Timothy Carney’s Atlantic column, “The Case Against Cronies,” has been making the rounds on the internet. He questions whether the mantra of profit maximization is really what libertarians want to advocate, knowing that profit maximization is not necessarily synonymous with social coordination. I think he misses some of the nuance in the theories of libertarians who have typically defended profit seeking behavior — no libertarian thinks we should monopolize every industry, despite the fact that a firm would maximize profit if it could garner monopoly rights. Also, libertarian economists, especially James Buchanan, have focused on the negative consequences of rent-seeking. But Carney’s main point is a good one nonetheless. I made a similar point in my review of Joseph Stiglitz’ The Price of Inequality, noting that rent seeking is an important dilemma, because it leads to non-market distributions of wealth (i.e. distributions not loosely bounded by productivity).
Before making my main point, I want to reiterate that not all rent-seeking is inefficient (from a social welfare perspective). Firms respond to regulation. Regulation can lead to sub-optimal outcomes. Rent-seeking that aims to reverse these interventions can be a positive social force. In fact, this kind of rent-seeking has been a major historical force for social change. It was the businessmen who “lobbied” the English crown in the 17th and 18th century that gave some impetus to the political movement towards pluralistic governance. They oftentimes managed to break the monopoly rights that the crown would offer certain industries. Nowadays, this is probably not so relevant, but the point remains that some rent-seeking is constructive.
But, as Carney and others point out, there is a lot of rent-seeking that is socially destructive. Carney approaches the issue from an ethical perspective. He makes the case that libertarians should criticize favored firms more vigorously and frequently. I don’t disagree with him. Public criticism goes a long way in restricting the scope of corporate choice. Bad public relations can cost a company much more money than what’s gained through rent-seeking. This is why automobile manufacturers are typically quick to recall malfunctioning product, especially in countries where consumers can quickly access information. This is also why firms don’t always opt to produce in countries where the production costs are lowest — being caught in these types of actions can lead to a large loss of customers.
Ethics can only take us so far, though. The best solutions to social discoordination are institutional (which ethics can, of course, inform). The problem is that for some reason we have not yet developed political institutions which are harmonious with the institution of the market, and vice versa. As it stands, political power can be used to distort markets, and wealth can be used to distort the political process. In his article “Market Non-Neutrality,” Gus DiZerega talks about some of these issues. I disagree with how he frames the problem, and his suggestion to separate these institutional spheres, but he looks at the same issue from a similar perspective. In my opinion, institutional progress isn’t measured by how well we can separate different institutional spheres — because of alleged ethical differences (I’m not sure how ethics can be different, if essentially the same people take part in all of them) —, but by how well these institutions harmonize with each other.
What this means is that there’s more to solving the problem of rent-seeking than just changes in how our ethics influence our actions (e.g. by being more proactive in calling out firms that conduct themselves anti-socially). We should also use our moral compasses to help shape the political process. And, I don’t mean just changes in the legislation. We already see how ineffective regulation can be, or even how burdensome regulation can be. It also entails changes in the political institutions themselves. We need to develop political processes that, while they’ll suffer weaknesses and costs of their own, institutionalize socially constructive behavior. In econospeak, we need to change the “rules of the game.” In other words, we need to constrain the range of choice, to choices which we can define, just for the sake of conceptualization, as socially constructive.
Political transformations are difficult to fathom. Historically, these changes have tended to occur suddenly, and often very violently. But, we should start to think about them as gradual and peaceful transitions. Take, for example, the development of political pluralism in England (or Great Britain/United Kingdom, more generally). England suffered its fair share of violence, but much of the movement towards democracy was peaceful. There we saw a case of a long-term, gradual, and more-or-less peaceful institutional transition. As institutions improve these kinds of transitions should become more prevalent, because they will be formed with a greater degree of innate flexibility.
Why isn’t the institutional approach typically addressed (except in certain academic environments)? I think that people tend to focus on market institutions. We have a hundred years, or more, of theoretical developments that tells us that markets are often imperfect. It’s accepted that the institutions of markets need to improve. But there exists some relationship between markets and politics, so it doesn’t make sense to separate the two when we are talking about progressive changes in how market agents behave. Many of the rules of markets are set by governments, and if we want to see improvements in these rules, and how these rules are formed and enforced, we also need to see political change.
Once people familiarize themselves with the idea that it’s not just markets which are imperfect, it’s also government, I think we’ll see more flexibility in institutional progress in the sphere of governance. There will always be resistance, but our society is already relatively pluralistic. The extent to which those in power can raise obstacles to change is more limited than it was in the past. This suggests not only that these type of changes are easier, it also implies that they should occur faster. And while institutions have been seen as important facets of society for at least 250 years (since the Scottish enlightenment), it has more recently become a truly flourishing subject area in economics (and in other disciplines, as well). These scientific developments will be transferred to the general public in due time. We have already seen, for instance, how theories like public choice have influenced the public.