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Liberal Politics

Just as the Left has failed to integrate prefigurative politics with strategic politics to bring about democratic and egalitarian society as pointed out in the previous posting, so also the Right has more than amply demonstrated its incompetence and impotence to bring about faster and fairer economic growth in the framework of liberal democratic capitalism.

Wherever it can be found, liberal democratic capitalism has given way to corporate statism and crony capitalism, authoritarian populism and ethno-nationalism.
In this milieu, liberal politics is the only ‘radical enlightenment’ of the Right. It professes that capitalism can be made to serve growth as well as fairness by making the economy more competitive and its politics more and more deliberative so as to act as a countervailing power against the rent-seekers’ politics of capturing government policy making in their favour through bribery and corruption.

This reimagined liberal politics outlined well by Lindsey and Teles (2017) follows, to repeat, from the fact that the twin perils of sluggish growth and spiraling inequality are due to the conspiracy by rent-seekers to rig the economic game in their favour, and from the redemptive question posed as follows: How can we have a welfare and regulatory state strong enough to undergird a modern economy and render its outcomes tolerably fair while not using that power to simply transfer resources to the most powerful and best organized? That is, how can we stop inequality from increasing due to upward redistribution in the captured or rigged economy?

The discussion is framed as follows.
In mainstream economics, rents can reflect either natural or artificial scarcity and their existence can be either good or bad for the economy. The demand-determined rent paid to the landlord reflects the fixed supply of land in a location. Nothing is bad about it. Here natural scarcity is the basis of rent. Another natural source of scarcity is innovation, the bedrock of economic growth by way of the introduction of a new product or a new cost-saving production process. Once an innovation proves its success in the marketplace, it takes a while for competitors to match what is on offer or leapfrog ahead with something even better. In the meantime, the innovative firm reaps above-normal profits. These rents are only temporary, and they are self-liquidating; their very existence creates strong incentives for other businesses to whittle them away through competition. Further, these rents are dynamically efficient. The quest for temporary monopoly profits encourages innovation, and the efforts of business rivals to match the original innovator speeds the diffusion of good ideas and thus the growth of overall productivity. Rents are bad when they arise from artificial scarcity due to, for example, government policies conferring special advantages on favoured market participants. Those advantages can take the form of subsidies or rules that impose extra burdens on both existing and potential competitors. Subsidies for financial institutions that lead to too much risk-taking in both borrowing and lending; excessive monopoly privileges granted under copyright and patent law; the protection of incumbent service providers under occupational licensing; artificial housing scarcity created by land-use regulation; high trade barriers and price supports for farm products disproportionately benefitting large agribusiness; legislation outlawing competition from foreign shipping companies in domestic waters while similar cabotage restrictions blocking foreign air carriers from domestic routes; and so on are examples of artificial scarcity creation. The rents enjoyed through government favouritism not only misallocate resources in the short-term but they also discourage dynamism and growth over the long-term. Their existence encourages scramble for more favours instead of innovation and the diffusion of good ideas required for growth.

The term ‘rent’ is most commonly used in a moralized sense to refer specifically to bad rents. In particular, the expression ‘rent-seeking’ refers to business activity that seeks to increase profits without creating anything of value through distortions to market processes, such as constraints on the entry of new firms. These bad rents are found to be too high as reflected in ceaselessly rising corporate profits, widening inequality among firms with the increase in above-normal market returns concentrated among the most profitable firms, and falling new business formation are the result of an increase in government-created bad rents.

The prevalence of rent-seeking indicates the prevalence of institutionalized corruption. In the ideal market economy, the rules of the game are set so that the desire for private gain is channeled into bettering the lives of others. In an ideal democracy, the mechanisms of government are devised so that the clash of contending opinions and interests is converted into policies that serve the common good. To the extent that rent-seeking holds sway, the invisible hand of capitalism degenerates into the grasping hand of crony capitalism, and the lofty pursuit of the public interest devolves into a feeding frenzy of special interests. This degenerative disease of democratic capitalism has taken a turn for the worst in recent decades, making the economy less competitive and less dynamic.

Note that the much glorified Arthur Okun’s trade-off between efficiency and equity no longer holds when the government is actively putting its thumb on the scale to favour the rich. This favouritism obviously exacerbates inequality, but its side effect is to reduce the competition and dynamism upon which economic growth depends. When government policies create bad rents, the end result is always to redistribute income from groups with less political power to groups with more. Note that political power consists of the ability to win distributional struggles over fixed resources. It has been found, for instance, that in the US rents are created for corporations in skill intensive industries. Those corporate rents then translate into higher inequality among individuals as they are passed through either to shareholders in the form of higher stock prices or to high-value employees as stock options have become a major element of their compensation even as tax policy subsidises the purchase of stock by the wealthy and lower income people are unlikely to own stock.

Accordingly, the reimagined liberal politics points to the opportunity now to kill two birds with one stone—scale back regressive (upward) redistribution and enjoy more growth and a more equal society. And since rent-seeking is most successful when politics is least deliberative, countervailing power against rent-seeking needs to be developed by making politics more and more deliberative. Both sides to an economic question should be represented in the political sphere, and when the side of those who pay the costs of regressive regulation can force a dispute to the political surface, true deliberation on the merits will be possible. Also larger political reforms are required to reduce the ability of wealthy rent-seekers to get their way. We need to check the malignant political influence of the rich and powerful with the countervailing influence of the non-rent-seeking elements of the rich and powerful. Apart from the conventional approach of disarming the lobbyists by restricting their use of money to influence elections, an alternative innovative approach can be used in that the policymakers need to be made resistant to lobbyists’ self-serving claims by making them less dependent on lobbyists for policy-relevant expertise and information. Governance has to become smarter and more independent of the interests trying to bend it to the will of the rent-seekers. Finally, the playing board of politics needs to be tilted as strongly as possible against regressive regulation, by creating rules of the game that disadvantage the resources that wealthy rent-seekers bring to the table and increase the visibility of funneling more resources to them. Judicial activism is also required that can nudge democratic decision making toward being more deliberative.

To conclude, the world is bedeviled by the state that has increasingly warped market competition, which has shown up in the distribution of income. It is no accident that many of the richest people have derived their wealth from sectors of the economy where competition has been stifled and distorted. Inequality has become a threat to the political consensus in favour of market competition and dynamism. Little wonder that the economy cannot be changed from its stickiness to be less innovative and dynamic as well as less fair.

The problem with this reimagined liberal politics is simply that the solution of rent-proofing democracy at multiple levels and across different institutions to generate more egalitarian and pro-innovation outcomes, is easier said than done. Good ideas, but bad practices dump us into disarray and downhill race to the bottom.

By Annavajhula J.C. Bose, PhD Department of Economics, SRCC

REFERENCE Brink Lindsey and Steven M. Teles. 2017. The Captured Economy. Oxford University Press.
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