & Associates
Oh-oh, yes I’m the great pretender. Pretending that I’m doing well. My need is such I pretend too much, I’m lonely but no one can tell. There are a lot of Greatthings in the world including the pretender that is discussed in this 1955 song by Buck Ram and recorded by The Platters. In fact, Great things abound in the world, from the Great Wall, to the Great Barrier Reef, to the Great Lakes. In economics we had the Great Depression, the Great Recession, the Great Moderation. Today, I am going to declare another Great – the Great Meh.
Pundits from the left and the right have all been trying to describe how the economy has performed since the last recession, and frankly none of the standard arguments about the economy have made sense. In spite of huge monetary infusions, inflation has been – well meh. In spite of falling unemployment, wage growth – meh. In spite of negative real interest rates, investment – meh.
Meh is an interesting term. It signifies complete indifference – a verbal shrug of the shoulders. The term can also be used as an adjective, meaning something is unremarkable. This is the current economy – meh.
The term, like many which sound like what they mean, likely comes from the Yiddish term feh which translates into “Yuck.” It gained popularity in the early 1990s when it was used in the long running television series The Simpsons. The Great Meh is really the best description of the American economy over the past 15 years – really since the 2001 recession. It has become increasingly meh since the 2007 recession, but has reached a penultimate level of meh over the past couple of years. Understanding the reasons behind the Great Meh will help policy makers and business leaders navigate the economy as it approaches the next recession.
First, let’s examine some basic economic statistics that describe the Great Meh. One that the candidates for President keep discussing is stagnant wages. And yes, wages have fallen since the beginning of the Great Meh. This does not mean that they were rising before, but at least they were keeping up with inflation. But real median wages have been falling slightly since 2001. So workers are feeling poorer, and at best they have been running in place for decades.
One reason why wages have been stagnant is that productivity growth has been falling. In the years leading up to the Great Meh, productivity was rising at about 3 percent per year. Not stellar, but at least growing. Since the Great Meh began, productivity growth has trailed off to a CAGR of just 1.9 percent per year. When businesses can’t generate more income they can’t afford to pay more, and everything is, well – meh.
Finally, there just are not as many people working as a percent of the total labor force. After having peaked in the late 1990s at 67.1 percent of the civilian working age population, the labor force participation rate has fallen to just 62.9 percent, and it has been consistently falling by 0.5 percentage points a year.
So, people in America are not working, they are not particularly productive and that is showing up in stagnant wages. Why might all of this be happening? I suspect three reasons:
- First, investments in what we call technology are not actually going toward productive technology
- Second, the reasons why we work have changed. Economists would say that the utility maximization function is different now than it was prior to the start of the Great Meh
- Third, the onset of the age of terror has done a lot to change ideas about risk and reward.
Let’s start with technology. While there have been tremendous investments in technology, over the last decade most of the money is being invested in consumer goods – basically toys. Video games, apps, iPods, and consumer electronics are not technology. Technology transforms the economy, as for example internet communications and the net browser did. Blogs and cats singing on Youtube – while fun – are not technology. They don’t transform industries and they don’t increase productivity. A good analogy might be clocks. The clock was invented in China but was used as a royal plaything and never really got outside of the Forbidden City. However, the clock was transformative in Europe where it was a key element in ocean navigation technology. In many ways, the clock opened up the age of discovery, the New World and all of the growth that happened in Europe. The clock, like the computer and video graphics, was a transformative technology, but using that technology as a toy had little lasting impact. This is a big reason why productivity is stagnating. Rather than investing in new machines, new processes and new concepts, huge amounts of capital are being spent making toys better.
This brings us to the second reason why the Great Meh continues to linger. Economies are driven by people trying to satisfy their wants and desires. In medieval times, those wants and desires tended toward the spiritual, so huge amounts of capital and energy were spent painting madonnas and building cathedrals. In the 1800s there was a desire for European-Americans to populate the West. Huge amounts of resources were spent on new and innovative transportation infrastructure, out of which came canals, new types of wagons and eventually the transformative technology of railroads. Madonnas are great to look at and attract tourists to museums throughout the world, but they did not transform the economy in the same way as railroads. Today, much of what Americans seem to desire can be inexpensively delivered to their homes on a video screen. If one’s greatest desire is to populate the west, or to own a farm, they will work a lot harder than someone whom is simply trying to get through three seasons of House of Cards.
That brings us to the third reason why the Great Meh economy continues. Over the past two decades, in part due to a change in the environment from one of relative freedom to one of constant surveillance, and in part due to the burdensome regulatory structure that comes from giving government too much power, there has been a transformation in how people view risk and reward. Throughout the Great Meh, the number of people working for new (start-up) firms has been well below the level in the 1990s. Between 1993 and 2000, the number of Americans obtaining jobs with start-up ventures (per year) was over 7 million. Since the beginning of the Great Meh, this has fallen to just under 5.75 million. Actually, more firms are being started, but they tend to be much smaller. The more stringent the regulatory environment and the more expensive it is to abide by them, the less opportunities there are for businesses to establish themselves and to grow. Productivity gains tend to come from small businesses not big companies, and this change completes the circular flow that keeps the Great Meh going.
So like the Platters who pretended that they were doing well, so is the American economy. The Federal Reserve pretends that printing money will make things better, the President pretends that he can use a pen and a phone to put people to work, and Congress continues to pretend that it is doing something. In the end, the American people … well they just say Meh.
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