Entries in a fat catalogue of bribes and votes

The Grabbing Hand
January 21, 2000

The unifying theme of this accessible collection of papers, all previously published, is that politicians care about two things: votes and bribes. I fear that we are meant to admire this premise for its gritty cynicism. Either way, the remains of socialism get an exuberant reburial.

"The allocation of talent: implications for growth" shows how excessive rent seeking can destroy technical progress. If an industry's "best-practice" frontier advances in line with the calibre of its ablest entrepreneur, and rent seeking is so lucrative that it attracts all the cleverest people, growth will be slow. One implication is that lower taxes on business, even if they induce only the least able rent seekers back into productive uses, will raise the growth rate. Another is that countries which exclude a particular race from rent-seeking occupations may perform better as the victims are driven into entrepreneurship.

"Why is rent seeking so costly to growth?" extends the argument with a simple model in which everyone is a cash-crop farmer, a subsistence farmer or a rent seeker. There may be two equilibria. In one, everyone would be a cash-crop farmer. This is lucrative enough for no one to want to be a rent seeker, and because no one is a rent seeker, cash farming stays lucrative. But the bad equilibrium is equally stable. Here rent seeking has driven farmers out of cash crops into (less productive but harder to tax) self-sufficiency. The number of rent seekers increases until their internal squabble for spoils brings their return down to that of the subsistence farmers. The policy problem, then, is how to bounce the economy off the bad equilibrium and into the good one.

In "Pervasive shortages under socialism", the authors look at the planners' love affair with the queue. Ignoring the sublime explanation that, say, the National Health Service's waiting list is an efficient device that repels those who do not want treatment that badly, the authors believe that socialist planners create shortages on purpose, so that they can take bribes to allocate goods.

Consequently, they fix low prices as well as low output. This has ominous implications for reformers who establish market-clearing prices first and think about ownership later. Anyone who thinks the price rises will induce more output is in for a shock. The higher the price, the lower the bribe the customer will pay on top. As prices rise, "marginal bribes" are choked and, with them, the marginal output the bribes might have secured.

The richest and most complex paper is "Politicians and firms". Readers who recollect the 1980s may remember that a common response on the left to the failure of nationalisation was to dub ownership "irrelevant" or "sterile". "Politicians and firms" demonstrates that this irrelevance proposition is true only if there is unlimited scope for (two-way) bribery. Then you can plug in the Coase theorem and show that it does not matter who has the property rights.

The authors assume that the politician's main interest is getting the firm to hire unproductive workers, in the belief that he will pocket their grateful votes. This has several results. First, managerial control involves larger subsidies than political control. By threatening to cut employment, managers can extract higher transfers from the Treasury than it would provide if it were in control. Second, control by the politician may make corruption desirable: firms might bribe politicians not to insist on their hiring too much labour. Third, democracy is bad so far as a secure dictator will not indulge in vote-buying inefficiencies.

None of this confirms the superiority of private over public ownership. But the authors now whip out a "decency constraint" under which politicians are ashamed to subsidise privately owned firms that are already making substantial profits. Consequently, overemployment is a feature of all publicly owned firms but only the unprofitable privately owned ones. If we can believe this, the privatised "fat cat" has earned the cream by alone daring not to offer outdoor relief to the unemployed.

John Maloney is senior lecturer in economics, University of Exeter.

The Grabbing Hand: Government Pathologies and their Cures

Author - Andrei Shleifer and Robert W. Vishny
ISBN - 0 674 35887 2
Publisher - Harvard University Press
Price - £24.95
Pages - 8

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