On rent thinking and the corruption of republican government.

AuthorMontanye, James A.

Economic rents--essentially, an excess economic return derived from consumer surplus (rent) and capital (quasi-rent)--lie at the core of public-choice analysis, which models public decision making in economic terms.

The theory of rent seeking pioneered by Gordon Tullock (1967) demonstrates that monopoly and other market imperfections created by state action for private benefit entail more than deadweight losses and economically neutral wealth transfers. Also entailed is the social cost of nonproductive activities undertaken to influence government decision making--the cost of bribing public officials, lobbying, legislating, litigating, and regulating that surrounds political rent creation. Tullock's insight is a powerful, positive construct for exploring a wide range of interactions between private factions and public decision makers (Buchanan, Tollison, and Tullock 1980; Rowley, Tollison, and Tullock 1988). Rent seeking has become a euphemism for describing a society in which government is "the chief weapon in a political war of all against all" (Yeager 2001, 249, emphasis omitted).

The theory of rent extraction that Fred McChesney (1987, 1997, 2002) introduced more recently demonstrates theoretically and anecdotally, although not yet empirically to any appreciable extent (McChesney 1997, 69-85), that public decision makers themselves are rent seekers with a vengeance rather than impartial spectators. The formal theory of rent extraction concerns "ways other than rent creation that a politician can obtain benefits from private individuals" (McChesney 1997, 18, emphasis added). The process entails politicians' threats to unleash the investigatory, legislative, taxing, and other compulsive powers of the state to harass and impose losses on individuals and firms unless the politicians are compensated to refrain from doing so. Compensation arrangements, as with rent seeking, take many forms, ranging from outright bribes and gifts to campaign contributions, in-kind electoral support, and prospective private-sector employment. Rent extraction is a positive theory of political extortion, pure and simple.

The picture thus painted by public choice is one of political corruption. It differs only in subtlety and complexity from the more familiar picture drawn by political scientists and journalists, who like Machiavelli (1513) characterize politics as a process "where integrity has become a handicap" (Sabato and Simpson 1996, 25). Despite the elegance of its theories, however, public choice neither provides a comprehensive theory of "corruption" nor identifies the quantity that is corrupted when a society pursues rents systematically through political means. The political actions at issue typically are not illegal, leaving scholars and others to judge corruption in the same way that courts once judged obscenity--by presuming to know it when they see it. Uncertainty has produced reforms that further impair the democratic process (B. Smith 2001).

Adding to the confusion is the inability of public choice to explain fully the relationship between rent seeking and rent extraction in the political production function (McChesney 1997, 156-70). If politicians can use the state's coercive power to extract rents for their own account, then why do they bother selling rent-creating services? Why not simply extract rents directly by selling promises of political forbearance and be done with it? Further, given that "[t]he state can now rise above the rights of the persons whom it represents" (Epstein 1985, x), why do politicians engage in extralegal rent activities at all? Why not expropriate directly?

These questions persist in part because economists have difficulty distinguishing empirically between rent-seeking and rent-extracting activities. McChesney notes that "much of what is popularly perceived as rent seeking by private interests is actually rent extraction by politicians" (2002, 346) and that "despite the centrality of rent creation in the economic literature, there is good reason to think that selling wealth protection [rent extraction] explains more of what is going on in the United States [than does rent seeking]" (1997, 164). The empirical evidence needed to establish a strong conclusion along these lines remains elusive.

The inability to distinguish between rent seeking and rent extraction springs in part from their complementarity. Every rent created by state action is an expropriation from one group or faction for the benefit of another, and every successful rent-seeking episode creates an opportunity for future rent extraction. Accordingly, politicians routinely attract compensation from predator and prey alike (McChesney 1997, 161), even as policy choices ultimately depend on politicians' incentive to maximize political capital (Peltzman 1976, 1980). The total amount of compensation collected over time cannot be allocated meaningfully between rent-seeking and rent-extracting activities. Furthermore, it may be impossible to distinguish between legislation introduced simply to extract rents and legislation introduced for the purpose of maximizing political capital by other means. Elected officials also have an affirmative duty to represent their constituents' interests and an incentive to pad their own utility by pursuing private notions of the right and the good. The upshot is that even robust correlations between side payments and public policies are more likely to reflect coincidence than to reveal causation. As McChesney notes, "[m]ere observation of payments does not permit one to infer that the famous `special interests' are subverting democracy" (2002, 355).

Channeling rent thinking into formal games of rent seeking and rent extraction reduces the whole of politics and economic regulation to positive theories of bribery and threat: "payments for political favors and payments to avoid political disfavors" (McChesney 2002, 355). It also has the unintended consequence of obscuring the overarching political game in which rent seeking and rent extraction are embedded--the cooperative, positive-sum game of maximizing political capital. This game arises from the jointly recognized interdependence between the private and public sectors and is played despite overt appearances of sector rivalry. Cooperation integrates and harmonizes the substance of rent seeking and rent extraction, making each element more efficient (perhaps to the detriment of the general welfare) and characteristically leaving behind no discrete evidence of quid pro quo political deals. Given that cooperation is a dominant force of nature, it is reasonable to suspect that this supergame has greater effect than rent seeking and rent extraction considered separately.

I proceed by defining corruption in the context of republican government and by arguing that today's rent games are artifacts of corruption so defined rather than a cause of it. I then expand on contemporary rent thinking by introducing the positive-sum cooperative game into a discussion that presently dwells on zero- and negative-sum outcomes. I describe and illustrate a theory that explains the mechanism of cooperation, and I argue that the appearance of discrete rent-seeking and rent-extracting activities can indicate either an initial absence of or a temporary failure of cooperative behavior. I identify several reasons why empirical studies may be unable to identify individual aggressors and otherwise to account fully for observed political behavior. I consider some implications in the concluding section.

Corruption and Rents in the Theory of Republican Government

James Madison described the virtues of republican government and the indications of its corruption in The Federalist No. 10:

The effect ... is, on the one hand, to refine and enlarge the public views by passing them through the medium of a chosen body of citizens, whose wisdom may best discern the true interest of their country and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations. Under such a regulation it may well happen that the public voice, pronounced by the representatives of the people, will be more consonant to the public good than if pronounced by the people themselves, convened for the purpose. On the other hand, the effect may be inverted. Men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests of the people. (Hamilton, Madison, and Jay [1788] 1961, 82) The systematic pursuit of rents through political means is a defining characteristic of corrupted republican government. The existence of rent seeking and rent extraction indicates that successive tyrannies of temporary voting majorities who rule according to private interests have replaced republicanism. Corruption reduces the aggregate welfare of society by surrendering the collective pursuit of wealth and utility to the self-interest of politicians (and through them to client factions) whose private incentive is reelection to office. Once that surrender has occurred, the notion of corruption has no further meaning and properly is replaced with concepts of illegality that pertain to the violation of the laws enacted to maximize political capital.

The Corruption of Republican Government

Imagine two contrasting societies. One is organized along the lines Madison championed. It is strictly rule utilitarian in that government's enumerated powers are limited by constitutional rule to the protection of life, liberty, and property and to the provision of wealth-enhancing public goods. It admits no possibility for political rent creation, rent seeking, or rent extraction. Any appearance of these activities indicates a corruption.

The other society to imagine is one that more closely approximates modern reality. This society, founded on the ideals of republican...

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