No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fourteen: Decision-making in Democracy: Public Choice 344 were social welfare losses in addition to the deadweight losses identified by Professor Harberger—and Tullock showed that the total of these costs could be quite substantial. Tullock’s personal research found that these costs, which were subsequently called “rent seeking,” could manifest in significant, socially unproductive behavior. Tullock observed that beggers in China would often mutilate themselves to look more pathetic and increase the returns from begging. Similarly, he found that local governments might let their roads deteriorate to such a point that their grant applications for state and federal funding would be received more favorably. Many would agree that it would be socially more valuable for our country to produce more engineers and less lawyers and lobbyists, but the rewards from the pursuit of monopoly profit steer considerable resources toward rent seeking activities. Since “incentives matter,” what would be the best social policy to steer resources away from wasteful rent seeking and toward productive activity that generates real goods and services? Hint: it will not be to pass more laws restricting or regulating lobbyists! POLITICAL BARRIERS TO ENTRY Are profit-seeking monopolists only active in the market arena, or can they exist elsewhere? Not surprisingly, many aspects of life feature attempts to limit competition, to include erecting significant barriers to entry. Islamic nations make proselytizing illegal, and charges of defaming their prophet are punishable by death. Most “cults” mandate members’ separation from outside influences to stay “pure” to the cause. Unions push for “prevailing wages” legislation to force government to only hire union workers in all its construction projects. Male suitors may threaten violence to competing males in the dating game, and increasingly we see similar behavior by females. Clearly, monopolists in the market place are not alone. Politicians also engage in erecting barriers to entry to preserve their political power. How do you explain that Congress is habitually unpopular and yet incumbents almost always win (90% in the House of Representatives in 2012) ? The conventional wisdom is that while Congress as a whole is unpopular, individual members are personally HOW LARGE ARE THE COSTS OF RENT SEEKING? Laband (1988), using a crude measure of unproductive legal activities (lawyers), estimated the costs of rent seeking in 1985 to be over 20% of economic output! Later research has also focused on the opportunity cost of the resources used in rent seeking—there is a loss of consumer surplus that would have accrued the resources’ alternative use. So how can we reduce this cost? Bees flock to the honey; if you want to reduce rent seeking activity you must reduce its rewards. As long as the federal government has the power to erect barriers to entry or grant special privileges, lobbyists will pursue the monopoly profit. Reducing the government’s role in the economy would reduce the incentive for unproductive rent seeking.