Business

How Bernie Sanders Was the Only Candidate to Uphold an Essential Pro-Market Principle

Why money in politics allows those in power to determine the rules of the game

Share with your friends










Submit
More share buttons
Share on Pinterest

By Guy Rolnik

Last month, The George J. Stigler Center at the University of Chicago Booth School of Business launched the Capture Index that looks at the concentration of donations to the presidential candidates. As an economist, I tend to believe in what we call “revealed preferences.” Donations from industries are a better measure of their interest than the candidates promises and rhetoric.

When we look at the numbers, we see very clearly that presidential candidates are not different from most congressmen and women: they are happy to take significant amounts of money from industries whose business models are based on favorable regulation, usually regulation that limits competition and helps the incumbents. It is safe to predict that this concentration of donations from what we call “rent-seeking” industries will only get worse as the presidential race continues—because once the special interest groups identify the winners or the candidates that may be a “threat” to the establishment or the status quo, they will coalesce around a few candidates and inject more and more money into their campaigns.

Screen Shot 2016-03-17 at 6.55.34 PM

This is where Bernie Sanders comes into play. You may not subscribe to many of Sanders’s ideas—particularly, those on limiting trade. But one thing is certain: he is really beginning a political and economical revolution. According to our research, Sanders is the only candidate in this race, and actually in the last few decades, who is not taking money from special interest groups. Sanders managed through grassroots movements to raise close to 100 million dollars from the “dispersed public”: that is, taxpayers, consumers, and investors that usually cannot organize and get representation in democracy because they are a large, heterogeneous group that cannot overcome the free rider problem. Sanders is defeating the model that has ruled politics for many years.

The economics of regulatory capture

Professor George Stigler, the Nobel Laureate (1982) who in some ways invented the idea of “regulatory capture,” and Professor Mancur Olson, who developed some of the most important ideas of “public choice,” are not around anymore. If they were alive today, they would probably be surprised to learn that the first politician in recent U.S. history to take their advice seriously and challenge them is a self-described socialist.

Get Evonomics in your inbox

In “The Logic of Collective Action” (1965), Mancur Olson taught us that, over time, most capitalist democracies develop “distributional coalitions,” aka special interest groups, which organize to get the government to provide them with special subsidies, laws, and protection from competition. The dispersed public, be it taxpayers or consumers that are footing the bill, will fail to overcome the free rider problem and lose in the democratic battle with those coalitions. As Olson states in a later book, this is what explains the decline, or sclerosis, of economies.

Stigler, in his “Theory of Economic Regulation” (1972), explained that regulation, which is presumably put in place to protect the public, will eventually be acquired, or “captured,” by the very companies, industries, or their trade unions that are supposed to be “regulated.”

The sprawling Lobbyist industry, revolving doors, money in politics—all those ideas that are today part of the public discourse are tools and symptoms of the ideas Stigler, Olson, and many of their students and colleagues developed in their “public choice” literature.

When you consider how clean, simple, and neat the ideas of Olson and Stigler are—why special interest groups will always carry the day in the battle with the dispersed public—it is easy to develop a cynical and pessimistic view of the world. Only special interest groups will have the incentives to organize, lobby, and win in the democratic process. The public, rationally ignorant and free riding by nature, will always pay the bill.

Olson and Stigler predicted that special interest groups carry the day because they can organize and lobby. They can do this because they can raise a significant amount of resources to push their agenda. These predictions turned out to be very accurate most of the time. The best way to see that is in the vast and growing amount of money being spent by special interest groups on lobbying and campaign contributions, as well as the rents extracted in many industries that get de facto protection from competition. The dispersed public was not relevant to this game.

There are reasons that most of the economic policy debate in the presidential race is framed in the right/left or democrat/republican division. It is easy to put policy, politicians, and economists into familiar “boxes”: conservative and liberal being the obvious ones here. Not only that, but many people also want to be part of a “camp,” because it helps them form an identity and get support and protection for their beliefs and ideology.

Ideology is important, but if we take a look at most industries, markets, and the expenditure of the government, we should ask ourselves whether it is “ideology” or a simpler idea: the rules of the game are determined by the sheer power of the vested interests. Energy, agriculture, healthcare, finance, insurance, defense—there is a reason why they spend billions of dollars on lobbying at the federal, state, and congress levels. They are the people influencing the rules of the game and shaping the discourse and narrative in these industries.

It is time to introduce an old idea that doesn’t get enough time, a perspective that is stripped from this usual discourse and labels. One overarching, important idea, which may be bigger than conservative or liberal economic questions, is that of the capture of democracies and regulations by special interests.

In comes Bernie Sanders. A self-described socialist. He wants to expand government and push the US towards a more Northern European model. He brings into the discourse yet again the debate of small or big government, private or public healthcare and education. But these are old ideas: the real message and idea that Sanders brings is much more interesting and revolutionary.

Until 2016. For the first time in recent history, we have a politician who is able to raise serious, big money—the kind of money that can finance a big campaign—from the dispersed public.

Whoever believes in a market economy assumes that players are “price takers” or “regulation takers”: they cannot influence the prices and the rules of the game. If we want to move into a more competitive market system, we should support the political revolution of Bernie Sanders, specifically the way he raises money. We must acknowledge that as long as it is totally within the norms, values, and beliefs of our society that politicians and regulators can take money from special interest groups, our chances of increasing the legitimacy of market ideas are diminishing.

2016 March 18

Originally published at the  Pro Market Blog, “From Mancur Olson to Bernie Sanders”.


Donating = Changing Economics. And Changing the World.

Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. We’ll use your donation to deliver even more game-changing content, and to spread the word about that content to influential thinkers far and wide.

MONTHLY DONATION
 $3 / month
 $7 / month
 $10 / month
 $25 / month

ONE-TIME DONATION
You can also become a one-time patron with a single donation in any amount.

If you liked this article, you'll also like these other Evonomics articles...




BE INVOLVED

We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop!

  • Jan de Jonge

    A minor correction. Olson did not write about “distributional coalitions” in “The Logic of Collective Action” but in “The Rise and Decline of Nations”.

  • McGartland

    I think Mancur Olson would argue that Gov’t itself can act as a special interest group without competition. I recognize that you did not take the analysis into Sanders’ policy prescriptions, but the title of the article seems to demand an answer to this as well.

  • Nicholas Gruen

    Naturally I like the basic idea of this piece but I have two quibbles.

    1) On a quick reading, the article isn’t clear that Sanders has foresworn corporate donations. If he has that’s much more significant, though again it doesn’t show that in future it will be a more viable strategy than accepting such donations.
    2) Didn’t Joe Trippi open up the sluice-gates in Dean’s campaign. In what sense is Sanders first and unique in tapping into crowdfunding his campaign?

    • Barry DeLong

      Nicholas I guess your second question almost “piggybacks” your first question. As far as I know he has rejected corporate donations and has no superpacs. Here is an analysis of his donations to his campaign. https://www.opensecrets.org/politicians/summary.php?cid=N00000528 My understanding is while Joe Tripp did go after “small money” hthe Dean Campaign also grabbed large Corporate contributions. Bernie is not doing that as you can read for yourself.

  • TedKidd

    Very very good.

  • Derryl Hermanutz

    Excellent point. Market theory assumes an economy where no player exercises market power, and treats big powerful oligopolistic business as a “market externaility”. But the global economy — since the days of the British and Dutch East India Companies — has been dominated by state-chartered corporate monopolies. It was “against” this kind of state-corporate collusion (“mercantilism”) that Adam Smith imagined a “free market” as a better way to organize a national economy, populated not by corporate behemoths but by by independent, price taking, regulation taking, individual entrepreneurs and small businesses.

    In 1841 Friedrich List published his National System of Political Economy, critical of “the popular school” that had emerged from Smith’s utopian vision of a free market of invididuals. List pointed out that every nation that had developed its economy, had done so by explicit government support of its nascent industries.

    In 1967 John K Galbraith published The New Industrial State, explaining how large scale corporations are the only institutions that possess the money and resources to access global supply chains and markets, and apply science-based technologies to economic production. Financial, commercial, industrial, and agricultural/pharmaceutical corporations together with governments operate what Galbraith called “the planning system”.

    Mainstream economics since Smith has modeled a utopian free market, while the real world economy was dominated by state and corporate powers. Individual entrepreneurs and small businesses cannot produce the technolgically sophisticated economic wealth that we enjoy in the modern world. It takes a coordinated “planning system” to bring together all of the myriad and geographically dispersed factors required to produce even so apparently simple a technology as a pencil, as Leonard Read’s famous little 1951 story, I, Pencil illustrates.

    “The free market” is the wrong model. The real world does not, and never has, worked like that. People brainwashed with free market illusions believe it is rugged individuals who produce the world’s wealth, and deserve megabillion rewards for doing it. The reality is that it is state-corporate cooperation — the collective efforts of millions of cogs in thousands of wheels — that produces our rich modern life.

    Powers need to be regulated to serve the public good, because there is no invisible hand in an imaginary marketplace to “automatically” discipline them. But people who believe they live in a free market reject regulation in the public interest as “socialism”. We already have socialism. The problem is that the socialists are the Executives and managers of vast “private” collective enterprises called “corporations”. And they “manage” thier corporate fiefdoms to serve their own interests, while the brainwashed masses wait for the invisible hand to deliver the optimal social outcomes that the free market delusion promises but never delivers.

    • BeSkeptical

      You missed the entire point of I Pencil. There is no coordinated planning system in the production of a pencil. It all happens spontaneous without any central character playing an organizing role.

      State corporate cooperation is exactly what we have with special interests and crony capitalism.

      • chris goodwin

        Rubbish. There is a coordinated planning system in pencil production. In fact, there are several. They are called “Pencil manufacturing companies,” they place orders with suppliers for all sorts of bits and pieces, and they take orders from office equipment supply firms, and artists’ materials firms, and back to school supplies firms, and general stores, and petrol stations, and supermarkets, and so on, and on. There is a hive of coordinated planning for you to be able to buy a pencil – it just isn’t run by the government. The organising role is not central, but dispersed to the organisations, (firms) who see this as a compatible part of their remit. And it does not result in (corrupt) laws, but in legally enforcable “orders” – of sale and of purchase. This is how the market works. People do things, make stuff, and flog it. There is a LOT of planning involved, but it only concerns purchasing managers, sales managers, and the hands who work in the firms which take part in these contracts. And they took their jobs, and accept the obligation to do the necessary work, of their own free will.

  • MaryLF

    Does that include donations the the super pacs supporting each candidate? Would Sanders be able to fund a nationwide election effectively based on the money he is receiving?

  • I am all for avoiding capture of the government by self-interested parties. In this regard, I have no issue with Bernie Sanders– the obvious problem is that much of what he advocated would in fact exacerbate the problems of capture and rent seeking, e.g. free tuition which makes the system of higher education even more a ward of the state.

  • I think we must first consider there is a Space called American Political system combined with the American Social being-ness and Economic Being-ness it seems that a value idea is formed.

    As an observer from another country this current election cycle for US President is nothing short of bizarre a circus of insanity.

    In one corner we have H. R. Clinton the Covert operative stretching truth in front for all to hear yet not see.

    In another corner we Have Mr. D. J.TRUMP the Overt business guy saying as he pleases stretching the idea space in the opposite direction seeing and not hearing.

    In another corner we have special interest groups wanting to be heard yet silent to the general American Public. Not speaking

    It seems to me the 3 monkeys Hear no-Speak no-See-no are at work here.

    Now enter the Canadian borne (Calgarian) Cuba descendent T. Cruz apparently nobody likes and has both overt and covert qualities.

    Is it any wonder B. Sanders emerges as the middle,being sensible middle, of course all the uni-students love B.S. he is a reincarnation of George Stanley McGovern and the circus goes on.

    It would be funny if it wasn’t so serious. The world watches as the Smartest, best innovators, best communicators on Planet Earth play out this act of American Political System.

    It begs the question… Are American now so smart they are dumb?

    It not about money, special interest groups or would be Presidents.
    In my opinion it is about Value and Character of the American way of life itself.
    Time to pay the Piper !-! JDS

  • He got donations from those who expected to benefit from the looting. That’s not revolutionary, it’s de rigueur.