The word entangle invokes images of unordered organic growth
where vegetation emerges and entwines into a chaotic and unproductive
mass--more like a jungle than a garden. In contrast, we imagine a plot of land that
relies on a benign gardener to selectively prune, pluck, and fertilize, thus
encouraging orderly growth and maximizing the resulting harvest. These two
images, when applied to the economy and the role of government, express the traditional
perspective of the “inevitable chaos” of an untended free market and the
“essential” role of a benign political gardener who steps in to extricate the
economy from chaos. An efficient economy, after all, is dependent on the
discipline supplied by well-defined and enforceable property rights along with appropriate
efforts to lower transaction costs.
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| Figure 1 |
As shown in Figure 1,
consumers seek to maximize utility by providing their labor, in exchange for
wages, and then using those wages to acquire the products and services that
will maximize their utility. At the same time, producers (firms) seek to
maximize profits by combining labor and capital to produce products and
services to sell for economic profits. In this model, the rule-of-law and
property rights are well defined and enforced by a non-meddling polity.
Unfortunately, this naïve view does not take into
consideration that politicians, like consumers and producers, are trying to
maximize something of their own—their influence. After all, to succeed as a
politician is to demonstrate to voters that their faith in you is well
founded—that you can deliver. Politicians trade, using their currency of influence, in much the same
way as the market trades using monetary currency. A freshman senator, for
example, comes into office with little influence to trade, and has to work very
hard to amass enough to make a difference, while a senior senator has a wide
sphere of influence and therefore has the most to trade and to gain.
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| Figure 2 |
As shown in Figure 2,
the polity becomes entangled in the economy when it seeks to increase influence
by garnering votes and campaign donations. In return, the polity provides rents
to both constituents and well-funded firms. In this version of the garden, the
disciplining and steady hand of property rights plays the part of the benign gardener,
while the polity is relegated to the role of the entangling, choking, and
unproductive weeds. These efforts to trade rents for influence inevitably do
more to throttle than to nurture. Perhaps the existence of property rights is
like the addition of a trellis to provide structure on which the economy can
expand and grow, as compared to the political entanglement that uses up
essential nutrients while choking out many productive plants.
There is no bright line between the role of nurturing and
the role of entanglement. The polity is like the bifurcated Dr. Jekyll and Mr.
Hyde, with the potential to both help and destroy. For example, it can be
argued that the introduction of the Café standards for emissions and mileage encouraged
the auto industry to independently innovate and reduce much of the negative
externality created by air pollution. Compare this effort with the entangling
edict in 1975 to include a catalytic converter in every car sold in the U.S. While
this law reduced some emissions, it also bolstered the equity of the patent
holder[1]
to the tune of almost five billion dollars. In another case, the requirement to
inform consumers, with nutritional information on packaged foods, reduced
transaction costs, while the outright ban on the miracle anti-inflammatory drug
Vioxx removed a potentially profitable and beneficial product from the market.
Politicians use the currency of influence to trade for cash,
rents, and even, in a few prurient cases, sexual favors. Accumulating this form
of currency requires making profitable trades with other politicians in the
form of earmarks or reciprocity voting. Voters have the power to strip away the
currency of influence, which explains the effort put into delivering rents to
constituents and special interest groups with deep pockets. Ultimately,
influence peddling leads to market meddling.
[1] Engelhard Corporation was acquired by the German firm
BASF in 2001 for five billion U.S. dollars.
