Category Archives: Public Choice

Virtuous Capitalism in Theory and Practice

Government is responsible for billions and billions of dollars of corruption and corporate welfare. Considering the potential returns on investment compared to honest entrepreneurship, it is a minor miracle the vice-to-virtue ratio in the economy isn’t even worse than it already is. Why is that? CEI founder Fred Smith and I wrote a recent paper, “Virtuous Capitalism,” which explores several possible answers to the question.

If you don’t have time to read the whole thing, Fred summarizes it in his most recent Forbes column, to which I contributed:

Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars-worth of special privileges?

Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?

Read the whole column here. The paper is here.

Virtuous Capitalism vs. Rent-Seeking

Over at the Institute for Energy Research’s Master Resource blog, I have a guest post summarizing Fred Smith’s and my recent paper, “Virtuous Capitalism.” The post is here, and the paper is here.

Ethics and Rent-Seeking

Nice writeup of Fred Smith’s and my recent paper at Business Ethics Highlights.

Virtuous Capitalism, or, Why So Little Rent-Seeking?

The venerable Fred Smith and I have a new paper out today. Click here to read it. In the paper, we try to solve the Tullock Paradox, named for the late, great economist Gordon Tullock (my remembrance of him is here).

What is the Tullock Paradox? It involves rent-seeking, or seeking special favors from the government. Bailouts, subsidies, and regulations that prevent competition are all examples of rent-seeking. To provide some context, lobbying is roughly a $3.5 billion industry, and the federal government doles out more than $100 billion in corporate welfare—meaning rent-seeking is potentially a 30-fold investment. Not 30 percent, 30-fold. Meanwhile, the Dow Jones averages an 8 percent return. With such outlandish returns on investment, the Tullock Paradox is: why so little rent-seeking?

Tullock had his answers, rooted in economic reasoning, which we summarize in the paper. But while Tullock’s theories are valid, they’re missing something: ethics, virtue, and a full picture of humanity. Most economists stick to analyzing a Homo economicus character who is unfailingly rational and utility-maximizing. This is a useful and interesting species to study, but Fred’s and my goal is to encourage economists to study Homo sapiens as well. We are capable of pride and shame, we want to love and be loved, we aren’t always 100 percent consistent, and we make mistakes all the time.

One reason there is so little rent-seeking is that most (but not all!) businessmen and entrepreneurs have a sense of virtue and honor that prevents them from seeking special favors. It is much more satisfying to make an honest living than a dishonest one. This sort of thing is difficult to quantify, but it is real, and economists should allow virtue to exist in their models.

Moreover, economists’ single-minded focus on sin means they’re only doing half their job. They should also praise and encourage virtuous behavior when they see it. Praise where due, not just criticism where due. Just as rent-seekers deserve opprobrium, honest entrepreneurs deserve to be admired and emulated. Maybe if virtuous capitalists had higher social standing, there would be more of them.

Over the next week or two, we’ll be putting up a series of short posts explaining Tullock’s “Big Four” theories for why there is so much less rent-seeking than one would expect. Besides providing a rent-seeking primer for those who don’t have time to read our entire paper, we’ll also delve into our larger project of encouraging economists to study Homo sapiens as well as Homo economicus, and to acknowledge virtue as well as sin.

Read our paper here.

GOP Split over Cronyism?

The Daily Caller’s Guy Bentley has a good piece on Ex-Im, OPIC, and the GOP’s conflicted relationship with big business. He also quotes Mercatus’ Veronique de Rugy and yours truly.

GE’s Outsized Reaction to Ex-Im Expiration

General Electric recently announced it would not move its headquarters to Cincinnati. The reason for this earth-shattering news is that some members of Ohio’s congressional delegation oppose reauthorizing the Export-Import Bank. GE is a major beneficiary of Ex-Im financing.

The announcement costs GE nothing to make, as the top contenders for relocation apparently include New York and Georgia. It expects to reach a decision by year’s end. GE, currently headquartered in Connecticut, is mulling a move as it sells off most of GE Capital, its financing arm. Connecticut’s high taxes and unfavorable business climate are also factors in GE’s relocation decision, though apparently GE only pays the state minimum in corporate tax–$250 (GE and its employees pay plenty of other taxes, though). Most of GE’s Connecticut employees work for GE Capital, whereas most of its other operations are elsewhere—including, ironically, Ohio.

GE also announced that, because of Ex-Im’s uncertain future, it is moving 500 jobs overseas. Then again, this isn’t exactly big news, either. GE has roughly 307,000 employees, so this is equivalent to about one sixth of one percent of its workforce. GE’s natural turnover from retirements, hirings, and firings is orders of magnitude higher. Also worth pointing out: about 55 percent of GE’s employees are already overseas.

Rep. Jeb Hensarling, one of the House’s leading Ex-Im opponents, made the astute point that GE “is leaving Connecticut because the state’s taxes are too high and is choosing to send jobs overseas because U.S. taxpayer-provided subsidies are too low.” In short, GE is making dire-sounding but insignificant announcements to make a political point. GE wants special government treatment that most other companies don’t get. Since some of those favors are being threatened, the company is throwing a tantrum.

Most congressmen are skittish creatures, eager to avoid angering large companies and their public relations departments. GE’s chest-beating may well throw many members back into line. But at least some members are willing to call shenanigans in this case. But are there enough backbones in Congress to prevent Ex-Im’s upcoming reauthorization attempt? Time will tell.

Reminder of Basic Principles

From p. 158 of The Social Dilemma, Volume 8 of Gordon Tullock’s Selected Works:

Altogether, the extent to which people have freedom is more or less an inverse function of the number of laws in force.

Think of it as a very 20th century way of saying the same thing Tacitus said about two millennia ago:

The more corrupt the state, the more numerous the laws.

Some principles are timeless. One of them is that simplicity is beautiful, and honest.