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.