Stiglitz and Toward a Theory of the Rent-Seeking Society

|Peter Boettke|

Joe Stiglitz argues in NYT that inequality is not inevitable.  Violent extremes in wealth and income are not inherent in the operation of capitalism.  They result, instead Stiglitz argues, from policies and policy.  This is a major step forward in the analysis.

While there remains many statements by Stiglitz that a free market thinker would find problematic, his basic thrust in this article actually gets stronger and culminates with his claim that:

Solutions to these problems do not have to be newfangled. Far from it. Making markets act like markets would be a good place to start. We must end the rent-seeking society we have gravitated toward, in which the wealthy obtain profits by manipulating the system.

The problem of inequality is not so much a matter of technical economics. It’s really a problem of practical politics.

But what follows is not a consistent narrative, but an appeal to wishful thinking as the very same governmental institutions that have resulted in the rent-seeking society are now going to be relied upon to curtail rent-seeking and engage in wise public investment to aid the poor and follow binding rules that protect the middle class from confiscatory policies.

In a fundamental sense, the problem is that Stiglitz is thinking in terms of ordinary politics when he must make the move that Buchanan and Tullock made, and look at fundamental changes to the rules of the game (the constitutional level of analysis).  Buchanan thought more about this than even Tullock, though of course the classic place to begin this analysis is The Calculus of Consent followed by the edited volume, Toward a Theory of the Rent-Seeking Society.

But those moved by Stiglitz's plea --- as they should be --- should look to Buchanan's (and Congleton) Politics  By Principle Not Interests and the development of the "generality norm" from Hayek's The Constitution of Liberty.  This is a vision on non-discriminatory politics.  The rent-seeking society is fundamentally at odds with liberal notions of the "rule of law" and equality before the law.  The sort of policies that provide "welfare for the well-to-do" are the problem, not the solution, but they emerge from the political rules of the game that provide access to political privileges to interest groups.  As Buchanan liked to say, "Same Players, Different Game: How Better Rules Make Better Politics."

If, as Stiglitz argues, the source of our problems is that democracy has been corrupted by special interest groups, the solution is not higher taxes on the rich, and greater public spending on the poor.  The solution is more fundamental than that, and it requires a shift in the rules of the economic, political, and social game that envision an order that exhibits neither discrimination nor dominion.  It is only within such a rule setting that we will be able to live better together, and realize the gains from social cooperation among free and responsible individuals.

Comments

[John Papola]

The great struggle for we classical liberals is to find a mechanism through which nondiscriminatory politics can actually come about other than lucky historical happenstance.

Our next step is usually to say "that's what we should have less politics" which is true. Or, even more pointedly, we can note that rent-seeking is inherent in democracy. It's just mob mentality. There's more of us... let's take their stuff!

But neither of those recognitions gives rise to a means by which we can actually bring about political institutions which are bound by classical liberal rules.

So far, the best combination I can see/imagine are a combination of voice and exit. Voice as in the creation, exploration and dissemination of classical liberal ideas and scholarship from the theoretical to the persuasive. Exit as in the discovery / creation of new spheres of life (physical or virtual) in which these ideas can come to life and be put into action.

So voice gives us The Denationalization of Money. Exit is enabled by bitcoin. these two sphere feed on one another. Voice is the Magna Carte. Exit is the new world of America. Voice informs and gives rise to exit.

Voice as in the vote and influence over the public sector is too weak to be noteworthy relative to the world of ideas and the world of physical and technological exit/creative destruction. Of course there is a place for public policy advocacy. But I think history tends to be moved by big ideas and big technology changes. Legislation, much like the social-climbing narcissists who dominate it, is mostly a follower of the two (especially the latter), not a leader of either.

So Mr. Stiglitz has made progress in recognizing that cronyism is the problem. That's good. The day he recognizes that discretionary state power is the cause of cronyism will be the day he probably writes an op-ed declaring himself a libertarian.

[John Papola]

Put more simply. Reform is kinda hopeless. Inspired creative destruction of political economy is the way to go.

[John Papola]

Lastly, having just read the source article... man are you being generous, Pete. This Stiglitz piece is a train wreck. A slap-dash collection of sloppy assertions, left-wing populist buzzwords and canards. The rich need to pay "their fair share"? How does that square with the US being the most progressively taxed developed nation? It doesn't. How does anyone square actual reality and history with Joe's tired and demonstrably false assertion that we've been living in an era of massive "deregulation" and "free markets" since 1980.

He makes a nod to rent-seeking. Fine. It's practically a footnote. Joe's lost in politics. He's also delusional about whose policies have been running the show. The rent-seeking, unequal world of American political economy we have today is a world built by the politics and policies of Joe Stiglitz and others like him. This is your America, Joe. It's a shame you're not proud of it. But don't blame us. You did this. Own it.

[Andrew_M_Garland]

Congressmen/women can be bribed by schemes which benefit family members. They arrange through family members to profit from their inside knowledge of which companies will benefit from legislation.

It is laughable to propose government solutions to curb the power of the wealthy. The public must demand that politicians write ethics rules which exclude their relatives and business partners from accepting contracts from the government and from working for companies which do, other than working within large companies and at usual salaries.

The inequality which makes people mad is the inequality bestowed by government. Few think star athletes are paid too much.

A wise public would vote out politicians after 8-12 years in any office. Alas, "wise public" is a joke.

Why do academics claim it is free market principles which ossify society? In fact it is those principles which constrain the already wealthy and powerful.

Of course, Marxist/Socialists love big government and love taxes even more. Each one dreams of a government job as advisor, or preferably king. Control in the name of the People is beautiful.

http://thetruthisnow.com/headlines/your-corrupt-government-78-members-of-congress-have-family-members-as-lobbyists-100-connected-family-members-splitting-2-billion-in-lobbying-contracts/
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Your CORRUPT Government: 78 Members of Congress Have Family Members As Lobbyists — 100 Connected Family Members are Splitting $2 Billion in Lobbying Contracts
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http://www.cnn.com/2012/07/19/politics/stock-act-loophole/
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[edited] Lawmakers proclaimed that the "Stop Trading on Congressional Knowledge Act" would restore trust in government. CNN uncovered that a loophole could still allow family members of some lawmakers to profit from inside information.
=== ===

[Jerry O'Driscoll]

I agree with John Papola. We need voice and exit, and should look to markets when we can. I think on money, gov't . Will close all exits.

[Peter Boettke]

John Papola -- I very much like your discussion of voice and exit --- and not only do I like it, I agree with it as a strategy for social change. The late great Richard Cornuelle used to say to me all the time ... we have a great understanding of the free economy, we don't have a great understanding of the free society. He also argued that this is what let to an overemphasis on "think tanks" and an underinvestment in "do tanks" which can drive what he called the independent sector.

One of Dick's greatest insights on this was that while the "political strategy" on the right was to "starve the state of resources", the more appropriate strategy for true liberals was to "starve the state of responsibility". But Dick, like you, understood fully the important link between voice and exit --- between theory and praxis.

[Julie Novak]

Excellent comments thus far.

Whilst the Stiglitz piece is replete with the clichés commonly associated with proponents of the political-left, and there are elements of inconsistency within, I do think the concession he makes concerning income/wealth inequalities driven, in part, by successful rent-seeking outcomes is significant. He would do well to stay on that particular line of thought.

The exit option John raises here is certainly appropriate. I like how John broadly conceptualises exit quite broadly, to incorporate something akin to the varied potential "escapes from over-government" which Arthur Seldon catalogued later in his career.

I would actually wager that classical liberals have a reasonable understanding of the properties and dynamics of a free society, but there is possibly a lack of intellectual systemisation here, at least compared with liberal economic thinking. Liberal ideas about toleration, free association, social "outsiders" "entrepreneurially" engendering changes in majoritarian social attitudes, etc. all need stronger linkages together.

[Mario Rizzo]

If we had "perfect equality" of income and wealth with a rent-seeking society, that would be an evil. The point is there is no *problem* of income inequality per se. There is only a problem of unjust rules of the game. When you focus only on the outcome of unjust rules, you are driven to the Stiglitz solutions.

[Roger McKinney]

Is Papola suggesting joining the "black" market?

[John Papola]

Roger,

I'm suggesting that exit/creative destruction is the primary mechanism of fundamental physical and political change. Big changes generally don't come from within the existing players and political systems. Just as it took Apple's entrance into the phone market to utterly revolutionize it. Existing phone customers exited their prior relationships with Motorola and Nokia, who both went from dominators to bit players each bought by Google and Microsoft.

Exit doesn't require the black market. It requires competition. The problem is that politics offers fewer chances to compete and exit. Federalism is the best we've got in the USA, but the cancerous mass that is the Federal government is inescapable. The birth of the USA was akin to Apple's entrance into the phone market. Now, political competition is very very difficult and becoming more so with cartelizing international "cooperation". So we have the startup cities folks and the sea steaders seeking to recreate political creative destruction and exit.

Look at the cronies battling Tesla, Uber and AirBNB and the local boss hog parasite trying to prevent these disruptors from eating the rentier lunch. Tech is out-running politics and it's only just begun. If the nascent efforts for physical exit can't help but a few at the margin, the tech disruptors are liberalism's last best hope. Pete likes to say that progress is a race between three "S"s: Smith (gains from trade), Schumpeter (creative destruction) and Stupidity (the state). Schumpeter is making some serious gains lately and butting up against utter stupidity in a way that's much more visible than usual.

[Barkley Rosser]

I have two problems with this thread, although let me preface my whine by agreeing that in general rent-seeking arises from crony capitalism generating government regulations that provide those luscious rents. That said:

1) It is far from obvious that general moves towards laissez-faire will eithre reduce rent-seeking, much less lower inequality ("crony capitalism" being the usual libertrian explanation for excessive inequality, when that is even considered to be a problem at all). The poster boys on this are the two generally high performing Hong Kong and Singapore, which rank at the top of freedom indices estimated by folks like Bob Lawson. But both have high and rising Gini coefficients, and there have recently been lots of stories coming out of both of them complaining about, well, crony capitalism and how small groups of top business leaders are controlling things and getting all kinds of special favors. There may be some other nations estimated to be freer than the US that do better on these things (New Zealand?), but there is no guarantee that simply cutting back government will reduce either cronyism or inequality, particularly the latter.

2) To John Papola, you should know better by now than to claim that the US has the most progressive tax system in the world. I know, I know, there continue to be all kinds of sources out there proclaiming this that get repeated widely, but it is simply false. Virtually all of these sources turn out to measure only the federal income tax, which if you do that and compare with othre nations, as Greg Mankiw did not too long ago, well, one finds the rato of taxes paid by the top decile to income earned by them to be the highest in the OECD, hot stuff. But this ignores fica, state sales taxes, and a lot of other parts of the US tax system that are regressive, and when one accounts for all that, well, that ratio falls to be lower than at least a dozen other OECD nations, and at the top end, mostly due to fica, the US tax system goes regressive, with the income percentile paying the higest average total tax rate around 96-98%, with the average rate falling above that and getting dramatically lower as one ascends into that top 10% of the top 1%.

[John Papola]

Barkley,

I'll have to re-visit those posts from last year, because I thought the progressivity of the US tax system was in total, including transfer payments. The countries with a VAT are surely taxing everyone just as regressively as the payroll tax which, ehem, is allegedly supposed to be specifically for support of Social Security and Medicare. Most Americans believe the lie that their social security is going into some fund and saved for their retirement. Ha. But I digress.

Even if the US is not the most progressive, that fact that is progressive AT ALL indicates that the rich as a "class" (which is nonsense) have failed to rig the tax system in their favor as a class. Of course, I favor the elimination of all taxes on productivity in favor of a mix of consumption taxes and work credits or guaranteed minimum income for all. Never going to happen of course. I'm just saying that I don't support progressive taxation. I'm merely pointing out that the "rich" are already paying much more than their "fair share" by any rational definition of "fair" that isn't concocted on a children's playground.

As for your phrase "excessive inequality"... what's that about? Excessive compared to what? Based on what? There's nothing wrong with inequality in and of itself. It's not a moral issue unless one falsely believes that the economic world is a zero-sum game.

The last time I checked... envy is a vice and a moral failing.

P.S. I miss you.

[Barkley Rosser]

John,

If you throw in transfers then the US definitely becomes much less progressive than the vast majority of other OECD nations. It is usually the case that people making the case you asserted just stick to the tax side, where indeed the progressivity ifs much less for many outside the US because of the wide use of VAT in many of these nations, and it looks even more so when one just looks at the US federal income tax system, as already noted. Indeed, the usual cliche is that the US is more progressive on taxes but much less so on transfers. But again, looking at the total tax systems, while the US is more progressive than the average OECD nation, it is no longer the most so.

Obviously what constitutes "excessive inequality" is a matter of opinion. The US has the greatest inequality of any nation among the OECD, last time I checked, although there are variations in the rankings depending on the measure used. However, looking at Gini coefficients, HK and Singapore are more unequal even than the US now (and thus all other OECD nations).

It's been awhile... :-).

[Barkley Rosser]

Correction.

Just checked on Gini coefficients. US third most unequal in OECD, behind Chile and Mexico. Chile's Gini at .510 and Mexico at .475, while US at .379 (though some other sources have it higher, including CIA at .450. Hong Kong at .537 and Singapore at .463.

[Rafe Champion]

In addition to comparing Gini coefficients, what about looking at the incentives and the opportunities for poor people to better themselves by working productively and living prudently?

[Rafe Champion]

An Australian professor of economics and Labor member of Federal Parliament recently published a book on inequality in Australia.
http://www.blackincbooks.com/books/battlers-and-billionaires

He reports that inequality has increased since the 1970s. What happened in the 1970s? In 1972 a socialist government was elected and almost immediately embarked on an economic program that installed the entitlement mentality for welfare and blew inflation and unemployment into double figures from a very low base (inflation near 1%).

Billions spent on our Aborigines have seen the conditions in the outback deteriorate. "Equal pay" for native stockmen turned proud horsemen into welfare mendicants.

When will they ever learn?

[Roger McKinney]

Yeah, US inequality has risen since 1968, the year of Johnson's "Great Society" legislation. Socialism does increase inequality.

I have a real problem comparing Gini for the US vs all the tiny European nations. The sample sizes are no where near equal. If we divided up the US into clusters of similar Gini we would find areas with the Gini equal to the lowest in Europe and areas equal to the highest in Europe.

An accurate comparison would be the entire Big EZ against the US. Then you would have high earners in Switzerland compared to high earners in CA and NY, and low income earners in Greece compared to Mississippi. I don't have a link, but I have seen only once such comparison and the US looked much like Europe, though still slightly higher by Gini.

[Roger McKinney]

John, I like the black market better than waiting for new tech to come along. I think it's much more reliable. Increasing the size of the black (free) market starves the state of funds. And once it gets big enough it will be accepted by people as legit, just as they now favor legalization of marijuana and gay marriage.

[Andrew Davis]

After reading that Stiglitz's credentials in economics are less that stellar, and that his left-wing views are more suitable to the New York Times in which it was published, I was glad to see the name "James Buchanan" in the Peter Boettke's response. Without the economic background, one should not make constructive criticisms to a system which relies very heavily on knowing the intricacies of the relationship between government, and the big companies whose Chief Officer's are ever widening the gap in wealth distribution.

In another article, which I feel greatly contributes to this one, the authors compared the wealth distribution effects of corporations who experience economies of scale, and have a market share over their competitors, will often use their special interest influence in politics to lobby for legislation, which will on the face of it hurt their own company, but the fact that they can take a greater hit for a longer period of time, and can drive the little guy out of competition to increase their market share even more.

This example of rent-seeking in politics is exactly the kind of problem which Buchanan argues, as Boettke stated in the article, "Same Players, Different Game: Better Rules Make Better Politics."
In my opinion, the upper echelon of these mega companies are not evil people (well, maybe some of them) out to impoverish the masses for their personal gain, but rather they are just smart people looking for loopholes, which they know exist in an inherently "broken" system.

[Roger McKinney]

Andrew, I agree. Politicians will sell their power to someone. If not the execs of major corps, then someone else. The problem is not the individual politicians; it's the system. Politicians will always sell their power to the highest bidder. Give them any power and they will sell or rent it.

[Rafe Champion]

On the topic of top executives and political insiders exploiting the system, see Nassim Taleb's account of the Alan Blinder strategy spelled out in "Antifragile: Things that gain from disorder" p412 under the sub-heading The Ethical and the Legal.