About this Issue

It’s called the Tullock Paradox: If you run the numbers, the expected returns to lobbying commonly appear much larger than they ought to be. Bad behavior pays really well, and yet corporations and interest groups routinely pass on what would seem, from a coldly amoral stance, to be easy money. Rational economic actors ought to bid up the price of government favor — and thus bid down the rate of return — but real-world actors don’t do so.

Why don’t we see even more money in politics? To answer that question, we have invited Fred L. Smith, founder and chairman of the Competitive Enterprise Institute, a man who has spent much of his career pondering just this question, and who benefits from an insider’s view of political advocacy.

To discuss with him the potential pitfalls of public choice modeling, we have invited a panel of distinguished academics: Professors Stephen Ansolabehere of Harvard University, Francesco Parisi of the University of Minnesota School of Law, and Raymond J. La Raja of the University of Massachusetts at Amherst.

Lead Essay

Public Choice and Political Advocacy : A View from the Front Lines

In the three decades since I founded the Competitive Enterprise Institute, I have seen the pro–free market intellectual movement grow by leaps and bounds. Many libertarian ideas and policies once considered on the fringe have entered the mainstream of public debate. This is all to the good. In the battle of ideas, we have won some significant victories. Yet, despite these victories, Leviathan’s onward march has continued unabated—as the stagnant economies and crushing debt burdens in the United States, Europe, and around the world show. Why?

My explanation is that the strategies proposed by F.A. Hayek to promote classical liberal ideas through traditional academic means, while compelling as a way to develop the ideas of liberty, are inadequate to the real-world task of ensuring that these ideas result in policy reforms in the political world. Hayek’s view that ideas are powerful things does not address the challenge of ensuring that the ideas that prevail are good ones.

One necessary element for “good” ideas to prevail is that they must be viewed positively, as making the world more virtuous or less sinful. Yet, as I argue in this essay, free market scholars have focused more on “sin” than “virtue”—on how business does “bad” rather than “good” things in both the private and political worlds. In this essay, I will both explore some examples of this trend and suggest some correctives.

Traditional economists have done much to publicize the “failures” of private markets, like pollution, inadequate provision of public goods, or collective action difficulties. While in the political world, many public choice economists present an equally pessimistic view of business practices. Essentially, public choice theory seems to imply that it is futile to try to effect change through ossified government institutions mainly concerned about their own self-preservation. Efforts to liberalize the economy never get off the ground. The tendency of public choice scholars to focus on the bad behavior of business in the political world, combined with traditional economists’ focus on “market failures,” leaves business little to respect about itself in either world.

My framework for examining this question stems from Joseph Schumpeter’s classic essay, “Can Capitalism Survive?” and his gloomy answer, “No, I do not think it can.” Like Hayek and others, Schumpeter saw capitalism succeeding materially, creating the world’s first significant middle class, which in turn created two forces of change in society: entrepreneurs and intellectuals.

Entrepreneurs, Schumpeter noted, would explore ways of meeting new needs or ways of meeting older needs more creatively. Entrepreneurial activities would further growth and thus help create a larger middle class. Intellectuals, he argued, would find statism in their self-interest. (The term “intellectuals” as used here is that defined by Hayek: those who view the world in conceptual terms. The members of this group are not the “original thinkers” but the “second hand dealers in ideas” who craft and disseminate the narratives that frame issues for most of us. )

Intellectuals, Schumpter argued, would favor the growth of government over an entrepreneurial society for both psychological and economic reasons. First, their championing of collective solutions grants them a feeling of moral superiority (Businessmen care about money—we care about people!) Second, as government expands, large numbers of powerful and influential jobs are created, not only in the government bureaucracy but also in the myriad positions—such as vice presidents for external affairs—within firms that businesses creates in order to negotiate with Leviathan. The net result is that intellectuals will see statism as their class interest. Anecdotally, the vote tallies in university towns, ideological surveys of journalists or even Hollywood types provides evidence that Schumpeter was on to something.

The intellectuals’ statist bias is critical, because they craft the narratives that inform most people about public policy. Entrepreneurs and businesses rarely compete in this communications realm. The result is a world where large swaths of the population view the world through pink-colored glasses. In such a world, political trends veer continually toward the expansion of state power.

This is clearly a problem, but public choice economists—whether wittingly or not—have helped foster a sense of despondent resignation in the face of an array of incentives that inexorably favor the political realm over the private one. Moreover, by focusing on the negative role of economic groups in the political process, they have failed to adequately consider the power of ideological interest groups, usually elite-driven, that play a major role in crafting, disseminating and legitimizing the narratives that inform how both business and the rationally ignorant citizenry view the economic world. By broadening its analytical scope, the public choice school could play a more positive role in the effort to liberate our economy.

James Buchanan defined public choice economics as “politics without romance.” Public choice scholars wisely noted that self-interest does not vanish when one enters the political arena. It may seem obvious today, but when that proposal was first announced, it was paradigm-shattering. Note that the public choice school has evolved in a world dominated by Pigovian economics. Pigouvians had argued for significant political intervention in the economy, based in part on their elaborated theories of market failure. Government intervention, they believed, would often be an effective way of resolving these problems.

It should be noted that Pigou himself was not altogether naïve. He was well aware that the history of political intervention in the economy has generally been prone to failure. However, he believed that the evolution of “independent” regulatory agencies, the improvements made possible by “scientific management,” the cultural shifts within in the English-speaking world that made reliance on civic virtue more viable, and the knowledge developed by economists of the ideal outcome of a perfectly competitive economy—all made government intervention far more credible than in years past. Thus, he argued, the path to expanding the power of government to “do good” was now open.

Given that context, the response of classical liberal economists should not be surprising. Progressives had focused on ways in which markets failed; classical liberals would focus on ways in which government failed. Thus, public choice scholars focused on the naiveté of the Progressives’ view that expanding the role of government would solve problems. The result was a theory of government failure to offset the then-dominant theory of market failure. Henceforth, policymakers would face a more realistic world in which all institutions and government policies were subject to failure. There could be no magic bullets!

But, while this focus brought some degree of balance to the policy debate, the overall picture of business painted by economists was negative: Progressives focused on ways in which private action in the private sphere led to social losses; public choice economists looked at ways in which private action in the political sphere led to the same. This focus on failure is all too typical of social policy research. Why was there little focus on the history of private efforts to resolve “market failure” challenges? Why hasn’t there been more followup on the work of Steven Cheung on bees and orchards or Ronald Coase on lighthouse provision? Why hasn’t there been more economic history research broadening the work of Burton Folsom demonstrating often heroic efforts by business to fend off political predation? Or, even more exciting, where business has actually fought to promote economic freedom—the success of the freight rail association in gaining the right to operate in the free market or the success of the Anti-Corn Law League?

That more balanced approach would yield a much wider and richer array of narratives that might better guide businessmen in our mixed economy. That work would also help business schools provide positive advice to their students about entrepreneurial opportunities by resolving “market failure” or by seeking economic liberalization. Moreover, both types of positive narratives help establish better norms for business behavior. Today, after all, the negative narratives encourage firms to avoid politics or to seek favor. The norms that would encourage positive moral behavior in the political world are weak. Norms that discourage bad behavior are valuable, but norms that encourage heroic and moral behavior are even more valuable.

The major point of this exercise is to suggest that the negative moral tales of public choice may mislead businessmen. The focus on the risks of political involvement may encourage them to drop out of the policy formulation process. This is tragic. The path to economic liberalization passes through politics! If the narratives portray only the wickedness of business in politics, they’re less likely to engage in the struggle for economic liberalization. Their withdrawal, their neutrality, will only means that Leviathan will expand even faster. Business needs to overcome the pessimistic fatalism that sees pro-economic freedom political action as futile.

The emphasis of public choice has led many to believe that crony capitalism is rampant. In reality, of the hundreds of thousands of businesses in America, relatively few seek special favors in Washington. Most small firms have no lobbyists at all and wish only to be left alone. Gordon Tullock noted a paradox: If, as public choice theory suggests, the economic benefits (rents) to be gained from government are so high, why is so little actually spent in pursuit? Estimates of lobbying expenditures by corporate watchdog groups and academics, while varied, all seem to indicate that although rent seeking is highly profitable, spending on lobbying is relatively modest, with estimates ranging from $3.5 billion to $30 billion. In a $15 trillion economy and with a $3.8 trillion federal budget (including regulatory costs would add another $2 trillion to that budget), those seem like extraordinarily low levels of “investment” for very high potential payoffs. Those sums seem even more modest when one considers that much of the expenditure is defensive—seeking merely to fend off or modify costly and poorly designed wealth-reducing regulatory initiatives. Yet, one study found a return of $220 for each lobbying dollar spent. So why do businessmen hire engineers or marketers rather than lobbyists? Other factors must be present.

One factor is the nature of politics—an environment where nothing like an enforceable contract is possible. (As Rick Stroup has noted: At best, you rent politicians, you don’t buy them!) In many ways, politics is like a game of chance. One may have done everything “right” to promote an issue, but some external event can intervene—war, financial crisis, natural disaster, political scandal—and the momentum one has built vanishes overnight. Lobbying is akin to liability litigation, a lottery, with high returns but high risks. Lobbyists in political negotiations do not know whether “promises” will be kept, whether the politicians are negotiating with others on an opposing policy. Higher risk means that lobbying is both more expensive and less productive—thus, reducing its extent.

Other factors that might explain the low level of lobbying activity include the dilution effect, the crowding-out effect, and maintenance cost considerations. Dilution means that if one achieves an attractive rent-seeking opportunity offering high profits, one can expect other firms to do so also, reducing the value of that privilege. Crowding out refers to the fact that if too many lobbyists seek the same favor, their voices may be less persuasive. Even politicians have some concept of the need to limit rents. Maintenance cost is the Danegeld issue—one may gain a special privilege but then have to invest year after year in retaining it as changes in the economy, negative publicity, and efforts by other claimants to gain priority come into play. Moreover, while citizen scrutiny of politicians is weak, politicians are in fact worried about being seen as the “Senator from Enron.” And in today’s fishbowl media world, deals may become public and create significant drops in voter confidence. Taking bribes remains for most Americans a contemptible act, and no politician wishes to face that charge. This chills the politicians’ enthusiasm to entertain lobbying that cannot readily be defended in a sound bite.

Gaining that cloak of legitimacy also explains the role of “Baptist and Bootlegger” alliances, coalitions of ideological/moral/intellectual forces with economic groups. Renewable energy is a good example. The environmentalists provide the moral and intellectual case for subsides and mandates, the firms make the economic case for whatever profitable government-favored activity they pursue. In a democratic market economy, one needs both an economic and a moral case. The number of rent-seeking opportunities that meet this test may be much smaller than commonly believed.

Public choice has emphasized the economic partner in Baptist and Bootlegger coalitions, but often the dominant partner is ideological. Consider environmental regulations. While the design and specifics of environmental rules have clearly been influenced by economic interests, the overall thrust to push residual emissions down to zero came from environmentalists.

Perhaps the most neglected consideration is that businessmen, like Americans generally, find little pride in gains achieved through special dealing. For most business leaders, as for most Americans, earned achievements with their concomitant sense of virtue are the only path to happiness. There is something shameful, immoral even, about being “given” success. Has morality been too quickly discounted by economists?

My point is that public choice economists focus on a problem that is smaller than they and the popular media suggest. The dominant, negative stories of crony capitalism—told by both left- and right-leaning academics—have led many businessmen to avoid politics altogether, and in some cases even to join the ranks of the crony capitalists. With intellectuals of all stripes emphasizing only the negatives of business involvement in politics, should we be surprised that business has largely remained passive and defensive as government has grown massively over the last century? And should we be surprised that calls for “driving money out of politics” would have become so powerful? A more balanced view clarifying the positive role of business in that world would be helpful. After all, if money (that is, economic interests) were driven out of politics, we’d be left with nothing but ideological groups. History does not suggest that this would lead to better policies.

Response Essays

What Is the Place of Corporate Money in Democratic Politics?

Most Americans express deep reservations about corporate campaign contributions, expenditures, lobbying, and other ways that for-profit entities are involved in elections and legislation. There are two distinct perspectives on this matter. First, and in widest currency, money is viewed as corrupt or corrupting of the political process. The Populist or Progressive reformer views business involvement with government as bad because it interferes with democratic politics and diverts legislation from what the majority of people want. Second, as Fred Smith’s essay keenly points out, the Public Choice economist views business involvement with government as bad because of the deadweight loss to society of government activity. All businesses seek a competitive advantage, and governments respond to the lobbying and contributions of businesses by passing anti-competitive legislation, such as protective tariffs or regulations, that favor some firms or sectors over others. The more one business or another asks of government, the more distortion the government’s actions will create in the economy.

Yet it is naïve to think that modern democratic politics can be conducted without money in elections or lobbying by firms. Modern elections do not seem possible without the expenses of advertising, organizing, and direct campaigning. Indeed, without the expenditure of money to inform voters about their choices, many voters would not be able to make a decision consistent with their views. Modern legislative politics also does not seem possible if Congress and state legislatures do not engage with businesses. Legislatures must somehow become informed about the effects of any action or inaction on competing interests in society.

Smith’s essay reflects on the deeply normative nature of the century-old debate about money in politics—namely, the moralizing about whether business does bad or good and what it may mean for the pursuit of libertarian ideas. My own vantage on this matter is quite different. I view the flow of money and the activity of corporations in politics as an opportunity to understand the elusive phenomenon of political power. Empirical political science does not begin with the belief that money is power. Rather, it begins with a question: under what conditions would money translate into power or influence? If money is power, what can we learn about the nature of political power by studying the flow of money? In this regard, campaign contributions, lobbying, and the like become useful a measuring stick of political influence and power.

I have always found Gordon Tullock’s insights about rent-seeking behavior to be quite enlightening about when and how money might translate into power. Tullock’s approach is useful precisely because the micro-economic models of firms and firm behavior fit the campaign contribution problem extremely well. What I find shockingly new about his take on campaign contributions (even 40 years later) is that he turned the problem around and made it into a problem that a business or an investor faced, rather than a voter or a candidate.

Tullock’s perspective opens up a wholly different way to understand politics. I and my colleague Jim Snyder distinguish two types of contributors in U. S. elections: Investors, those who expect something in return, and Consumers, those who give for the intrinsic value of participating in politics. Corporations, because they are for-profit institutions, have some expectation of return on their investment. Companies use resources from their own treasuries and the time of their personnel to support their Political Action Committees (PACs), and they sometimes spend or contribute money directly, as was the case with soft money in the 1990s and Super PAC money today. The same may be said or corporate lobbying expenditures. These funds come directly from the corporate treasury and they are subject to the same scrutiny by the company CFO, board, or other entity, as purchases of equipment or hiring and firing decisions. Is it worth it to spend $1 million to maintain an office in Washington DC, or $250,000 to staff a Political Action Committee (let alone raise and contribute money)? The answer for about 3,000 companies in the United States is yes. But few spend exorbitant sums. The largest corporate contributors in 2012 were Honeywell International at $3.2 million in contributions to presidential, congressional, and party committees, followed by AT&T at $2.5 million, Northrop Grumman at $2.4 million, and Lockheed Martin at $2.3 million.

Individual contributors, by comparison, are not readily classified as Investors or Consumers. Most appear to behave as Consumers, giving to their preferred party, to ideological kindred spirits, or candidates with whom they have a personal connection. Some may also behave as Investors, giving with either some immediate personal return, such as appointment to office, or return to their company.

Most money in U.S. elections does not come from business. Campaign contributions come from businessmen and women, but not from business per se. Even after Wisconsin Right to Life and Citizens United reputedly removed a substantial barrier to direct corporate involvement in politics, individual donors still dominated campaign finance.

Corporate campaign contributions, however, are particularly interesting as a measure of political power. What does money as a metric of power reveal?

  • The president and Congress are about equally powerful.
  • Within Congress, the House and Senate are about equally powerful. Their corporate PAC contributions in the aggregate are about the same.
  • For a firm with an interest in a specific committee’s jurisdiction, a congressional committee member is about 3 times more valuable as a typical member.
  • Ways and Means and Energy and Commerce Committees in the House are powerful in all aspects of the economy.

These and other patterns are quite regular in the record of U.S. campaign finance, and their regularity underscores the insight that can be gained from viewing corporate presence in politics from a positive, rather than a normative, perspective.

It is natural to ask, then, what corporate political money is worth. What do businesses get in return? Here Public Choice Economics is less useful. The game theoretic models that have been spun out over the years yield results that run the gamut. Under some conditions it is possible to give a tiny amount and receive an enormous rate of return; under other sets of assumptions it is possible for politicians to do nothing and receive enormous amounts of money. Gene Grossman and Elhanan Helpman’s Special Interest Politics analyzes a full range of such models.

There are two extreme cases, each of which implies abnormal rates of return on investment. At one extreme is a case in which there is one firm and many politicians compete for that firm’s support. In this situation, the firm can extract an exceedingly high rate of return for very small contribution, or can substantially alter legislative outcomes with only minimal lobbying expense. If politics were a sector of the economy in which any corporation or investor could garner high rates of return with little investment, then every large company would be in the game. Not all Fortune 500 companies are, let alone all companies in general. At the other extreme is the case in which there are many firms and one politician whose support all firms require. In this situation, the politician can extort large amounts from companies with little more than a threat. If this were the situation in the United States today (as is the case in many countries), then each firm would be forced to give much more than they do, every firm would have to pay to play, and the return in terms of public policy would be minimal.

The discourse on the role of business in American electoral politics alternates between these two poles. Neither seems reasonable to me, or to most businessmen and women whom I talk to. A more sensible model strikes the balance between these extreme and abnormal cases. There are at once many donors and many recipients, and in a world in which there is healthy competition on both the supply side and the demand side, we expect behaviors more akin to a competitive market than to monopolistic or monopsonistic competition. Like any kind of capital or labor investment that firms may make, politics has a normal rate of return determined by the negotiations among many thousands of people. There is some heterogeneity of quality (power) in the market, but on the whole it is quite competitive. Politics, then, resembles any other productive activity one may invest in; the amount invested will reflect the return one can get.

American businesses give only small amounts of money to politics compared with other productive activities, and the return on their investment, according to the vast empirical literature, is modest, at best.[1] That observation deflects some of the normative criticism hurled in the direction of money in American politics. But it does not detract from the positive value of using corporate campaign contributions and lobbying activities to understand the nature of power in the U.S. political system.

Note

[1] For a literature review see Stephen Ansolabehere, Jon deFiguereido, and James M. Snyder, Jr., “Why Is There So Little Money In U. S. Politics?” Journal of Economic Perspectives 2003.

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 SpeechNow.com 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.

Notes
[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, http://www.opensecrets.org/overview/blio.php
[4]See Advertising Age, October 29, 2012: http://adage.com/article/special-report-pg-at-175/procter-gamble-s-advertising-spending-1987-2012/237974/. 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: http://www.opensecrets.org/bigpicture/index.php

The Political Advocacy Paradox

Fred L. Smith’s essay “Public Choice and Political Advocacy: A View from the Front Lines” suggests that, contrary to the conventional narrative, only a small amount of money is diverted towards political advocacy. To some readers this may sound like surprisingly good news, while to others this may seem disappointing. In this brief comment, I will suggest that—good or bad as this may be perceived—the fact that only a limited amount of resources are invested in political advocacy is neither surprising nor attributable to a previously underappreciated virtue on the part of businessmen.

Politics-like-markets metaphors have inspired much of the academic thinking in public choice and political economy circles. The use of economic models of competition for the study and understanding of political competition forms an established foundation of much of the work of the Chicago school of political economy, and of the Virginia school of public choice. Stigler (1971), Becker (1983) and Peltzman (1990), among others, have provided the theoretical foundations of the so-called efficiency hypothesis of political markets. On this issue, the Virginia public choice school has offered a more skeptical—and in many ways more realistic—view of political markets, suggesting that in real politics, legislative and political bodies seldom work like traditional markets.

Undoubtedly, competition is an important ingredient of political markets. But a political market can be competitive without necessarily exhibiting the features that we generally associate with the idea of a competitive marketplace. Gordon Tullock’s (1967) seminal article lays the foundations for the understanding of the nature of competition by individuals and groups through the political process. Tullock’s idea was followed by the work of Anne O. Krueger, who coined the term “rent-seeking,” which still stands as the fundamental conceptual framework in economic theory for the study of competitive politics and political advocacy. Rent-seeking models consider how political advocates expend costly efforts to increase their probability of receiving or their share of a given political good. The literature that followed focused on how much effort each political player expends, identifying the main determinants of effort expenditures (e.g., Posner 1975, Demsetz, 1976; Bhagwati, 1982; Tollison, 1982, and many others).

This important literature has shown that the conventional results of competition economics did not have a direct applicability to political markets. In a long-run equilibrium, investments in a competitive market yield the normal market rate of return, but this equilibrium result hardly provides any useful benchmark when considering political markets. The rent-seeking literature unveiled the different nature of political competition, identifying conditions under which competitive political markets could lead to higher or lower returns than long-run market equilibria. This literature is of great practical and theoretical significance for the understanding of political advocacy contests, and to explain some of the apparent contradictions unveiled in Fred L. Smith’s essay.

Gordon Tullock’s (1980) rent-seeking paradox can be used to show that in adversarial political advocacy contests with strong contestants, aggregate political expenditures could exceed the value of the political good that is at stake. This could lead to negative expected returns for the players. If given an exit option, rational players should exit the political advocacy contest. But this would leave valuable political rent opportunities unexploited. This framework can therefore explain the surprisingly low levels of investment in political markets. The apparently discontinuous and erratic participation of players in political advocacy can further be explained by the recent solution of Tullock’s paradox offered by Dari Mattiacci and Parisi (2005). In that paper, Dari Mattiacci and I have shown that when political contestants face increasing returns to effort and players have an exit option (e.g., can choose not to invest in political advocacy, given the high cost and low expected returns from participation), valuable opportunities may occasionally remain unexploited. The unexploited political advocacy opportunities may be puzzling if considered individually, but reflect a fully rational mixed participation strategy. The forgone opportunities of active engagement in political advocacy should be viewed as an additional hidden cost that results from strong political competition, rather than as an indicium of weakened political participation.

References

Bhagwati, Jagdish N. 1982. “Directly Unproductive, Profit-Seeking (DUP) Activities,” 90 Journal of Political Economy 988–1002.

Becker, Gary S. 1983. “A Theory of Competition among Pressure Groups for Political Influence,” 98 Quarterly Journal of Economics 371–400.

Dari-Mattiacci, Giuseppe and Francesco Parisi. 2005. “Rents, Dissipation, and Lost Treasures: Rethinking Tullock’s Paradox,” 124 Public Choice 411–22.

Demsetz, Harold. 1976. “Economics as a Guide to Antitrust Legislation,” 19 Journal of Law and Economics 371–84.

Peltzman, S. 1990. “How Efficient Is the Voting Market?” 33 Journal of Law and Economics 27–63.

Posner, Richard. 1975. “The Social Costs of Monopoly and Regulation,” 83 Journal of Political Economy 807–27.

Stigler, George. 1971. “The Theory of Economic Regulation,” 3 Bell Journal of Economics and Management Science 3–18.

Tollison, Robert D. 1982. “Rent Seeking: A Survey,” 35 Kyklos no. 4:575–602.

Tullock, Gordon. 1967. “The Welfare Costs of Monopolies, Tariffs, and Theft,” 5 Western Economic Journal 224–32.

Tullock, Gordon. 1980. “Efficient Rent-Seeking,” in J.M Buchanan, G. Tollison, and G. Tullock, Toward a Theory of the Rent-Seeking Society. College Station: Texas A&M University Press.

The Conversation

Empirical Assumptions about Rents

On a subject that is rife with value-laden claims, my effort is to make a hard-nosed assessment of the empirical assumptions of those claims. What have we as social scientists learned about the effects of contributions on legislation and elections, and what do the amounts contributed to and spent by campaigns mean in the larger perspective of elections, legislation, and business? It is not the case that there are no rents to be gained. Rather, my assessment is that the rents are not exorbitant and out of line with the returns on other sorts of investments that wealthy individuals and corporations might make.

Capitalism’s Survival Depends on Politics

I would like to thank those who have commented on my Cato Unbound lead essay. Although I touched upon some of the mechanistic explanations for “what keeps money out of politics,” my primary intent was to focus on the related question of why business leaders so rarely seek economic liberalization via political engagement. In this response, I address points that respondents have raised to date.

To reprise: My initial piece suggested that public choice economists had focused unduly on crony capitalism while largely ignoring the potential for wealth-enhancing entrepreneurial activity in the political sphere. I also noted that economists generally—and intellectuals on both the right and left—have tended to focus on negative functions of business, namely market failures in the private sphere and rent seeking in the political sphere.

This focus has influenced the narratives that frame public policy issues for most people, thus helping to propagate a distrust of business engagement in politics. Since, as I argued, the path to economic liberalization leads through politics, this has discouraged business from challenging the growth of the regulatory state. Absent that resistance, we have seen a steady shift of the economy toward statism.

My perspective, as noted, is based on the work of Joseph Schumpeter—his essay “Can Capitalism Survive” and his reasons for answering “No.” Businessmen, he believed, would be inarticulate in the political sphere, while intellectuals, seeing the growth of the state as advancing their interests, would have strong incentive to master engagement in the political process. And, fulfilling their role as “second-hand dealers in ideas,” which Hayek so ably described, intellectuals—conceptual thinkers and narrative crafters—would disseminate these negative stories to the citizenry, leading to capitalism steadily losing its legitimacy. In a democratic market economy, loss of legitimacy attracts “entrepreneurial” politicians who champion new interventionist policies. The market shrinks as Leviathan expands.

On the initial question of why more money isn’t spent in politics—a point discussed in the literature as the “Tullock Paradox”—there was, I think, much agreement among us.

However, my posting did not elicit comments on my observation that public choice analysts placed undue emphasis on crony capitalism—that is, the negative role of business in the political world—and the corollary suggestion that public choice economists might give a closer look at the conditions in which business might find it advantageous to seek greater economic freedom in the political sphere.

I also noted that while public choice economists understand well that interest group politics determines much in Washington and that interest groups are both economic and ideological, they seem to view ideological groups as minor players in the Washington power game.

The major point I wished to make was that intellectuals have focused on the social negatives of business (and these certainly exist) but have neglected the social positives, and that this has encouraged a state-broken business community (another Schumpeter term), has discouraged business from engaging in economic liberalization efforts, and threatens to make Schumpeter’s gloomy (to me) assessment a reality. I think it is worthwhile to respond to some particulars from my fellow authors.

Is business the dominant force in Washington? I have been in the public policy arena for over 40 years and have been engaged in many policy fights. Business is almost always present and often dominates, especially when the issue is technical and involves some backroom dealings. But when issues move into the public arena, when the media covers the debate and public opinion becomes an important factor, I find that Schumpeter’s description of business’s role in politics to provide a far more accurate picture: “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose—both in the drawing room and on the platform.” Anecdotes are not evidence, but they do provide a window into ways of thinking. In my experience, businesses tend to adopt preemptive surrender strategies, accepting the validity of almost every criticism, in order to get the latest crisis behind them.

The results are sometimes amusing. At one meeting I attended, a lobbyist for a major firm proudly stated: “We never oppose anything, we like to get along!” That partly explains why some of the most important policy changes in Washington over the last few decades—the environmental laws—were pushed not by business but rather by powerful ideological environmental lobbies. True, some firms have tweaked the resulting environmental rules in their favor, gaining a larger share of a smaller pie, but these remain minor ameliorations of the regulatory costs of well over $1 trillion that now hinder economic growth.

Should we view business efforts to resist the growth of government, to regain economic freedom as negative? The freight railroad sector, facing bankruptcy in the 1970s, sought and won economic liberalization. The result was that an industry barely surviving moved into the mainstream. Shippers enjoyed massively improved services, and in the decades since hundreds of billions of private capital have been expended to upgrade and expand private rail infrastructure. Had such economic liberalization efforts been mounted and succeeded in other areas, America’s current economic plight would be much less serious. As we like to say at CEI: One doesn’t need to teach the grass to grow; simply move rocks off the lawn.

There is a path dependency element in politics. For at least the last century, intellectuals have viewed the role of business in the political sphere negatively, focusing on its rent-seeking crony capitalism aspects. Yet what is truly surprising is that we have seen so little of those. As some of the commenters seem to agree, many (I would argue most) businessmen have tended to see Washington as not only inimical, but irrelevant to their wealth-creation skills and thus have stayed away. But today, with government’s share of the nation’s economic terrain approaching 50 percent, can they remain neutral? Will they be forced to engage the political process to survive? Is it therefore possible that at this stage in the game, an aggressive positive effort toward entrepreneurial liberalization is not only a morally correct option, but also an economically profitable one?

Does competitive politics restrain politicians? The argument that greater competition in the political world—such as more competitive legislative districts—would encourage greater efforts to inform voters on the pros and cons of specific policies is not persuasive to me. I think competition would do much good but communicating with a rationally ignorant electorate poses many problems that are not resolved simply by increasing the information content of those communiqués. Some political observers believe that competitive elections drive candidates toward the “center”—as the median voter theory explains—which in reality means that they encourage candidates to feign support for “consensus.”

How much does product reputation affect political legitimacy? There is much to say about this topic, but I find the linkage weak. An individual consumer can love her car, but in her role as citizen, she can still advocate more extensive regulation of automobiles. That Joan Consumer and Joan Citizen inhabit the same brain does not mean that they often meet, much less agree. Firms face two distinct challenges in achieving sustainable profitability: gaining reputation in the private world to ensure profitability (sales) and gaining legitimacy in the political sphere to fend off political predation. One appeals to the self-interest of the consumer; the other to the values of the rationally ignorant voter. In democratic market economies, it is not sufficient to be “consumer friendly”; one must also be viewed as “socially moral.” The two challenges are very different.

Why do large firms so often become crony capitalists? Large firms cannot easily avoid entanglements in politics, and absent any positive capability for defending their wealth-producing role, they often slip into cronyism or appeasement. Moreover, many of these large firms already have extensive government affairs personnel who maintain close contacts with politicians, which further exacerbates the principal/agent problems that are especially prevalent at firms’ political wings. Here, I believe that Raymond La Raja may have misconstrued part of my argument. I do not seek to posit a set of absolutist propositions regarding political advocacy that “run against some basic understandings about interest group politics in the United States.” Rather, I hope to extend interest group analysis to the inner workings of the firm, where all too often, the left hand doesn’t know what the right one is doing.

Why politics? La Raja correctly identifies one of my key arguments: As I mentioned above, the path to economic liberalization passes through politics. I raised that point to suggest that in recent years public choice economists have seemed not to consider that opportunities for entrepreneurial capitalists—that is, those who are wealth-creators, not wealth-redistributors—to invest in economic liberalization campaigns may be increasing. By focusing on the negative role of rent-seeking capitalists, I argue, they have discouraged business from engaging in politics generally—another reason why there is so little money in politics. Business must engage in politics if it is to regain any significant degree of economic liberty.

However, influence in politics is not primarily about money. The left has crafted powerful narratives promoting the expansion of government; the right has been far less successful. The important task of developing positive narratives and moral arguments that can help gain public support for economic liberalization is the task of free market intellectuals, and I believe that we have largely failed to achieve that goal.

La Raja is doubtful that the counteroffensive to expand the private sphere and regain for it terrain now under political control is viable. He thinks it more likely that we’ll see economic interests continuing to focus on the “physical” rather than the “moral,” and that rent-seeking will continue to be the dominant form of political advocacy by business. Perhaps, but with huge swathes of the economy already politically dominated, and with a federal government nearing bankruptcy, we may be approaching a tipping point. He is right that rolling back Leviathan is a difficult and risky game, but to paraphrase Damon Runyon: I long ago came to the conclusion that all life is six-to-five against.

La Raja cites two reasons why he considers a free-market counteroffensive unlikely. First, there is in a sense no such thing as “ ‘Business’ with a capital B.” Rather, we have a large number of specialized subgroups within which we can expect to find rent seekers as well as free-market entrepreneurs. Second, their competition in the private sphere makes it difficult for them to cooperate in the political world.

The first point is correct, but as the example of the successful freight rail deregulation effort shows, parts of an economy can be liberalized with limited engagement from a set of key interests. Some shippers joined with freight rail companies to push through a degree of economic liberalization. Yet it also raises the question: Must bankruptcy be the only spur that could prompt such behavior? Regarding La Raja’s last point, businesses routinely compete and cooperate. For example, competitors join the same trade associations, which sometimes achieve a degree of cooperative response.

La Raja’s skepticism that public choice theorists could become activists and that businesses could become more effective in the political world is warranted. But I’m not asking that public choice economists “renounce their analytical approach of ‘politics without romance.’” Rather, I suggest that they consider that political action can have wealth-enhancing as well as wealth-dispersal results. And, while I agree that to expect most people to display “heroic and moral behavior” would be foolish, many important changes in the world—for good and bad—have come from exactly such acts. Certainly the left has figures many of whom have been both “heroic and moral” in their cause. I believe that economic liberals are not lacking in these attributes.

Gordon Tullock rightly noted the naïveté of the “civic virtue” model of politics. His focus on how concentrated interests—rent-seeking businesses, organized interest groups—engage in politics as an investment opportunity is important. But again, as in most of the public choice literature, more emphasis could have been given to the conditions that could lead to investments in wealth creation rather than wealth redistribution.

La Raja and I agree that the sums spent on political campaigns seem reasonable compared to the amounts spent to market consumer products. Some estimates have business globally spending almost $1 trillion annually, but, as noted above, selling soap is a different challenge than legitimizing the ability to sell soap in a free market. But it is also worth noting that expenditures on political campaigns are much larger than those spent to legitimize business activities. As La Raja points out, casino mogul Sheldon Adelson spent large sums of money during the last election cycle, but did those large sums accomplish anything of substance? He is right, however, that the “money determines everything in politics” mantra has become dominant, making political marketing to gain legitimacy a difficult task—especially if business seeks to do so by itself.

Stephen Ansolabehere raises several interesting points. He notes that many Americans consider money in politics to be an invariably corrupting element, and that therefore, business should stay out of politics, leaving decisions that affect their survival to Progressive reformers. I agree that many think this way, but to resign ourselves to that reality would be a mistake. As noted above, do we really believe that society would benefit by trying to drive corporate money out of politics, leaving the intellectuals who command the media, the academy, and popular culture as the uncontested arbiters of the narratives that influence public opinion?

I do not agree with his second argument that, “[t]he more one business or another asks of government, the more distortion the government’s actions will create in the economy.” Business can approach government for wealth-creating liberalizing reforms just as easily as it can for wealth-destroying favors. That the past has seen most business engagements falling into the wealth-redistribution category does not mean that the future must be the same.

I found Ansolabehere’s division of contributors into “investors” expecting a return and “consumers” acting for other imperatives compelling. However, I think it more worthwhile to focus this discussion on policy debates rather than elections. The complexity of achieving returns certainly explains in part the paucity of political investments. Too little research has been done on the rates of return that have come, and might be expected, from investments by economic groups in politics. There are studies, but they seem often little more than anecdotal—Corporation A spent y and obtained z! How many sought but failed to achieve anything? And I agree that game theoretic approaches can be less effective in the real world.

The politics-as-market analogy is unsatisfying for another reason. There is a special kind of political “investor” that has escaped scrutiny in the course of this discussion so far: interest groups that are entirely (or overwhelmingly) dependent upon government largess. Foremost among these are government contractors and public employee unions. For these groups, politics is not “[l]ike any kind of capital or labor investment that firms may make,” but rather an all-or-nothing fight for survival.

This brings us back to one of the fundamental challenges free market advocates face. The entrepreneurial capitalists who stand the most to gain from economic liberalization rarely see the struggle for it as essential to their long-term survival. Instead, when they do engage in the political world, they are often in a reactive crisis mode. Such policy myopia is dangerous. If entrepreneurial capitalism is to survive and thrive, it will require its practitioners to have a long-term vision going forward. State intervention into the economy has gone too far for policy inertia to be a viable option.

Back when government accounted for only a small share of the economy, there were few examples of government restricting business and stifling entrepreneurship. In 1890, around the onset of the Progressive era, government was perhaps 5 percent of the economy. It was around that time that the challenge toward maintaining economic freedom shifted from protecting traditional liberties to ensure that the institutions of liberty—property rights and freedom of contract, for example—would be allowed to evolve into new areas, to enable capitalism to adapt to new circumstances and technologies. Unfortunately, much of that development was stunted.

For example, technological changes made the electromagnetic spectrum a valued resource, and property rights were slowly evolving as entrepreneurs sought to make use of it. But that evolution was derailed by Progressives’ insistence that the spectrum should be owned and managed politically. The Federal Communications Commission took over the spectrum, which then became a mismanaged and politically manipulated resource—a problem that persists to this day. Liberating enterprise will require untangling the web of regulatory interventions that to this—in effect, to reverse-engineer the Progressives policy edifice built up over the past century.

Why Capitalism Won’t Be Saved by Politics

Thank you to Fred Smith for his reply to my comments. In his follow-up he reiterated his desire for business to cease lobbying like they are a business and start advocating like an ideological group. According to him, public choice scholars have been losing the battle of ideas by focusing only on the negative role of business, and entrepreneurial business elites have not been pulling their load in pressuring government toward free market policies. In my previous post I’ve explained my skepticism about the possibility of a shift in strategies and emphasis that Smith calls for. I also highlighted the features of the political system that would make such lobbying efforts incremental at best. Here I want to elaborate more broadly on why capitalism is not going to be saved by politics.

Let me begin by saying that Smith underestimates the success of free market promoters. From my perspective, since the 1980s conservative and libertarian think tanks (like the Cato Institute) have done good job changing the terms of debate about the welfare state. Perhaps it has not shrunk as much as he and others would like but it has not grown to the degree that someone like Hayek might have imagined (and that includes Obamacare). In democratic politics, stasis is often victory.

That is small comfort to those like Smith who believe free markets will make society better, and that the nation is wasting precious opportunities and resources by not challenging statism. Since Smith believes that citizens are rationally ignorant and fail to see the social benefits of free markets, he shrewdly sees that intellectuals must create the kind of pro-capitalism moral narrative that both citizens and policymakers can grasp readily.

Smith is right that ideas matter, and ideas with moral weight matter even more. Although I disagree with Smith’s goal of radical free markets, I agree that current arguments in support of free markets do not inspire widespread political action. Of course, economists like Milton Friedman have made moral arguments for capitalism, which continue to resonate with many people. But perhaps the effect is limited because such arguments have been made primarily by economists who, by training, write with a limited conceptual palette. It would certainly help if economists wrote less with equations and more with words. And it would help the cause even more if such ideas spread to other disciplines, where different concepts and understandings might be applied.

However, even if public choice intellectuals could frame a positive narrative, the second part of Smith’s strategy – getting business elites to evangelize the message – is not going to succeed for the reasons I mentioned in my previous post. I’ll add one other point. It is not just the business rent-seekers that undermine Smith’s project. It will be the voters who will not buy into what Smith sees as capitalism’s virtues. It is not necessarily because voters are rationally ignorant but because they are risk averse. Markets create winners and losers. Even if the losers face a temporary setback, what is temporary for someone with no job, no healthcare insurance, or a mortgage in foreclosure? Democratic governments will compensate the losers because they are voters. Indeed, failing to do so could create the kind of social unrest that undermines the stable environment that allows markets to work reasonably well. If the democratic process is responsive and accountable to voters, then all the pro-market lobbying in the world will not alter the government’s inclination to intervene in the economy. I support this trade-off between democracy and capitalism, but Smith probably does not.

The other writers in this current issue of Cato Unbound — Ansolabehere and Parisi – have eloquently explained why investments in politics have limited and uncertain payoff. I suggest another strategy for those seeking broader change. I am no fan of Ayn Rand’s ideas and her literary style is dreadful, but her books have inspired millions of young people. I hear her arguments echoed in my classes every semester. So instead of politics, invest in novels.

A Further Response to Raymond J. La Raja

I’m appreciative that Raymond J. La Raja has written a second commentary on this topic – so I’ll respond (hopefully with greater clarity) to the points he raised in his April 19 comment.

My intent in my original and second posting was not to argue that “business… cease lobbying like they are a business and start advocating like an ideological group.” Rather, I was arguing that in today’s mixed economy (about half private, about half political) business might have neglected profitable entrepreneurial opportunities in the political sphere that are actually wealth-creating rather than wealth-redistributing. I gave one example: the successful effort of the freight rail sector to gain economic liberalization.

That effort was in one sense incremental. Freight rail is but one element within the transportation sector and an even smaller element of the overall economy. However, for the firms involved in this sector, the changes were far from incremental. For the first time in decades, railroads could offer variant price/quality packages — innovations that required great improvements in rail operating efficiencies but that also yielded great value to the automobile and other industries. Many forms of government intervention in the economy (but certainly not all) are sectorial rather than economy-wide. I agree with La Raja that taking on these economy-wide regulations will be far more difficult.

La Raja says that I’ve underestimated “the success of free market promoters,” but I disagree. I do, of course, agree that in the War of Ideas (the debate within the intellectual class) classical liberal ideas have made gains. Rather, as I’ve noted in an another piece, I think Hayek’s point that “ideas have consequences” fails to stress that his analysis applies to bad ideas too. Hayek said little about how ideas become policy. I argue that that narratives must be crafted and disseminated that would legitimize the policies stemming from those ideas to the diverse values of our heterogeneous citizenry. (Thoughts on how this might be achieved are discussed in a paper by The Yale Law School Project on Cultural Cognition.)

To date, I believe that process has been mastered far better by those favoring a larger role for government than by classical liberals. As evidence, I note that for the last 130 years, with some mild and temporary reversals, government has steadily increased its dominance of the economy. The Constitution was (and is) a wonderful document with many checks and balances but it has certainly not proven adequate to restrain the growth of government. So, “stasis” is scarcely the term I’d use to describe the political trends of the last century.

La Raja correctly sees my focus on narratives, narratives, narratives! Democratic market economies require that policies gain a degree of support from the citizenry. They must be seen as morally acceptable as well as economically beneficial. He is right again that too many free market advocates “write with a limited conceptual palette.” This fact is beginning to be realized, as Deidre McCloskey’s work on bourgeois virtues and society shows.

He doubts that a counter-reformation for economic liberty is likely to succeed—a theme he developed in his earlier contribution. We differ on several points, as my last post noted, but revisiting some of those points is perhaps worthwhile.

The Media: La Raja earlier noted that a massive financial investment to liberalize the economy would likely trigger a flurry of media stories and that such an effort would backfire and be seen as an attempt to “buy Congress.” Yes, he’s right, but only if it were done that clumsily (and given the quality of past business and conservative attempts to influence policy it well might be), but the public choice concept of “Baptists and Bootleggers” addresses this point. My claim was that it might be possible to craft an alliance of entrepreneurial businessmen who could exercise their wealth-creating skills more effectively in a liberalized world and intellectuals who would be able to craft narratives that might legitimize such reforms. Those favoring the growth of the state have been successful using such tactics to overcome the status quo. Is it impossible that classical liberals might do the same? Still, the cautions given by La Raja are certainly appropriate.

One minor point: La Raja suggests that voters may or may not be rationally ignorant but certainly are “risk averse.” Markets create “winners and losers.” I would agree in part, but America remains (at least compared to Old Europe) far more optimistic about innovation. There was no significant opposition to freight rail liberalization. Moreover, this favorable view of innovation reflects a more positive view of “creative destruction” and a realization that all innovations introduce new risks but can also reduce older risks. We’re in a risk/risk world, and I do think that Americans are more aware of that reality than La Raja suggests.

Editorial Note

Welcome to the New Cato Unbound

Welcome to the newly redesigned Cato Unbound. Here you’ll find all the original content from the first issue up to the current, delivered in a sleek, clean, easy-to-use design. 

Some things, of course, are worth keeping — like the in-depth conversations, the challenging topics, and the wide range of invited authors. We hope to bring you many more of those at the new Cato UnboundWe also invite you to join the conversation on Twitter and Facebook.