Public Choice Theory Criticized - McChesney, Money for Nothing

Feb 03 1998
Commentaries

MONEY FOR NOTHING: POLITICIANS, RENT EXTRACTION, AND POLITICAL EXTORTION
Author: Fred S. McChesney
Publisher: Harvard University Press (Cambridge, MA), 1997 (216 pp)
Reviewer: Albert A. Foer
Date of Review: February 3, 1998
Appeared in White House Weekly

The Commonwealth of Virginia, once known as the "Mother of Presidents", today bears a certain academic notoriety as the intellectual mother of the theory of failing political processes. How far the Common Weal has rolled! The so-called Virginia school of political economy and public choice uses standard economic principles to analyze political behavior, and what it finds feeds the libertarian movement. A recent contribution to this expanding opus comes from Fred S. McChesney, a professor of economics at Emory University's School of Law, whose book Money for Nothing develops a model of routinely practiced political extortion as the basis of political decision-making.

The road to Virginia starts in Chicago, where one might well anticipate a certain cynicism about politics. Regulation was for many years viewed as serving a public interest, but a more Machiavellian perspective began to emerge in 1971 when the University of Chicago's George Stigler produced an interpretation of regulation grounded in the ability of government to benefit private parties by legalizing price fixing, policing cartel agreements, and restricting entry into markets. By making it possible through these and other means for businesses to earn super-competitive returns called economic rents, regulation was revealed to have particular value to the interests being regulated. Indeed, the value was so great that producers would make payments to politicians -in the form of campaign contributions, get-out-the-vote campaigns, intimations of future jobs, and occasional outright bribes-- in return for rent-creating regulation.

Developing Stigler's model of a market for regulation, Sam Peltzman, Gordon Tullock, and James Buchanan, among others, further explored the phenomenon of rent-seeking, showing how various political decisions could be explained by bribes (legal or illegal) paid to politicians for regulatory largesse. The central insight of this "public choice" analysis is that political actors are just like everyone else, which in the story told by economists means that they are rational individuals who act in their own self-interest. Tautologically, if elected politicians and bureaucrats are acting to maximize their own welfare, there is no longer a viable concept of a public interest, because the public's agents by definition have theirs own private agendas.

McChesney argues that this analysis doesn't go far enough. Certainly, politicians may seek votes or money from producers and offer rents from consumers in exchange. "But a politician may also make his demands on private parties, not by promising benefits, but by threatening to impose costs-a form of political extortion or blackmail." In other words, the politician would be paid, not for rent creation, but for withholding action that would destroy existing private rents. What Caesar gives, Caesar can take away. Most of the book elaborates on a model of how politicians force special interests to pay them "money for nothing". Not satisfied with supply and demand curves that illustrate the model, McChesney also attempts to show that the model accurately describes the way the world really works.

For example, when Bill Clinton targeted the health-care system for overhaul at the beginning of 1993, the stage was set for rent extraction. Just as the model would predict, the pharmaceutical companies, which had a lot to lose if the Clinton proposal was enacted, "poured untold funds into the congressional pockets to combat the possibility of price controls." Thus, McChesney concludes, "legislative threats cause the destruction of firms' wealth even when they ultimately are retracted." Another example is gun control. The National Rifle Association, "an organization of millions of gun users, regularly pays politicians, who regularly threaten but then do not institute gun control." And, most important to McChesney's pattern of threaten-and-withdraw is the example of tax reform, which he argues is being placed on the legislative agenda more and more frequently because it is recognized as the ultimate "cash cow", "juice bill", or "fetcher" -the various descriptives used by politicians themselves for bills that are intended to extort money and in-kind benefits from lobbyists.

Such bills do exist, but how much do they stand for? I am reminded of Sherwood Anderson's characterization of "grotesques" in Winesburg, Ohio: "[T]he moment one of the people took one of the truths to himself, called it his truth, and tried to live his life by it, he became a grotesque and the truth he embraced became a falsehood." Here is some of what I find grotesque about the analysis:

First, consider McChesney's examples. In the case of health-care reform, if Clinton had initiated the proposal for the purpose of extracting valuable assets from the companies which would be negatively impacted, then the lobbyists in opposition should have been swearing fealty to him and making contributions to the Democrats. Instead, they were cursing him and throwing their support primarily to Republicans. And whom does the NRA support: the liberals who propose gun control-or the conservatives who oppose it? For the McChesney theory of political extortion to work, there would have to be an enormous conspiracy in which the proponents of a particular regulatory action are in cahoots with the opponents in a complex game of Mutt & Jeff that plays out like this: "I'll scare 'em with legislation; you scoop in the bribes; I'll back down; and we'll split the loot." Of course, if the lobbyists who actually pocket much of the expenditures aren't part of the scheme, the politicians are leaving too much on the table. Grotesque!

Second, let us note a confession by McChesney in his chapter on yet unanswered questions. He observes that politicians' returns from rent extraction appear to be small, relative to the expropriable wealth threatened, and he has no explanation. In McChesney's model, special interest and politician enter into an extralegal contract, where regulatory benefit or inaction is promised in consideration of campaign contributions and other benefits. Political scientists and those who write as lobbying experts, on the other hand, talk in terms of "access" as being what a lobbyist expects as the usual quid pro quo. The opportunity to argue for an outcome is truly valuable, because a politician has only so many ears he can lend his countrymen, but it is much less valuable than the desired political decision being sought. Perhaps the market is working: the low price politicians are getting reflects the nature of what they are selling.

Finally, McChesney and the public choice theorists in general have a view of human nature (their "economic man") which is grotesquely narrow. Ask yourself why some political actors -judges, for example-are generally viewed as making decisions that are not driven by maximization of personal gain. There is no single, agreed upon answer, but many observers are impressed by the role of specialized legal training, a highly developed institutional structure, ethical and legal strictures against conflicts of interest and corruption, and the culturally instilled drive to please peers and specialized critics. In varying degrees, similar pressures apply to politicians and bureaucrats, and this makes for a far more complex model than we are offered.

The over-reaching of public choice theory has political consequences. As McChesney concludes, "The one unambiguous solution for reducing rent extraction is reducing the size of the state itself and its power to threaten, expropriate, and transfer." A better solution may be to beware of anarchistic economists wearing the clothes of political science.