Power, Corruption, and Lies

After reading yet another article calling for China to embrace democracy as an antidote to their corruption woes, I decided I should throw my own shallow drivel on the subject up on the web [1]. Would-be reformers often get tangled up in good intentions and what they feel should be, while ignoring the many constraints of human nature. Any solution to the problem of corruption must take into account the answers to two questions:

1. Why do people try to buy influence?
2. What is the return on investment?

Obviously, people try to gain influence in the hope of getting officials to do something for them, or not do something against them [2]. This presupposes that the recipient has the power to effect the desired change. If there is no power to force changes there’s no point paying any amount to gain influence.

Having decided money should be directed to an official, the next question is how much, which is a function of the return on investment (ROI). ROI depends on the power an official has to force change, as well as the competition faced in buying influence. Paying $1 million for influence today isn’t much help if someone else pays $2 million tomorrow. Like any other market, if the market for influence is sufficiently large and competitive, the ROI will be lower, and bribes will generally be smaller and less consequential. Great returns on investment require the combination of enormous governmental power, a significant concentration of wealth, and barriers to entry into the bidding war. Following the 2008 financial crisis this is the situation in nearly every major industrial country and, not coincidentally, corruption has become a more pressing issue around the world.

Anything that increases government power or ROI will promote corruption and the paying of larger bribes. So how do the most common solutions stack up?

  • Making bribes or lobbying illegal  – Power is increased to the extent the laws are enforced, and increased further if they are enforced arbitrarily. ROI is increased by removing some bidders from the market. Therefore, it will be as ineffective as making drugs, sex and gambling illegal.
  • Campaign finance reform – Power is increased by a new mass of regulation and enforcement (again, more so if arbitrary). ROI is higher due to enhancing insiders and incumbents ability to stay in office despite ignoring the interests of their constituents [3].
  • Tougher enforcement – Increases power, dramatically so combined with selective enforcement. Increases ROI by decreasing the number of competing buyers..It will tend to leave only the more powerful sellers of influence in place, favoring big money buyers.
  • Increased transparency – Increases power by creating a new body of regulations to enforce. Decreases overall ROI due to increased costs of staying out of the public eye and adding a layer of palms to grease with no direct monetary benefit. Of course, the downsides can also be bypassed by paying up at the legislative level to craft a more easily evaded law.
  • Democracy – No inherent impact on power or ROI – just count the pages in the Federal Register and look at the ROI on lobbying in the US. In every democracy people will eventually try to vote themselves rich, guaranteeing other people will try to buy their way out of paying for that wealth transfer.

Human nature guarantees there will always be a steady supply of officials willing to take bribes in one form or another, so the only real solution to official corruption is on the demand side. Power is the driver of all corruption, yet limiting the power of government is rarely considered as a solution. Instead the solutions generally involve a further expansion of power with more bureaucrats to carry it out, all of whom are potential purveyors of influence.Eliminating the power of government to do anything for or against anyone is the only thing that will eliminate the demand, so unfortunately, unless people are willing to be anarchists, corruption is here to stay.

There are many parallels with the war on drugs – making illegal voluntary exchanges between willing buyers and sellers – so collateral damage minimization through legalization is probably the most compelling alternative for corruption as well. Giving everyone access to the influence market would at least level the field somewhat – particularly with pooling of resources, and diminish power and the need to influence to a degree, as well as remove a host of unintended consequences.

Hey, I never claimed to have a popular solution.

_________________

[1] Most of the wealth accumulated by high officials in the Communist Party is the natural result of running a system designed to loot the rest of society and is more an agency issue than corruption per se. Political systems are designed so that the rulers get rich, regardless of what they call the system of government they run. Here I’m concerned with the corruption of others trying to influence government officials.

[2] Therefore major regulatory initiatives come out of the woodwork in advance of election campaigns, compelling campaign contributions aimed at altering the regulatory trajectory in favor of the contributor.

[3] Most implementations of campaign finance reform also provide a ready-made Nixonian enemies list of people who contributed to opposition parties.

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