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Virtuous Capitalism

Issue Analysis

Title

Virtuous Capitalism

Why There Is Less Corruption in Business than You Think

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On its surface, this paper is about rent-seeking—private parties’ use of government to secure special favors. In today’s political environment, the question to ask is not why there is so much rent-seeking, but why so little? The federal government spends about $100 billion per year on corporate welfare, yet lobbying is only a $3 billion per year industry. Given rent-seeking’s incredible returns on investment, why is the lobbying figure not higher?

Public choice theorists call this question the Tullock Paradox, in honor of the late economist Gordon Tullock, who is widely credited with developing the modern concept of rent-seeking. Tullock’s economic analysis offers several convincing answers for why there is so little rent-seeking. Those answers are valid as far as they go, but in explaining capitalist vice, they do not go far enough in accounting for another important factor in play: virtue. The purpose of this essay is to convince social scientists to consider ways to incorporate morality and virtue in their analysis of Homo economicus.

Homo economicus is only one part of human nature. We urge social scientists to study the whole human being as best they can. While we confine our analysis to rent-seeking, our larger point—that morality and virtue deserve a place in economic analysis—has much broader implications.

We begin by analyzing Tullock’s “big four” economic explanations for why there is less rent-seeking than one would expect. His first theory is the lottery model of rent-seeking. If the government offers a million-dollar subsidy, a company could potentially spend nearly that much to secure it. But if 10 companies chase that subsidy by spending $100,000 each on lobbying, the winner reaps an astronomical profit. But the nine losers’ combined losses strongly diminish the total returns on rent-seeking as an investment.

Tullock’s second theory involves vote-trading, also known as log-rolling. If a Member of Congress wants to do a favor for a rent-seeking constituent, he must negotiate support for that favor from other politicians, who will ask for their own favors. Since each negotiation eats away at the return on rent-seeking investment, rendering the favor—or “rent”—far less lucrative by the time the Congressman buys majority support for his proposal.

Tullock’s third theory concerns the need to build cover stories. Most people view naked cash grabs like bailouts and subsidies as unseemly. Therefore, companies construct cover stories to make their cash grabs look like something else. Cover stories are not free, and reduce rent-seeking  returns. Cover stories can range from multi-million-dollar national advertising campaigns to hiring lobbyists and public relations professionals. General Motors draped itself in Old Glory when it was bailed out by taxpayers, appealing to patriotic nostalgia about American manufacturing. Renewable energy companies paint their considerable rent-seeking activities in environmentalist green. Established companies often also seek non-cash rents such as barriers to entry, licensing requirements, and other preferential regulations. These are harder to trace than simple cash transfers, hence their ubiquity, but they have much the same effect.

Tullock called his fourth theory the transitional gains trap. Existing rents often require upkeep, which over the long run reduces the rate of return. For example, New York City taxicab medallions secured very nice rents for their owners for a long time, but now that they face viable competition in the form of ride-share services like Uber and Lyft, those rents are going away. Medallion owners are fighting reform because even though they could thrive on a level competitive playing field, giving up their rents would require a very large upfront cost. They are trapped in a bad place, and will continue to waste resources seeking ever-lessening rents.

Having gone through traditional economic explanations for low rent-seeking, we conclude with morality-based explanations, and present several ideas for further research.

Most—but not all!—businessmen, we argue, have a sense of decency or an implicit code of honor that causes them to refrain from rent-seeking behavior, or at least do less of it than one would expect. This virtue defies quantification, which may be why many economists defy incorporating it into their analysis. We seek to encourage public choice economists and other social scientists to gain a fuller picture of humanity than they do now.

A second point we wish to make is that entrepreneurs deserve praise, not just criticism, where due. Economists are quick to condemn unethical behavior like rent-seeking, and rightly so. But they rarely take the time to praise virtue or to recognize the value of cultural restraints on unethical behavior. If abstention from rent-seeking were more widely praised, there might be more of it. To the extent economists focus on rent-seeking while paying little attention to virtuous behavior, they tell only half of the full human story.

We invite academics, students, think tank analysts, and educated lay readers to join this conversation.