26 January 2018

How to liberate the captured economy


The dominant political narrative surrounding inequality is one in which a powerful elite have rigged the rules of the game in their favour, lining their own pockets while the rest of us find it harder and harder to make ends meet. It was different versions of that message that gave Bernie Sanders and Donald Trump’s campaigns such force during the most recent US presidential election. It is the sentiment behind Jeremy Corbyn’s “for the many, not the few” and even Theresa May’s “a country that works for everyone”.

A persuasive and provocative new book argues that this “folk theory” of inequality is wrong. Yes, the economy is rigged – but not in the ways that many people think.

The sub-title of The Captured Economy, “How the Powerful Enrich Themselves, Slow Down Growth and Increase Inequality”, may give it the air of an Owen Jones column, Paul Mason tweet or Elizabeth Warren speech. But don’t be deceived; its authors are restating the case for free-market liberalism.

According to Brink Lindsey and Steven M. Teles, a liberal and libertarian who teamed up to write The Captured Economy: “In real and consequential ways, the economic game has been rigged in favor of people at the top.”

Government, they argue, can be socially regressive. In all sorts of ways, it redistributes wealth in the wrong direction, taking from the poor to give to the rich.

This reverse Robin Hood act has come about thanks to the “proliferation of regulatory rents”. In other words, government policies have created artificial scarcity by giving some market participants a special advantage. The result is exactly the wrong sort of inequality.

This kind of rent-seeking isn’t just unfair. It’s also hurting the economy as a whole. As the barriers to entry rise, the creative destruction that is an essential feature of a dynamic economy comes with higher costs.

Lindsey and Teles identify four areas where this problem is particularly acute: finance, intellectual property, occupational licensing and land use. They argue that it’s overwhelmingly subsidies for financial institutions that are to blame for too much risk taking. Patent and copyright law have been extended to a point at which they “render useful ideas inaccessible”. The growing need for everyone from physios to gardeners to have some form of accreditation raises the costs for newcomers. Restrictive planning laws put an artificial cap on the property supply, making homes more expensive. This, they say, is just the tip of the iceberg.

Lindsey and Teles are not simply making the case for “less” government. One of the striking things about the substantive examples they raise is that they eschew the established dividing lines between Left and Right. There is plenty for Democrats and Republicans to agree on in The Captured Economy.

The book chiefly concerns the United States, but there are lessons for Britain too. Many of the issues raised — especially the problems with the housing market — translate almost exactly. But the most important point is more general than any particular complaint, sensible though many of those are. Arguing against the enemies of the market — who are more popular today than they have been for a generation — has become an exercise in justifying the status quo. The Captured Economy is a reminder that economic and political liberalism is a radical force that isn’t just responsible for much of the prosperity we enjoy today, but could be the source of so much more.

I’ve written before about Westminster’s mistaken assumption that Britain’s problems are caused by “too much capitalism”, to which the response should be “more government”. Lindsey and Teles’s point is less ideological; much of the problem is a question of political procedure. As Richard Reeves put it in an essay on the book, the authors “show how political power is converted to regulatory power and then to economic power”.

The problem of rent-seeking is hardwired into democracy. Thanks to what the economist Mancur Olson called “The Logic of Collective Action”, when a small group has a great deal to gain from a given policy they have a strong incentive to lobby for the piece of regulation in question. Even if the costs outweigh the benefits, they are spread so thinly that there is little incentive to lobby against the policy. This problem of concentrated interests versus diffuse interests plagues everything from copyright law and planning law to tariffs and subsidies.

How, then, to guard against the rent-seekers?

To get around the concentrated interests problem you need a vibrant civil society populated not just by organisations that defend specific interests but third parties with the resources to offer up counter-arguments to the rent seekers. All too often, they are the only ones to show up to the public but poorly attended committee meetings where all sorts of important decisions are made. Backing the rent-seekers becomes the path of least resistance.

“Exposing the weaknesses of the [their] claims and the naked self-interest behind them is not rocket science, but finding opportunities to do so requires someone to be constantly, carefully building a case and looking out for opportunities,” argue Lindsey and Teles. The irony is that solving the rent-seeking problem depends in part on generosity of wealthy individuals: “It is necessary to check the malignant political influence of the rich and powerful with countervailing influence by other elements of the rich and powerful.”

Simplicity also helps. The more labyrinthine the rules, the easier it is for rent-seekers to exploit their privileged position. Carillion would appear to be a classic case of this problem. The now-defunct firm started as a construction business before branching out a range of other services. The one thing these types of work had in common is that they are outsourced by the government. When Carillion won work, they would often sub-contract it out. In other words, Carillion’s business was built on their ability to win government work. When navigating a bureaucratic process like outsourcing is a skill in itself, you know things are too complicated. Again, this is not a case of big or small, but clarity over intricacy.

The rewards for success are high: the liberal case for the market has always been about power, and the way in which the invisible hand disperses it. And so tackling the kind of injustices described in The Captured Economy would demonstrate arguments that fall on deaf ears: that the John McDonnells and Jeremy Corbyns are wrong; that the market isn’t the means by which the rich keep the poor down. In fact, handled properly, it’s the exact opposite.

Oliver Wiseman is Editor of CapX.