How Political Institutions Constrain the Power of Corporate Money in Politics

Fred Smith makes two intriguing arguments in his essay “Public Choice and Political Advocacy.” First, in addressing the Tullock Paradox, he explains a number of reasons why investments in politics are lower than expected. His argument hinges principally on the uncertainty of the outcome, as well as a failure of imagination on the part of public choice economists and business elites. Second and related, he raises a clarion call for the entrepreneurial business elites to pursue a principled policy agenda for free markets. In doing so, they would be shucking the conventional narrative of rent-seeking “bad behavior” of business. He urges business elites to engage directly in the political process to take on the Leviathan state, which he views as undermining economic liberty and social advancement.

On the first argument, I think Stephen Ansolabehere’s response to Smith complements the latter’s explanation of the Tullock Paradox rather well. Ansolabehere basically argues that there is relatively little investment in politics because business firms can expect very modest returns in the political world. Some investors get nothing for their substantial lobbying efforts and political contributions, while others spend very little yet still hit the jackpot. Taking into account all these transactions, the expected value of the investment does not amount to much. While Smith argues that uncertainty about political outcomes causes business firms to withhold investments, Ansolabehere emphasizes that competitive environment for political money functions like a market economy in keeping prices down. The arguments are complementary and both make a good deal of sense. Smith’s additional arguments about the reluctance of business elites to engage in bigger questions are less satisfying because they run against some basic understandings about interest group politics in the United States. I’ll get to that later in my comments.

In making his case, Smith employs the language of economics to explain the Tullock Paradox. To unpack the black box a bit, I will speak to some political-institutional factors that tend to increase uncertainty for lobbyists and dampen the impact of political investments. These include the following:

The party system. Voters typically do not have much information about politicians, but party labels help them hold political elites accountable. Parties with strong brands push members to stick together, which means individual politicians have less discretion to cut deals with rent-seekers. The level of accountability hinges considerably on competitive elections. When one party dominates, voters get less information and accountability through elections. A system with strong, competitive parties should result in less rent-seeking behavior. This arrangement does not necessarily mean there will be less money in the political system. Parties that are far apart ideologically may attract additional funds from ideologues with strong preferences for one party or the other (what Ansolabehere calls “consumers” rather than “investors”). However, rent-seeking under these circumstances should be minimized.

Constitutional structure. In the United States, the division of power and federalism makes buying new policies a very expensive proposition. The design multiplies the number of gatekeepers and allows entrenched interests numerous options to block change. Invariably, investing in the status quo is a lot cheaper and more effective. Recent scholarship confirms this dynamic. According to one study, investments in politics represent less than five percent of the difference between successful and unsuccessful efforts.[1] Thus, there is a tremendous bias in favor of the status quo, a dynamic that Smith laments because it produces sub-optimal social outcomes.

The media. Lobbying is often construed in a narrow sense. It is more than walking the halls of Congress and making political contributions. It also involves building a strong public image through local and national media. This activity not only helps sell a product, but protects a firm from public backlash in the form of regulations when things go awry (think of the banking sector meltdown and ensuing Dodd-Frank Wall Street Reform Act). An aggressive and scandal-hungry press will make businesses pay dearly for making what appears to be excessive political contributions or doing favors for politicians. For this reason, many corporations favor limits on contributions. It is why the vast majority have not contributed to a Super PAC. It is too risky for the limited payoff. Smith argues that politicians are worried about their self-image, but so are business interests.

Smith’s second argument urges more political activism by business elites to liberate the economy. He writes that, “The path to economic liberalization passes through politics!” For this reason, free market entrepreneurs should stop avoiding politics and start framing positive, moral arguments that will gain public support. I am less inclined to agree with his reasoning here.

First, a few correctives. Business is hardly reluctant to engage in politics and is far from being pushed around by lobbyists who he claims represent “statist” interests. Business interests dominate in Washington. Firms comprise more than 1/5 of the 20,000 active interest groups in Washington. And among federal PACs, 50% are affiliated with business firms or trade associations.[2] These PACs provide more than 70% of all PAC contributions to federal candidates.[3] To be fair to Smith, these are not the kind of business interests he wants to defend. Many of these are rent seekers rather than the virtuous free marketers.

However, I am doubtful his strategy is viable (setting aside my personal views on radical deregulation of the economy). More likely we will continue to observe rent-seeking behavior by business interests, and the absence of sincere moral arguments. Two understandings, rooted in political science research about the nature of democratic politics immediately come to mind.

Pluralism. There is no such thing as “Business” with a capital B. The business community is and shall remain a house divided. Perhaps, as Smith and others suggest, the greatest divide is between the rent seekers and the free-market entrepreneurs, but it is also likely that different sectors of entrepreneurs are pitted against each other in a competitive environment that would make them unlikely partners in a coalition to de-regulate.

Collective Action Problem. Assuming factional interests can be muted in the business community by focusing on limiting government, the problem of getting action remains. As Mancur Olson argued, organizing for a public good—in this case, free markets—is difficult to advance collectively, especially among large groups. The incentives to free ride and continue carving selective benefits are just too great.

Smith suggests that obstacles might be overcome by making “liberation of the economy” an ideological and moral cause among public choice theorists and business elites. Certainly, moral causes can inspire people to act, as Olson suggests. People feel good about participating in them. But Smith is asking public choice scholars to stray far from their intellectual moorings. Remarkably, he is asking them to renounce their analytical approach of “politics without romance” by introducing an element of idealism. Such idealism would spur emotional attachments to a cause. The economists on the left, like Krugman, understand the power of combining moral and economic reasoning. But I don’t see it happening in a tradition where cold-blooded reasoning is a source of pride. Despite my skepticism, I am curious to hear the kinds of positive norms that might be generated from a public choice approach, including those that encourage what he calls “heroic and moral behavior.”

I appreciate Fred Smith’s efforts to reframe questions about the degree and kind of political advocacy pursued by business interests. At the same time I must close by observing that the Tullock Paradox sounds very unconvincing to most Americans. They carry images in their heads of corrupt business lobbyists like Jack Abramoff. And they perceive campaigns awash in money. To be sure, most citizens fail to appreciate how expensive it is to communicate with voters. If Proctor and Gamble can spend as much as $9.3 billion in 2012[4] advertising household goods like toothpaste then surely it seems reasonable that advertising for legislative and executive elections in the most powerful nation in the world should fall in a similar range (estimated $6.3 billion in 2012).[5] Given such public attitudes, it seems that additional political investments by business interests, even for ostensibly moral purposes, might be met with much cynicism and mistrust.

The Tullock Paradox also presents an ongoing puzzle for scholars. While studies are mixed on whether individual corporations get what they want through contributions, studies of aggregate donors suggest that politicians listen much more to the preferences of the donor class than to average Americans. Many respected scholars have come to the conclusion that political donors are distorting policy because politicians listen to their concerns more than those who do not have the resources to contribute money. Thus, there is a systematic bias in the political system toward wealthy interests and, pace Tullock, it appears that the rich are buying democracy on the cheap. Tullock, or course, would wonder why more rich people aren’t making large contributions, especially in the wake of court decisions like Citizens United v FEC and v FEC, which allow unlimited contributions and spending by Super PACs. A few did. Casino magnate Sheldon Adelson, who earns an extraordinary living by playing the odds, spent $150 million in the 2012 presidential election. Given his longtime experience with gambling, I would really like to know what he thinks of the Tullock Paradox.

[1]Baumgartner, Frank R. 2009. Lobbying and Policy Change: Who Wins, Who Loses, and Why. Chicago: University of Chicago Press.
[2]Nownes, Anthony J. 2013. Interest Groups in American Politics: Pressure and Power. New York: Routledge.
[3]Center for Responsive Politics,
[4]See Advertising Age, October 29, 2012: Since US sales for Proctor & Gamble accounted for 35% of 2102 worldwide sales, a very conservative estimate of US ad spending is $3.3 billion.
[5]Center for Responsive Politics:

Also from this issue

Lead Essay

  • Fred L. Smith Jr. argues that while public choice economics can be a powerful tool, it has focused far too much on failure rather than success — markets fail; governments intervene; governments fail in their turn. We are told again and again that there is too much money in politics, and yet, if we quantify the returns to be had from lobbying, we discover that businessmen have actually been holding back. This suggests a previously underappreciated virtue on their part.

Response Essays

  • Stephen Ansolabehere recommends a shift in focus, away from normative claims and toward using money in politics as a tool for understanding the distribution of political power. He shares several of the more important findings from research in this direction and downplays the return on lobbying investment, characterizing it as “modest, at best.”

  • Raymond J. La Raja argues that American political institutions work against would-be buyers of special favors. The party system, the structure of our Constitution, and the difficulty of crafting a national media campaign all mitigate against rent-seeking behavior. That said, the lucky few still manage to earn outsized returns, even while many lobbyists go away with nothing. La Raja is skeptical that businessmen can work the political system toward better governance, and he doubts that the Public Choice school would make an apt partner in the effort.

  • Francesco Parisi argues that markets for political goods are highly inefficient and seldom work like traditional ones. Unexpectedly low levels of political advocacy effort do not reflect a hidden virtue on the part of would-be rent seekers. On the contrary, they indicate that simply that hidden additional costs exist in this area of effort, and that the rents to be sought are not as cheap as they may appear.