An Absurd Tax on our Fellow Citizens: The Ethics of Rent Seeking in the Market Failures (or Self-Regulation) Approach

In summarizing Heath’s approach, for example, he prefaces what Heath says with “…it is a distinction between firms that succeed fairly in market competition and firms that succeed by exploiting loopholes created by market failures and government failures (Norman 2011, p. 51).” And, again, “…we find it prima facie unethical for firms to try to gain competitive advantage by ignoring legitimate norms, whether they are grounded in market failure, government failure, considerations of justice, public decency, or what have you (Norman 2011, p. 55).”

Writes Heath (2004), “…profit is not intrinsically good. The profit-seeking orientation of the private firm is valued only because of the role that it plays in sustaining the price system, and thus the contribution that it makes to the efficiency properties of the market economy as a whole (Heath 2004, p. 550).”

Writes Heath (2004): “the more promising defense of profit is the Paretian one, which points to the efficiency properties of the market economy as a way of justifying the profit orientation of firms. According to this view, the point of the market economy is not to respect individual property rights, but rather to ensure the smooth operation of the price system. The profit orientation is valued, not because individuals have a right to pursue certain interests, but rather because it generates the competition necessary to push prices toward the levels at which markets clear. When markets clear, it means that all resources will have been put to their best use, by flowing to the individuals who derive the most relative satisfaction from their consumption (Heath 2004, p. 541).” In responding to an earlier criticism of mine (Jaworski 2013), Heath (2013) explains: “…my major claim is that the point of marketplace competition is to promote Pareto-efficiency, and in cases where the explicit rules governing the competition are insufficient to secure the class of favored outcomes, economic actors should respect the spirit of these rules and refrain from pursuing strategies that run contrary to the point of competition (Heath 2013, pp. 50–51).”

I’m grateful to Alexei Marcoux for helping me to see it this way.

In a separate paper, Heath argues that business ethicists, in seeking to give moral guidance to managers and other market actors, fail to see that different moral obligations apply in between-firm contexts where adversarial relationships obtain, and within-firm relationships where adversarial ethics may not be appropriate: “there is, rather, an institutional division of moral labor. In market transactions, the checks and balances built into the system of commercial exchange are such as to permit more instrumental (or “self-interested”) forms of behavior. In administered transactions, by contrast, these checks and balances are absent (indeed, managers often wield great power over the lives of subordinates), and thus the institutional context calls for much greater exercise of moral restraint.” (Heath 2006, p. 360).

The transaction-cost sense of “market failure” may lead us to misidentify the problem, and thereby to misidentify a possible solution. Market failures are often wielded as arguments in favor of government intervention. Government failures, meanwhile, call for reforms in government institutions and policies.

Separately, there is a lovely analog here for government ethics, as distinct from business ethics. Government agents, politicians in particular, should not engage in activities that contribute to, promote, or are instances of government failure. There are analogous principal-agent problems, but sometimes different goals. Exploring the possibility of a government failure approach to government ethics would be interesting.

Some permit requirements and some occupational licensing, for example, are already instances of government failure. Sometimes bribing an official may, all things considered, have the effect of minimizing the social waste involved. Whether we should endorse this bribery, a second-order government failure, is an interesting question I leave aside.

Alternatively, we can accept Norman’s “friendly amendment” to rename the framework the “self-regulation” approach, which is to include a manager’s obligation to not participate in activities that generate both market and government failures.

Importantly, Buchanan thinks that this social waste is undesirable: “the unintended consequences of individual value maximization shift from those that may be classified as ‘good’ to those that seem clearly to be ‘bad,’ not because individuals become different moral beings and modify their actions accordingly, but because institutional structure changes. The setting within which individual choices are made is transformed (Buchanan 1980, p. 4).”

It should be noted that Bhagwati includes cases where rent seeking leads, “paradoxically,” to socially beneficial outcomes.

Someone who happens to be a regulator buying potatoes at the grocery store is not distributing or allocating rents.

We might also point to “quasi-rents” in cases where activities in the market sufficiently resemble the behavior of political actors. So we might capture monopoly positions as well as feuds over inheritance in this way.

I suspect that it may be possible to exclude property rights from our list on the grounds that what we mean by the market is voluntary exchanges in a context with fixed and secure private property. Notice that this would have to be a conceptual claim, rather than a claim arising from a normative theory about the legitimate functions of the government. This would result in controversies (like over intellectual property in general, or over the specific contours and details of physical property rights), which would mean the concept of rent seeking would not find uncontroversial application. But the possibility of including property rights as analytically a part of the meaning of a “market” might insulate this conception of rent and rent seeking from the charge of over-inclusivity, at least with respect to property rights.

Importantly, the wrongness of corruption cannot be understood using a market failure approach. This is especially so when corruption improves economic efficiency, which is possible, rather than harms it. A government failure approach may better capture the wrong of corruption. Interestingly, a politician is expected to prioritize the preferences of her constituents, just as managers are to prioritize their shareholders, but both of these rules are derivative on the general justification of government and markets, respectively. Thompson (1993) has persuasively argued in favor of an account of corruption, which he calls “mediated corruption,” which locates the wrong of corruption not in any corrupt motive on the part of the official but in the damage it does to democracy.