A culture of rent seeking

Two asides are perhaps useful at this stage. First, obviously, not everyone in a community needs to believe that rent seeking is advantageous and a legitimate strategy to pursue gain for rent seeking to occur in that community. It is enough that some actors view rent seeking in this way. At a minimum, the parties to the political exchanges involved in rent seeking, and those in a position to observe as well as curtail or prevent those exchanges who opt not to intervene, must at some level view the exchanges as legitimate. Second, by saying an economic actor views something as legitimate, we simply mean that the actor does not view it as out of bounds. We do not mean that the actor has or could articulate a fully worked out and consistent moral justification for a particular activity or set of activities.

See Congleton et al. (2008) for an extensive overview of the rent seeking literature. This particularly complements our paper, as the authors sought to include papers that are consistent with the notion of institutional origins to rent seeking and that imply institutional reforms are necessary to lessen societal losses associated with rent seeking.

As Storr (2013, p. 89) explains, culture “gives content and character to institutions. The ‘same’ institutions are, thus, likely to have different meanings and to be given different moral weights in different cultures. For example, the moral meanings and import associated with failing to greet a subordinate as you enter your workplace, or with lying to a potential customer, or with stealing office supplies from your place of employment are likely to be culturally specific even if there exists very similar if not identical de jure and de facto rules around greeting strangers (even subordinates) in the morning, and against lying (even to potential customers), and against stealing (even from your workplace).”

Calabresi (2016) referred to this as the legendary Minneapolis 5% tradition.

This definition is consistent with that offered by Hillman and Ursprung (2000). Additionally, as we note below, while more than a single member of a community must view rent seeking as legitimate for us to suggest that a CoRS exists, not all members of a community need possess a CoRS for us to say that a CoRS exists in that community. It is, however, likely that the more people there are in a community who share the view that a particular form of rent seeking is legitimate, the more incidences of that form of rent seeking will occur in that community.

In this paper, we employ North’s (1990) definition of institutions and his model of institutional change. However, this is not the only definition of institutions in economics. For instance, Greif (2006, p. 30) defined an institution as “a system of social factors that conjointly generates a regularity of behavior,” or, more specifically, “a system of rules, beliefs, norms, and organizations that together generate a regularity of (social) behavior,” where these factors are “man-made, nonphysical factor that is exogenous to each individual whose behavior it influences.” Greif believed institutions are endogenous and represent the equilibria, not the rules, of a game.

In the Indonesian language, for instance, there are: bribes given to soothe or ease the process (uang pelican); bribes to look the other way (uang rokok); bribes given with the expectation that a promise will be kept (titipan); bribes paid in gratitude for a rendered service (uang terima kasih); a cut from a profitable, but illegal, activity (jatah); the opportunity to receive a cut from government funding or project (proyek); and several others (Collins 2007).

For instance, in the late 1990s, the Russian central bank was engulfed in a scandal: an offshore company, speculated to be controlled by private Russian business interests, has secretly managed billions of dollars of the country’s foreign exchange reserves over the course of 7 years. When Boris Fyodorov, the former finance minister, questioned this arrangement, he was told to mind his own business. “It was, he says, a money-making scam for the government's cronies and corrupt officials in the Russian Central Bank. ‘They were simply allowing friends to earn handsome profits’” (Reeves 1999). IDEM Foundation (1998) observed:

An anti-corruption law was adopted by the Russian duma (parliament) in November 1997. The law did not designate as illegal the participation of an official figure in commercial activity for personal benefit. The law did not designate as illegal the use of an official position to divert state resources into private commercial entities for personal benefit, with the involvement to this end of relatives and/or other persons. The law did not designate as illegal the granting of privileges to private commercial structures by an official figure for personal benefit.

Again, lobbying, logrolling and coalition building are not necessarily rent seeking. They are only rent seeking if the expenditures on these activities are socially wasteful or their ends that they are aimed at are not socially beneficial.

See Alesina and Giuliano (2015) for a comprehensive overview of empirical studies in economics that investigates culture’s impact on economic outcomes, and explores the relationship between culture and (formal) institutions.

Granted, although North (1990, p. 37) primarily regarded culture as an informal constraint in an institutional context, he emphasized how “the cultural filter provides continuity so that the informal solution to exchange problems in the past carries over into the present and makes those informal constraints important sources of continuity in the long-run societal change.” He acknowledged that informal rules, such as culture, convey tacit knowledge; merely having explicit knowledge about formal rules would not suggest how an individual should act (and whether his actions would be accepted) within a particular society.

As Weber ([1905] 2002, [1905] 2011) explained, an “economic spirit” is a shared perception of how economic success is attained and what economic success looks like. It could alternately be described as an economic culture or a culture of enterprise. In his famous book, The Protestant Ethic and the Spirit of Capitalism, he described the West as possessing a spirit of capitalism characterized by a worldly asceticism that was derived from Calvinism. But, he also noted that different economic spirits were likely to exist in different times and places.

As Mitchell (2012, p. 30) wrote, “[p]rivileges limit the prospects for mutually beneficial exchange—the very essence of economic progress. They raise prices, lower quality, and discourage innovation. They pad the pockets of the wealthy and well-connected at the expense of the poor and unknown. When governments dispense privileges, smart, hardworking, and creative people are encouraged to spend their time devising new ways to obtain favors instead of new ways to create value for customers. Privileges depress long-run economic growth and threaten short-run macroeconomic stability. They even undermine cultural mores, fostering cronyism, blurring the distinction between productive and unproductive entrepreneurship, and eroding people’s trust in both business and government.”

Only Alaska and Mississippi have higher conviction rates of public officials for corruption (Glaeser and Saks 2006, p. 1058).

Murphy et al. (1991), similarly, described how human capital can be reallocated in when the payoffs associated with rent seeking increase. As they conclude, the ablest people in a society will switch into rent-seeking occupations when the benefits associated with rent seeking are higher. This, in turn, has a negative effect on economic growth.

As suggested above, culture shapes the meanings that community members attach to the use of their social capital and resources. Imagine, for instance, a community comprised of multiple individuals who are politically connected. If a CoRS exists in that community, then we should expect community members to use their connections to gain privileges. If no CoRS exists or there exists a culture where rent seeking is illegitimate in that community, then we should expect that social capital (i.e., the network with politically influential members) to go untapped for rent-seeking activities.

Take Dagen H, or Högertrafikomläggningen, as an example. On September 3, 1967, Sweden switched its traffic from driving on the left-hand side to the right-hand side. To ease this switchover, the Swedish government tasked a state commission with overseeing the switch. The committee widely publicized how the switch would logistically occur with a large national campaign and sought to facilitate the switch by changing road signs, repainting streets and reshaping intersections for traffic basically overnight. Yet there were still minor accidents reported on the day of the change and on the first weekday after the switch. This is certainly not an instance of changing the existing attitudes and thoughts of a group of individuals. But it serves to illustrate how a society, looking to merely adjust a behavior that is not so deeply ingrained into the culture, still underwent an adjustment period after when a great deal of information was provided to the public by the government.

See also Boettke (2001).

As Levin and Satarov (2000, p. 125) explained, “[f]or instance, in the old system there existed special kinds of ‘securities’: documents with a collection of visas, permissions and authorizations ranging from a village in Soviet to the Politburo. The necessity of obtaining these permissions allowed the informal conversion of administrative capital into economic capital. Such practices existed in all branches of authority and at all levels. The tradition has persisted.”

This is, of course, not to say that FEX institutions never stick nor succeed. Boettke et al. (2008) pointed to Japan and West Germany’s successful reconstruction after WWII as instances when FEX institutions stuck. Their main point is that any institution or institutional change (whether they are endogenously or exogenously motivated) must align well with the local culture.

Some casual observations suggest that the younger generation do and prefer to split bills. See also Choe (2016) and Shin (2016).

These evening outings and parties were so frequent that South Korea has a booming industry producing a variety of dietary supplements that lessens or cures hangovers (Babe 2016).