"The man who prefers his country before any other duty shows the same spirit as the man who surrenders every right to the state. They both deny that right is superior to authority."
Lord Acton

Tuesday, March 1, 2011

Rent Seeking at the Empire

 I would like to respond to Jesse's  post "A Microcosm of the Market Manipulation in the US and repeated failure of Ideology".  I agree with him that there is systemic corruption, I agree that there is rampant white collar crime in the financial sector, however, I must disagree with his statement:

"The problem is not that there is too much government, but rather, the government which you have is tainted with corruption and needs a thorough cleaning and reform. Knock down all the fences if you will in the name of an unsustainable ideal, and give the ravening wolves free range for their plunder. And then be surprised."

This popular consensus paints the picture of two options, one being anarchy with no rules which will unleash further the criminality of those exploiting the weak.   The alternative narrative presents that cleaning the current government, (a wash and a fresh coat of paint), and some new laws (presumably  re-enacting Glass-Steagall) will create a healthy framework going forward.  I disagree.  The problem lies deeper than that.  There is a third and just option. It is fact that increasing government legal hoops create an environment biased towards big business and enables the very fraud that results and we all criticize.  Large, centrally controlled government is cause and consequence (recursive) of this type of corruption regardless of innocent original intentions.  The act of enlarging the government creates operational space for frauds of all types and especially the "heads: I win, tails: you all lose" games.   One does not blame the flies for swarming the stinking garbage, or further create house fly association rules, limiting the population to a arbitrary number per cubic foot.  One must understand the incentive structure and take care not put in place incentives that could produce a very bad outcome. 

Mega companies are dependent upon a unfair playing field created by government,  else, inevitably they will destroy themselves or recede to a natural sustainable and competitive size, it is creative destruction.  Additional specific laws (commands as Bastiat calls them) merely serve to water down the laws that exist on the books outlawing criminal activity.  Fraud and theft have been illegal for years.  These protective barrier of laws and requirements become impossible for the little guy to enter the market.   One must hire a team of legal and compliance specialists to merely ensure one is following the law.  This entrenches the businesses that are currently serving those markets and limit their competition. This stamping out the little guy occurs with every industry, from beer, defense, agriculture, and finance.  Big government naturally makes friends with large business bailing them out along the way and snuffing out their competition (Railroad, Lockheed, Chrysler, savings and loans, Airlines, Banks, Fannie and Freddie, et al).  Big business employs many people, and it is good for elections to bail out the big employers  - neutering the hugely important force of Creative Destruction

Example: Anyone who has traveled to Washington DC several times over the past 10 years should be able to reasonably assess the growth and size of big government largess and may have witnessed the inherent corruption. One of these areas of largess is defense contracting.  I grew up with much of my family working for the defense contractors of yesteryear (during the cold war) and remember the feeling of important business being done to protect the country. Contrast that with what is happening today.  As one who has worked in military service and later in defense contracting, I have witnessed personally the motivations and operations of several of these types of companies.  The management has changed from the 1970s, and past staple missions of dutiful defense of the country has been replaced with a healthy portion of rent seeking.   It wasn't perfect in the 1970s, but it's much worse now.  I have seen a hundred washed up, painfully incompetent, pig headed, but most importantly, politically connected Lt. Colonels, Colonels, and Generals who were recruited to nameless defense contractors to run a division.  An incentive structure is created between military and business, businesses create a safety net for military officers who "make friends" with these businesses.  Someone said recently that baseball is no longer the national pastime, it's rent seeking.  If this scenario sounds scarily familiar, it should.  We see the same situation play out in the financial sector.  Big business and big government are truly best friends. 

I think it was Richard Epstein who recently said that the modern administrative state precludes the effective rule of law, now pleasant sounding, but hollow sentiments take it's place.  As a result the congressional federal register has become more important than the voting record.  Without effective rule of law beholding government and business for fraud and theft, our future may be dark.  Net, if one wants freedom, increasing quality of life, equality and justice for one's self and one's children there is no quicker highway to ruin than an ever-growing government which annexes power arbitrarily. 

No comments:

Post a Comment