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Intro. [Recording date: February 13, 2019.]
Russ Roberts: My guest today is political economist and author Michael Munger.... This is his 36th--count 'em--36th appearance on EconTalk, at least I think that's right. We last heard from him in October of 2018 discussing his book, Tomorrow 3.0.... Mike, welcome back to EconTalk.
Michael Munger: It's a pleasure to talk, Russ.
Russ Roberts: I think you meant that. I appreciate that. There was a certain radio sound to that. But, I'm going to take it as legitimate.
Michael Munger: It could be both.
Russ Roberts: Our topic for today is a recent article you wrote in the Independent Review with Mario Villarreal-Diaz, "The Road to Crony Capitalism". What is that road?
Michael Munger: We're obviously trying to riff on Hayek's Road to Serfdom. And, Road to Serfdom is often mischaracterized, where people say Hayek says if you take a single step toward centralized planning you end up being Communism. That's not what he said. What he said was there's a tendency towards collectivization, not least because if you start planning it creates distortions that then require additional regulations; and before you know it, most of the economy is planned even if all you did was regulate a few industries to begin with. So, what we became interested in was an analogous problem: Might there be, looking at the way capitalism is working in the West now, might a Hayek but of the Left, say that there's a road to cronyism? Because--the simple summary of the argument is that--as industries mature they invest more and more in new products, in new engineers, in cheaper ways to make things; and that's the essence of competition; and that's great. At some point, the first dollar that they might spend on lobbying becomes more profitable than the last dollar that they spent on pursuit of honest profits. What that means is that I am hiring now people who are trying to lobby the government to protect my product from competition--to obtain tariffs, to obtain subsidies. And, it would be surprising in a mature industry if it were not true--that the first dollar spent on lobbying and getting government help was not more profitable than the last dollar that I spent on investment. And, once that happens, then it means that your industry owes some of it's existence to the state. You become dependent on the state; and, it's likely to see an expansion of that dependence. So what we became worried about was that the criticism that many people on the Left have made for years is--they actually have a point. And, what we noticed--and I've done this myself--I'll say to one of my friends on the Left, 'Look, Socialism doesn't work. Look at Venezuela.' And they'll say, 'Well, that's not Socialism.' Well, I actually think that's where Socialism leads. Socialism is a recipe for, economic at least, totalitarianism. But likewise, if one of my friends on the Left says, 'Well, look at Solyndra,' or 'Look at the way that many industries have basically gotten in bed with the government, with regulatory agencies that they depend on,' then I'll say, 'Oh, well that's not Capitalism.' Well, wait--I'm making the same
Russ Roberts: 'That's crony capitalism. That's not the real thing.'
Michael Munger: Yeah. 'That's not real capitalism. But, what if it's true that, as industries mature, they find that crony capitalism is more profitable in an accounting sense than playing it straight? Then I do this thing that I would criticize in other people. What I will say is, 'Oh, we need better people. All we need is better politicians that don't engage, don't allow this rent seeking.' Or, 'We need better CEOs [Chief Executive Officers].' That's the one thing, Russ, that you know that I cannot say--
Russ Roberts: it's against the rules--
Michael Munger: because the premise is: You cannot say, 'Good people.'
Russ Roberts: Right. 'We need'--our premise, our team, is that incentives matter, institutions matter. And with bad incentives, the best people become corrupted. And with good incentives, not-so-great people do the right thing. So, that's the--right. So you can't say that. Keep going.
Michael Munger: Well, what that means is, once you recognize that it would depend either on capitalists, corporate CEOs, leaving money on the table--that is, they would have to choose not to take legal but economically immoral actions that would get them protection from competition, then I go--imagine that the yearly stockholder's meeting. I'm the CEO and I tap on the microphone and say, 'Good morning. Thank you all for coming. And I want to say that our profits are significantly lower. Our accounting profits are significantly lower this year than they might be, but you'll be glad to know that the reason is that we decided not to engage in rent seeking. We have not used lobbyists to obtain protection from competitors. We have not obtained government subsidies that we might have obtained.' And I wait for the applause and there's silence. Stockholders say, 'What the heck. We need a new manager.' So, even if we did have a good manager, it's not sustainable, in the sense that either we're likely to see stockholders who are in pursuit of legal profits--and I mean accounting profits. There is nothing illegal about using lobbying to obtain the benefits that I can get from the government. And actually, I have to say, we first started thinking about this seriously after I heard Luigi Zingales basically summarize this argument a couple of times. It's not very original. What we tried to do is close the circle and point out that if you think that the only solution to this problem is better people, you actually need to rethink that, because that's the one thing that we cannot say. Now, our point is, the short point is: Capitalism in a democracy is not sustainable.
Russ Roberts: So that's deeply disturbing. It might be true. And, like you, I also have this issue where I'll point out some flaws of Socialism; and they'll say, 'That's not real Socialism.' Or they'll say, 'That's not the kind of socialism I want.' So, similarly, I find myself doing this with capitalism; and I'm sure I've said it have conceded this point on EconTalk in the past: That we do kind of do the same thing. We say, 'Well, that's not the kind of capitalism I want. I want the real kind.' The fundamental question that you raise in this article which I think is a deep and important one, is: Is there something inevitable about cronyism that's built into Capitalism? Is it somehow an illusion--excuse me, a delusion. Am I deluded into thinking there's such a thing as capitalism without cronyism, without government handing out favors. Now, my usual answer to this, by the way--and I'm going to critique it--but, my usual answer is, 'Well, there is such a thing as capitalism without cronyism if you have a Constitution, and you have a legal system and a legislative system that limits the power of government to hand out goodies.' The problem with that argument is that maybe built into the system is that powerful capitalists then change the political system so that it can hand out goodies. And that's really, I think, the Left's critique right now. It's very clever; and it might be true. Which is: it's inevitable. Like you say. It's part and parcel of the system and to pretend otherwise is to delude yourself. Before we go on, I want to read the Milton Friedman quote that came to mind a minute ago, that I think deep and important. He says,
It's nice to elect the right people, but that isn't the way you solve things. The way you solve things is by making it politically profitable for the wrong people to do the right things.
So, the point there is that--the counterpoint to that is that, eventually, the political system is going to be structured by capitalist influence to give out those goodies, so that even good people do the wrong thing.
Russ Roberts: So, that's the thesis on the table. I'm going to challenge you. I'm sympathetic to it. I worry about it like you do. I'm thinking, 'Am I just doing the same thing that my political opponents are doing? Am I living in a utopian world where I'm imagining an ideal that is not credible, not realistic, can't exist?' So my first question for you in thinking about this is: Why do you think this is an issue now? You and I are old enough to remember--I have a decent memory of the last 40 years of political economy in the United States. And, there are a lot of things that haven't changed. One of them is: We subsidize agriculture. And that is a vague statement that masks what really goes on, which that a very small group of people capture a fairly large amount of money. I learned from Gary Becker, who was the first person probably who pointed out that in societies where there are only a few farmers, farmers can do really well. In societies that are mostly agricultural, they don't get a lot of favors. But, say, in Japan. Right? Rice is highly protected in Japan. There are very few rice farmers. That small number of people produces a large amount of the rice, just like in America a very small number of agricultural corporations produce an enormous proportion of the food. And they use the government to exploit the rest of us. Sugar quotas are an obvious example--you talked about subsidies, but quotas are another example that you alluded to: trade policy where we keep out foreign sugar just like Japan keeps out foreign rice. I've probably mentioned it before, but my Japanese students, when I would be teaching MBAs [Masters of Business Administration] and have Japanese students, they were always shocked at how good American rice was, because they'd been told for years that it was awful and that's why we had to keep it out, to keep it from, you know, destroying Japanese cuisine. And of course it's a lie. A lie engendered by the political power of a small number of politically important rice farmers in Japan. And similarly, a small number of sugar beet and sugar cane farmers in the Dakotas and Florida keep out foreign sugar. So, that hasn't changed. That's as old as--a tale as old as time, in America: that certain small groups of people get favors. Why do you think that the system is "corrupt"--or 'cronified', I'd call it. I don't feel that. I think there's a handful of industries that get special favors--and we can talk about which ones they are and why they get those favors. But overall, I'm not sure there's a lot of cronyism in American capitalism. And I'm not sure it's growing. And if it is, the burden is on all of us as scholars and thinkers to figure out: What's changed? So, give some of your reaction to that.
Michael Munger: Well, there were a bunch of issues there. I'll try not to take too long to respond by answering them one-to-one. But, let's go back to 1944, when Hayek published The Road to Serfdom. And you could imagine one of his, someone else in England, saying, 'Now, Fritz, we're not a socialist country. Yes, there's a few sectors that are being planned. But we're not really a socialist country. Don't you think you're exaggerating?' And the point that Hayek would make is, 'Yes, but I'm identifying a tendency. Which, if we not act on it, will result in more and more sectors being planned.' So, my answer to you is, 'Yes. We're not especially cronified yet, although there are a few industries where it's happening. But, I don't know if you remember--in the good Star Wars movie, the one that's Number 4, where Grand Moff Tarkin is on the bridge of the Death Star and a guy comes in and says, 'We've analyzed their attacks, and there is a danger. Should I have your ship standing by?' And Tarkin says, 'Evacuate. In our moment of triumph, I think you overestimate their chances.' Well, the point is: I've analyzed the attack of the Left, and there is a danger. They actually have a point. Now, Marx's claim that the animating force is driven by Capitalism is actually not right. What I'm trying to do is say we should take Public Choice seriously. And what Public Choice says, is that people in government act on their own self-interest. And the self-interest of people in government is trying to increase their power and to increase the things that they can use to raise money. And, selling off rent-seeking opportunities is something that political entrepreneurs are likely to do. So, I'm not claiming that this is entirely being driven by capitalists, so that the Marxist idea that the system will be driven by the narrowest of capitalism, I think is wrong. However, the system is driven by the broad self-interest of people in government to find ways to increase their power. So, what I'm worried about is, if Public Choice is right and we cannot depend on the goodness of people in government, and people in government can change the rules, then it's very likely that there are people in government--legislators, regulators--who are going to approach industries and say, 'Look, we can help you out. And if you don't play ball, we are going to hurt you.' So, in a way it's a kind of protection or extortion racket. But still, as a result, there's going to be a tendency towards cronyism. So, the only criticism that I would make is, 'Wait: we have to add something.' And that is: We have to take Public Choice seriously. The question that you said--a good question--is: Why now? And I want to note the passing of a giant of a person that I have long admired, Anthony de Jasay, who died just, not quite a month ago. And he this very interesting critique of Public Choice, the Buchanan theory of constitutions. And so, you said, the solution would be, 'Let's have a constitution that puts rent-seeking beyond the ability of government to move towards cronyism.' Well, what de Jasay said was that constitutions are either ineffective or unnecessary. They are ineffective when everyone wants to do something the constitution prohibits. So, a paper parchment barrier cannot stand when all of the incentives and the attitudes of people are: Let's go crony. But, constitutions are not necessary when there is a shared commitment to the principles that are written in the constitution. And so I think for a very long time the United States got lucky, because we looked to the Constitution as containing, as expressing a set of values about the way that we should conduct ourselves in our private, in our public lives. And that has started to be stripped away. Once that's true, we can't expect the Constitution to constrain the ability of people in government to rewrite the rules. So, that's--once people in the state realize that they can rewrite the rules to encourage rent-seeking, there's always going to be a relatively small number of people in business that say, 'Why would I leave money on the table?' And if there's not, somebody else can come in. When you consider the market for mergers and acquisitions this becomes a little bit more chilling. So, suppose that you, Russ, are the CEO of a medium-sized corporation, and you say, 'We're not going to invest in rent-seeking. We're not going to get subsidies. We're going to leave money on the table.' And the employees say, 'You know, that's right, because it's the wrong thing to do.' Well, I'm a corporate raider; and I look, and your stock price is lower than it could be, because you could reallocate your capital in a way that would produce quite a bit more accounting profits, if you would just go to the government and seek those subsidies--which are legal. Well, I put out a tender offer for your stock. I can buy up the stock, because I can pay a higher price, because I'm willing to do the things that you will not do. Very quickly you lose control of your corporation because I buy up all of the stock; I hire a "better"--and I'm making quote marks--manager than you, a more rational manager than you. And now we're off to the races. And now, the company that was good is now wise, in the sense that they are now maximizing their return on capital. Do I care if the return on capital is based on rent-seeking rather than on honest profits? Well, maybe I do, but there's someone out there that doesn't. It doesn't take many, at the margin, to drive this system in the direction of crony capitalism.
Russ Roberts: I don't agree with that. I'm going to try to push back against it in a different way in a minute. But I want to start with a more fundamental question that you raise. I mean, I'm sympathetic to it: I think it's a risk. I don't think it's "wrong." But part of the story is missing.
Michael Munger: I hope so.
Russ Roberts: Don't we all--
Michael Munger: I'd really like you to talk me out of this: [?] slash my wrists.
Russ Roberts: I'll do my best. But I want to go back to--I want to go to a more fundamental question, which is: Why is the murder rate so low? There are a lot of people out there people don't like; they'd prefer to see them gone. There are a lot of things we can do as individuals that are deeply wrong and immoral. And, I actually think there are people out there in the world who think that the murder rate is low because it's against the law. And that's not why it's low. It has an impact. I'm not going to suggest it's irrelevant. But it might be a small part of the story. The main reason the murder rate is low is fortunately most people think it's the wrong thing to do, and they don't do it. So, we understand that if you find a wallet in the street, and it's got the person's driver's license and it's got the person's credit cards, an it's got, say, $200 in cash, you've got a few options there. And nobody sees you pick it up. And you take it home and you find out what's in it. And you've got some options. You could take the cash out and return the wallet as a kindness. You could keep the cash in. Or you could just keep the whole thing--keep the cash and the credit cards, throw it in the garbage. I think at different times in human history and in different societies, the modal finder of that wallet would do different things. So, I think deep down, your Jasay point about constitutions is 100% right. He was right that a constitution that people don't believe in is not going to be sustainable. And it's true, I think that the attitudes in the United States about the power of government have changed. I don't think the attitudes toward cronyism have changed much. I think most people are against it. Most people would say it's wrong to favor particular industries over others and at the expense of consumers. And yet we've got more of it perhaps than we used to have. But I think that's part of the attitude that's opened up the Pandora's Box of, 'Let's let government do--let's let politicians do what they think is right,' rather than what's constrained by the Constitution. Once that attitude becomes widespread among lots of people, yeah--there's a lot of things on the table that weren't there before. But the idea that somehow it's okay--'We understand that cronyism is tempting'--you know, so is a lot of dishonest, horrible things. You wouldn't say that a stock is underpriced because the people don't engage in fraud. Right? We don't expect a CEO--'Well, CEOs, of course, fraud is against the law but if they can get away with it, we expect them to because after all, they'll raise their stock price.' I don't say that. Do you say that?
Michael Munger: I don't say that.
Russ Roberts: So, how do you reconcile that with your story that, 'Well, of course, there's a natural temptation to use the government to extract goodies from the rest of us?'
Michael Munger: Surely you are not claiming that it is somehow morally equivalent for me to lobby a Senator from my state for subsidies for my business, which is about to fail, and murder. The first is not only legal: I can find someone who will persuade themselves that it's moral, and in fact it's a great benefit. It doesn't take many people to say, 'Not only is this legal. It's morally okay. This isn't cronyism. This is the way that capitalism works. I see it all around me.' The difference is that it is--scale. I mean, murder happens one at a time. But, if companies grow, using the Misesian logic of profit and loss, then, if a company can increase its profits by seeking subsidies, successfully, then that company is going to grow. Rapidly. And so, the economy will come to be dominated by those companies--the economy, the national economy--is going to quickly become dominated by precisely those companies that, at the margin, are successful. Using profit and loss. And the ones who seek subsidies are going to grow faster. So, I, I think that we have produced--and I worry a bit about the--If you go to be an MBA [Master of Business Administration], you are probably taught that what you should do is accept all legal means to increase the profits of your company. And in fact, Milton Friedman, famously argued something that could almost be--and that's not what he said, but you could almost interpret it that way--the only responsibility of the corporation is to seek profits. Now, he would say, but 'Oh but of course, you shouldn't do rent-seeking'--
Russ Roberts: He says, well he says explicitly: Without fraud. Keeping the laws of the land--
Michael Munger: It is not fraud!
Russ Roberts: I agree with you.
Michael Munger: So, what you are doing Russ, you are actually resorting to the thing that we cannot do. And that is good people--
Russ Roberts: Oh no I'm not--
Michael Munger: All we have to have--Yes, you are saying we have to have no fraud. You are saying 'No fraud.' And what you mean by 'fraud' is the legal pursuit of means that many people accept as legitimate. But you are saying, 'I think people won't do it because it's wrong.' It's just morally wrong. It's not illegal.
Russ Roberts: Here's what I'm saying. Here's what I'm actually saying rather than what you'd like to think I'm saying--
Michael Munger: this characterization--
Russ Roberts: exactly--
Michael Munger: contentious mischaracterization.
Russ Roberts: And cruel, actually.
Russ Roberts: I would try to restate it in a more acceptable way. I understand there's still a flaw in it, but I'll--maybe you won't find it, so I'm going to take a shot. What I'm trying to argue is that culture and norms matter a lot. If you have a world where people don't have a moral compass, I'm not sure any system works well. Right? I also believe that certain systems enhance a moral compass, and some destroy it. I think in a--in the Soviet Union--you were a sucker if you played by the rules, because no one did. You know, one of my, I have a lot of favorite jokes--it's not good English, but one of my favorite jokes of the Soviet Union is, which I heard from someone who grew up there, is, 'We pretended to work, and they pretended to pay us.' That kind of system, where, you know, basically it was describing a factory where, you know, people stole--I think they were making stockings. And he said, theft out of the inventory was common. It was how you made money. It was the way you got paid. The way--the way you put food on the table of your family was to steal some of the stuff. So that's a system that distorts and brings out the worst, I think, in people. Adam Smith argued, as you know, that capitalism does the opposite. It forces you to put yourself in the shoes of other people and figure out what they want. It forces you to imagine being empathetic about their desires and about their needs. And I think it--I'm not going to--I don't want to be naive. I don't want to be Pollyannaish, and I don't want to pretend--I don't want to suggest it's easy to fix this: we just need to change norms and culture. But I don't think you can talk about this descent into cronyism that you are accusing the American system of and suggesting it's going to get worse, and ignore the cultural and educational [?]. I'll give you an example. When I get too much money back from the cashier, I give it back. At least I think I do--
Michael Munger: Because you are rich enough to be able to afford your preferences. You want to think well of yourself. And you are rich. You can give it back. So that it's a luxury good. You are wealthy enough you can afford to be able to think well of yourself. Most people can't do that. They'll happily take the money.
Russ Roberts: I did it when I was making $18,000 a year, by the way, as an Assistant Professor--
Michael Munger: You are a good person.
Russ Roberts: Well, I don't know if I am or not. Maybe I just had--my parents raised me poorly to be honest, when in fact I'm a sucker. Right? Only a sucker gives--right? There's two ways to look at that: What a noble thing to do. Or, what a sucker. And I think when you transition to a world where you are a sucker for being honest and failing to exploit opportunities like that, you--you are on the road to hell. Whether it is socialism or capitalism. And, you know, I think--I am conceding that I think, there is something endogenous about the culture we are in. Right? Obviously; and you make that point implicitly in your paper and you made it earlier, right? Once you start thinking, 'Huh. Everybody else is taking--why shouldn't I?' And in fact, 'If I don't, my firm is not going to survive; and I have to fire them; my workers will all be laid off, so it doesn't matter.' 'It's the right thing to do,' I convince myself. But I do think: The example is--I should get a special deal for my company, my industry, my situation. Because everybody else is at the trough. Of course, that's the ultimate--government is public bad. That's where the Tragedy of the Commons is running amok. And, to bring it full circle, you know, you and I think-believe--and tell me if I'm wrong--that we think the Tragedy of the Commons in private settings can be overcome by norms. And by self-monitoring. If groups are small. And, it's observable that people are sending their cows out at night and grazing when it's not their turn. So, how do you deal with that?
Michael Munger: I actually want to turn now and agree with you. I was obviously trying to make the provocative form of the argument. I just think--I don't know if you know this, Russ: You and I are weird. There are a lot of economists--
Russ Roberts: I know that--
Michael Munger: that would not concede the value, the central importance of norms and culture. They would look instead to institutions. So, let me state--
Russ Roberts: I'm not sure what's the difference between those.
Michael Munger: Well, right. Maybe if you drew a Venn diagram there's very substantial overlaps. Norms I think or individual concept; culture is something that is larger, collective concept from which norms come. But, let me state the technical claim that I'm making. What I'm asking is: Is the honest pursuit of profits, and evolutionarily stable strategy, in the game-theory sense--or, if it's invaded by mutants--it doesn't take many mutants: you are looking at the relative rates of reproduction in a game-theory system--a mutant that is a pursuit of honest profit but instead is willing to pursue any legal profits--won't the invasion of those mutants result in the proliferation of that form of an agent? And I'm worried that the answer is, Yes. That it's easy for them to expand. I think--I was just in Guatemala, at Universidad Francisco Marroquín--and was able to give a number of talks on this subject. And got to talk quite a bit to their rector, Gabriel Calzada. And the thing that--I'm an outsider; I'm in no position to urge anything. But they teach a lot of people economics, Austrian economics. I said, 'I urge you to think of the importance of character.' I think that one thing that the people on our side have failed to do is to emphasize the importance of character, to emphasize the importance of perpetuating the norms of seeing there are right ways and wrong ways to do things; and even if it is technically legal in the sense that you won't get caught or punished, there are still profit opportunities that you should eschew. Now, the question is: Can we do that enough to make the pursuit of honest profits an evolutionarily stable strategy? Because you are always going to be invaded by outsiders to that system. That don't share those, don't share that value that this is the correct way to act. So I don't know if we can make the system immune. But, perhaps--because--you've taught in a business school. The Business Ethics class is, usually, you look at a list of criminals, and then say, 'Now, don't do that.' And, 'Don't do that.' And I don't know--we don't teach the, character, as something that's something that's very central. And frankly, I'm not sure how to do it. So, what I would like to do is turn back towards the idea that there are right and wrong--and this--Adam Smith would be surprised to learn that this is something that I think economics now doesn't do. Because, it was the core of what Adam Smith thought was important. So, I want to come back and agree with you, now that I have made the argument now in its starkest form. But it's still true that if you take the Public Choice argument seriously, that you cannot say 'We have good people in government, and we have good people'--and by 'good' I mean willing to leave money on the table. In a way, irrational. Because there are legal means of acquiring profits that I'm not going to do because I personally think they are morally wrong. Unless we have that resort. Unless that's something that we can invoke. I do think the system has an undeniable tendency towards cronyism.
Russ Roberts: Well, I guess you could argue that--it's too fine a line to argue that, 'I'm not arguing that we need good people. We just need people with good mores, good norms, good values.' You know--I understand there's still something a little bit utopian about believing that. But I don't think it's so long ago that people would have thought it wrong to take advantage of every opportunity. I would suggest, by the way, that one of the challenges in America--maybe in the world--of being a modern human being--you and I have probably talked about this before. But, why would it ever cross your mind that everything that's legal should be done? Or everything that's legal should be allowed? And the flip side of that is: Everything that's bad should be illegal. We want a space for self-monitoring. Self-regulation. Where we don't need the legislative power and coercive power of the state to maintain stuff. You know, a trivial but not uninteresting example of this is tipping in a restaurant that you never expect to come back to. You are on a trip. It's a one-time thing. I still tip. Now, you could argue I'm a fool. Why should--and we've talked about this before, at length, in other episodes; we'll put a link up to it. But, my point is that: It would never--there are a lot of people who would just say, 'But that's the right thing to do.' When you go from a world where the right thing to do is irrelevant, all that matters is that you're going to be caught, or screamed at by the waiter, or beat up by the waiter who chases you down the street, that's a bad world to be in. I don't want to be in that world. If we don't have character--if we don't have norms of decency and some trust in a willingness to leave money on the table--that's not a world you and I want to--I don't want to live in that world. I'd rather live in a different world. And I don't think it's totally naive to think that that world--I know it exists, and I still think it exists to a large extent. Because, when my wife lost her diamond earring in Great Tetons National Park in the lodge we were staying in; and the visiting East European maid gave it back to us because she found it sweeping up--there was no way she was going to get caught keeping that earring. She didn't even know it was my wife's. It could have been left there by somebody--it was on the floor in the kitchen under a counter. It could have been three guests back. And she's giving it back to us? It's hundreds--it's not a big diamond earring; it's worth a few hundred dollars. But, as you say, that's a lot of money to somebody who is a housekeeper. And it's even a lot of money to me--I was--my wife was really upset, for emotional reasons. I was like, 'It's okay.' It's part of life. Things like this happen. But, the housekeeper gave it back. That's virtue. That's the world I think we all want to live in. We all want to live in a world where people return their diamond earrings. And I don't think it's ridiculous to imagine that. I do think it might be ridiculous to think we can get there from here. We can increase it. We know how to do that. And I agree with you that an Ethics class in business isn't going to do it.
Michael Munger: But the difference is: Both of your examples were basically interpersonal relationships. So, murder, which is both immoral and illegal, and the return of something--or tipping--the things that, I'm acting in binary relationships between people--I think that system can be sustained if there is a few people who act badly. Because there are social pressures to act well: We get reward, we get the esteem of other people. We feel--and those of playing the drinking game, I'm going to say it--'We're not going to just be loved, but we're also going to be lovely.' We're going to be deserving of. So, probably, that maid, she would have felt bad if she'd kept the earring. She felt good: you know, 'I'm actually a good person. I'm the sort of person that deserves the respect of other people.' That system is stable with respect to some people who act badly. The problem with capitalism is that its very dynamism means that, if you have only a relatively few people who are willing to act badly, that company could very rapidly expand because it's more profitable. It's more profitable to engage in rent-seeking activities. And that means that it's not restricted just to individual actions. I'm a corporate CEO: 'I don't care that other people think badly of me for charging high prices and receiving subsidies. Because I'm earning money hand over fist.' So, I worry about the dynamism of capitalism being used against it, in the sense that if I approach a politician and can get the help of just a small sector of government, I can rapidly expand at the expense of my opponents, precisely because they are acting morally. So, the--I do worry about the scaling aspect of this. But, I do think that somehow we need to reincorporate this idea of character and the importance of norms. So, you asked me to distinguish, before, the difference between individual norms and culture. Culture probably is the thing that reproduces this. But it also needs to--I think we've talked about this before on the show--Chile and Argentina spend almost exactly the same amount on tax compliance enforcement. But, in Argentina the tax compliance rate is maybe 60%, maybe less. In Chile, it's 99%. Well, if you don't pay your taxes in Chile, other people think, 'Well, you're a terrible person.' And if you do pay your taxes in Argentina, people think, 'Well, you're an idiot. You're a chump. Nobody does that.' So, Argentina tried to hire some people to--some football players, some actresses--to go on TV and do ads about how you should pay your taxes. They had to pull the ads within two weeks, because all of the actors had not paid their taxes. There's two different equilibria. One is, everybody does the right thing, and if you don't do the right thing you are a bad person. The second equilibrium is: Nobody does the right thing, and if you do the right thing, you are an idiot. And, I worry that the second one is the one that we're tending towards. And, while there's still time--and it's not too late--while there's still time, we need to call people's attention to the fact that there is actually a danger. That the complaint of the Left about Capitalism is not entirely ill-founded.
Russ Roberts: Well, I concede that. And I have before. I agree with you. That's why I invite you on, Mike. It's not because it's an interesting article. You've been on 36, 35 times. I just want to put a footnote on that story about the diamond earring. And the tipping episode we did was with Anthony Gill. We'll put a link up to that. But, as fate would have it--and I can't explain this--I left an exceptionally large tip for the housekeeper that morning. By my standards. It was not a large tip in any sense. We've talked about this before: I usually leave a dollar or two a night for my housekeeper when I stay in a hotel. I think it's a nice thing to do. I don't know whether it's--I'm not going to suggest everyone should do it. But I like it; and I think it's a good thing to do. For some reason, I left--we'd been there I think 3 or 4 nights--four nights, I think. I think I left a $20 tip. Which is just, still, not a huge amount of money. But, I don't know if that played a role in the housekeeper's decision to return the earring. It's an interesting question. We've talked about the idea that one reason to tip housekeepers is that you do leave things behind. And it's just--it's a weird--it's not a contract, but it does engender, perhaps, some good will on the part of the housekeeper. And I will also add that I tipped her--I don't know how money I gave her--for returning it. And I think she took it. But I think I gave her another $20 or $40 just as a thank-you for her honesty. And was so overwhelmed--I mean, my wife was deliriously happy at finding it.
Michael Munger: She was probably more happy than the value of hearing, actually, that--
Russ Roberts: Oh, absolutely--
Michael Munger: 'This is great!'
Russ Roberts: You know, it wasn't her fault. Etc., etc.
Russ Roberts: But, the other point I want to make, though, is that you said a CEO gets a subsidy or whatever. I own a Ford Escape. And I would say--I'm an exception; I understand this--but I am not alone. One of the reasons I own a Ford Escape--I also own a Honda Accord--but one of the reasons I own a Ford Escape is that Ford did not take money in the bailouts during the Financial Crisis. That could have been the equilibrium. 'Oh my gosh: GM and Chrysler took bailouts. Oh, we're not going to buy their cars any more.' And I say that, because these predations that we are talking about that lobbyists and CEOs extract from the rest of us: They are not secret. Now, they are not always well-known. They are not waved about all the time, like Ford's. A lot of times you have to read the paper carefully. And I think it's strange that newspapers don't, maybe, have a special section, or a special tally on their website, for local cronyism. Because I think that would help people get--anyway. To me, it's like the hall of shame. It's not the hall of, 'Hey, I got what I could.' It's the hall of shame. You took from me. So, I think that publicness has some leverage, perhaps, in the future. Or could. It's imaginable. But it does make the problem a little bit harder. Because it's not: I took behind your back, I took advantage of you, I kept your wallet or I didn't return the earring. It's that: It's out in the public. It's out in the open, now. It's true. As you were saying earlier. They do tend to figure out ways to make it look like they are doing it in the public interest.
Michael Munger: Well, maybe even to persuade themselves. I think there have been, again, Russ, there's just not many people like you, and the world is a worse place for it. I wish there were more. But, I don't watch that much TV, but I watch some. I have never seen a Ford ad that said, 'Oh: Buy a Ford because we did not take any subsidies.'
Russ Roberts: Yeah. That's a good point.
Michael Munger: So, if that were salient, if that were socially salient, it would be--because you don't have to have the newspaper do it. The company should be able to advertise. And if it worked--if people actually cared about that. But you raise a good point. One of the things that we use to flog things like Fair Trade Coffee, and the actual social impact of Fair Trade Coffee is probably less than many people believe. But they'll advertise and say, 'This is Fair Trade Coffee. You should pay a little extra.' If--
Russ Roberts: 'We left money on the table. We overpaid for this, so you should too.'
Michael Munger: But, that works. And that's an example of the kind of thing that you are talking about. People are willing to pay at least a little bit extra for doing the right thing. Now, what the right thing is maybe can be manipulated a little bit. But all that would be necessary is for consumers to say, 'Nope. We're not going to be complicit in these kinds of rent-seeking activities. We're going differentially to seek those companies that have behaved in a way that's socially responsible.' And what I mean by 'socially responsible' is the pursuit of honest profit. And, so maybe that. That's the word that's going to go out from this time and place. Like ripples on a pond. You have now started a new consumer revolution, Russ.
Russ Roberts: I'm so excited. Uh, I just want to read a line from David Foster Wallace. He has an essay called "Host." It's quite an interesting essay. It was written around 2004, in the heyday of conservative talk radio. Which has morphed into--talk radio has morphed into Twitter and Facebook and--and, David Foster Wallace, of course, is gone, unfortunately, tragically. But I want to say to him as I read his essay: You ain't seen nothing yet. You know, he's talking about the incentives that talk radio faces. And he has a line in there: he says, 'Aren't there parts of ourselves that are just better left unfed?' And that's really hard for us. That's really hard for us. That's end of quote, 'is unfed.' It's really hard for us to say, 'I can have this but I shouldn't.' And, our culture right now is: If you are hungry, feed it. And that includes rent-seeking. It includes subsidies. It includes tariffs. It includes food. It includes everything. It's all on the table. Nothing's--foregoing things has become--it's a fool's game. And I think it would be great if we got back to a different world.
Michael Munger: Well, may I read a quote from José Ortega y Gasset? So, in The Revolt of the Masses, in 1929, he wrote this about liberalism--and it'll take me 20 seconds to read. It's not that long.
Liberalism--it is well to recall this today--is the supreme form of generosity. It is the right which the majority concedes to minorities and hence it is the noblest cry that has ever resounded in this planet. It announces the determination to share existence with the enemy; more than that, with an enemy that is weak. It was incredible that the human species should have arrived at so noble an attitude, so paradoxical, so refined, so acrobatic, so antinatural. Hence, it is not to be wondered at that this same humanity should soon appear anxious to get rid of it. It is a discipline too difficult and complex to take firm root on earth.
So, liberalism means that you have to--
Russ Roberts: That's the end of the quote.
Michael Munger: Yeah; end of quote. Liberalism means that you have not do things which you could legally do because you recognize that you have a larger duty to the system not to exploit it. And that--I mean, we see that in politics, where liberalism means that someone you disagree with--violently--is still allowed to speak. In economics we see it where I could go and get a subsidy or a restriction on the ability of new competitors to enter the industry, and yet I say, 'Nope. We have to do that.' Because that's the system that we're part of. So, that system is really fragile. And that Ortega y Gasset book was written before Schumpeter. So it's interesting that in the 1920s, 1930s, and 1940s there was quite this--exactly the same pessimism that Mario and I are expressing. And, we are--I think that there was more concern then--that you see these concentrated industries that were getting power from government. And, in a way, what we've done is gone back to that. There was a period of pretty robust liberalism and capitalism in the 1960s, 1970s, and 1980s. We see the dramatic expansion of democracy--the sort of triumphalism of liberalism--in the 1990s. And now I think some of that optimism that we saw from Francis Fukuyama and other writers who said, 'History is over. We're done. Liberalism and democracy have won'--that optimism, it's going to require continued work on the part of all of us in order to sustain the values that we think are essential.
Russ Roberts: Well that's a really deep quote. And the idea of not doing what comes naturally is--it's unnatural. It's hard to do. And maybe it's not sustainable. Maybe. But that's like saying civilization is not sustainable. So, I'm not quite ready for that level of depressing reality.
Russ Roberts: I want to go back to a critique of an earlier point you made, because I think this is relevant. Actually, I want to say something first. Which is, we both mention in passing that you could fool yourself into thinking that what's good for you is good for other people. Like, taking that subsidy is important, or keeping out your competitors 'because they are low quality.' 'We need licensing because we don't want to let scam artists come in and exploit people.'
Michael Munger: Your rice example earlier, is great, because if the rice were really bad, you wouldn't have to exclude it. People would say, 'This rice is bad.'
Russ Roberts: It requires a further point and belief in people's gullibility--because 'They might be fooled into thinking it's good rice. We have to keep it them.' But I do want to add--and I think this is extremely important for the economists and would-be economists listening: I know there are a number of graduate students and undergraduate econ majors who listen to EconTalk. It's one thing for Tim Geithner or Ben Bernanke or President Bush or President Obama to argue that we had to bail out all the banks--almost all the banks--100 cents on the dollar--because if we didn't, the world would come to an end. So, I think that was a lie. I don't think the world would have come to an end if they'd gotten, say, 80 cents on the dollar. I don't think the world would have come to an end if instead of bailing out banks we'd be able to help[?] homeowners. I think we've bailed out banks because they are politically powerful. And, politicians take a lot of money from them. And that was the worst cronyism of our lifetime--the Financial Crisis of 2008 and how it was handled. And I think we are going to live with the costs for a long time. And I think we are in the middle of those costs, even though, 'Oh, wow, we saved the world. It's great!' We didn't. We encouraged people to use the system to exploit the rest of us. We destroyed people's faith in democracy. We destroyed people's faith in capitalism. I think it was a terrible, terrible mistake. But, that economists have to applaud that is inexcusable. That economists become the enablers of that by saying, 'Yeah, well the system. Of course. ATM [Automatic Teller Machines] machines might have stopped.' Economists had no moral foot to stand on when they argued, when we argued--and I'm not one of them, so I don't like to say 'we'--when they argue that 'Of course they did the right thing. It was terrible. It was the best choice available, but it was terrible.' We shouldn't say that. We should have been out there suggesting alternatives. And when we look back on it as history, we should say it was a terrible mistake. And, of course, as Zingales's--Luigi Zingales pointed out on EconTalk--we're just like everybody else. We have our own incentives. We like being part of the system, too. So, let's not fool ourselves, folks. Let's call it like it is. And I think that was a really horrible set of policy decisions that remained in 2008 [?]; and I invite all economists to join me in saying so. And I think saying otherwise--to give them the intellectual cover for that kind of exploitation of the taxpayer and the average person is inexcusable.
Michael Munger: You--I hear you. I am with you. But, listen to yourself. What you basically said was: These incentives appear to be irresistible, for two reasons. One, we want to be part of the system; and as Zingales has said, there's monetary incentives. You get paid better, if you are a consultant for this sort of view. But then you said, 'But, I want to live in a different world.' Well, that's the thing that make it--I mean, you literally said that. And so do I. I can imagine a different world. The question is, just in terms of A to B to C, how can we have a combination of a structure of material incentives and intellectual ideas--an explanation that makes people say, 'This is the problem that we have. It involves character and norms.' I worry that economics has abandoned the position of emphasizing character, norms, and morality. And, one of the reasons that I'm a political scientist and philosopher rather than an economist in terms of my academic affiliation, is precisely that I'm worried about the structure of preferences and the sustainability of the willingness of people to try to act in the right way, even if it may be illegal. And let me emphasize: The real problem here is the ability of rational state actors to restructure the legal rules in ways that over time could corrupt moral character that might otherwise prevent a move in this direction. So, the real problem is we have to take the public choice objection seriously. Members--people who work for the state, elected officials and bureaucrats--are rational and they are entrepreneurs. They are looking for ways to increase their power. Now, that doesn't necessarily make them bad people. Maybe, you know, it would be better if we had a system where that weren't true. But I can't imagine what it would be. What we need is voters that will say, 'No. I'm not going to accept that.' So, the character of voters and consumers ultimately will drive the system. I'm just not sure that we're even trying to do that at this point, except for this excellent podcast.
Russ Roberts: You're kind.
Russ Roberts: I want to draw a distinction to bring home your criticism of my little rant there, which is a distinction between George Stigler and Milton Friedman. George Stigler looked at the world and laughed. He observed it; he saw those incentives; and he didn't think he could do anything about it. Milton Friedman was the opposite. Milton Friedman said, 'This is wrong; I'm going to speak out against it.' Now, we can debate about what their relative impacts have been on the world and we can debate about Friedman's academic work versus his polemical work. But I just want to concede your point, that, that little speech I gave a second ago about 'economists should do this'--that's preaching. It's not Social Science. It's not Economics. It's preaching. I'm asking the economists out there listening to this, and in theory the ones who aren't listening, to join me in what is effectively a moral crusade: not a study, not research. It's saying, 'Don't we want to live in this world?' And we understand that it's easy and fun to free-ride on, when people act morally. But it's the wrong thing to do. And, I think it's good to talk about that, even if I understand that the incentives to act otherwise, are otherwise. Just take a more trivial example: I think studying econometrics is somewhat corrupting because it encourages you to believe that you can measure things accurately that you--some of which you can't. And yet, I understand that if you're 27 years old and you've just come out with a field in econometrics, you're going to do a lot of econometric work--some of which is, maybe, not going to be as reliable as you'd like it to be. And the incentives, which we've talked about many times on this program, to publish things that are--not dishonest, not fraud, but just simply you convince yourself that this set of regressions that led to a significant coefficient, those are the ones that are the right ones. And the ones that didn't, those were wrong, for other reasons. And, I tell people on this program: Don't be like that. Now, that's bad career advice. I get it. But, you know, I want to look in the mirror every morning and be relatively pleased with what I see. And I hope other people do, too. And that's--again, it's the world I want to live in; I want to encourage people to live in that world.
Michael Munger: And there's the--what I like about that argument is that it's true that we probably don't have direct material incentives to defend free markets in the context of the right thing to do. But, it's important that we do it nonetheless. And actually, one of the things that started me, after I heard--in several podcasts--there was a paper in 2004 by Rajan and Zingales. And they said,
The behavior of government is determined, in part, by public mood. But to a greater extent, it is also determined by the special interests being regulated. This is why the free market system is fragile. Not economically..., but politically. While everyone benefits from competitive markets, no one, in particular, makes huge profits from keeping the system competitive and the playing field level. Thus, nobody has a strong vested interested in promoting and defending free markets.
Now, one thing to do is what Stigler did, and throw up your hands and say, 'Well, this is amusing.' And Stigler did take--
Russ Roberts: And study it. And measure it.
Michael Munger: Yeah. We can study it. It's interesting to watch. But another would be to, in spite of the fact that we have no direct material incentive, to point out, nonetheless it's still really important. And there's a lot of things which, collectively, we can, as a culture--as a nation--I don't want to get too, sort of vague-patriotic here. But it is important that we say it precisely, because it's not in anyone's direct material interest. And that is an important part of teaching. And I really worry that economists have abdicated their responsibility to at least offer fair-minded commentary, listen to arguments--that, this is not a church. But the preaching part of it is to say, 'This occurs in the larger cultural context; and that context matters. Let's talk about that.'
Russ Roberts: Yeah, I agree.
Russ Roberts: And now that brings me to the other point I want to make. Which is: Don't you think a lot of this concern about cronyism is not about the passing of time or the maturing of industries or the sclerotic nature of democracy, but is the outcome of an economic process in particular industries and those industries alone? And elsewhere it's not a problem? There's huge parts of the American economy that aren't particularly cronyized. Where people have to make good products. If they don't make good products, they go out of business. They are highly competitive. And those sectors do great. And, a large part of our life is blessed by those kinds of products, produced by those kinds of industries. They are highly competitive. There is no option for them to cartelize through the crony-ish system. They can't. It's too hard. It's too difficult. Transaction costs are too high. Maybe it's antitrust laws. But, they don't. For whatever reason. But it's those other industries that are highly concentrated. Here's what I'm arguing: I don't think concentration is the inevitable result of capitalism. And I don't think it's the inevitable result of every industry. I do think that in 2019 there are a handful of areas where very large firms, that are few in number, are able to wield political power in ways that are quite destructive. But that's where the problem is. It's the information world we live in, where Google and Facebook--they have to compete, but I think they make some serious monopoly profit; and some of that profit is through legislation or certain property rights that have been established or that are not established. I think that matters a lot. I think the banking industry--we've talked about it as highly blessed by political goodies. Outside of that, I mention farming. And, there are creeping licensing problems, which we've talked about on the program before; and I know you're aware of those. But, so much of the rest of the economy is just doing great. And it doesn't seem cronyized. Or am I being naive there?
Michael Munger: I think you're right. I'm worried about the tendency. And, the thing that struck me in writing the article was: It's just a calculus problem, in a way. Microsoft, for example, for a long time said, 'We're not going to have any lobbyists. We're just going to sell our product. We're not going to have any lobbyists.' Then they got in antitrust trouble; they had a couple of lobbyists. Now they have a building. So, some of this is a process of maturation. So, it's true that in a new industry you are focused--if you are making something in a new market, at first the profit opportunities just from making better, cheaper products, you are going to keep hiring engineers. But it doesn't take that many years, before, as a matter of just of calculus, at the margin, the next dollar that I'm going to invest can more profitably be put into lobbying than it can into engineering. It may take a while for that to happen. The other thing that I worry about is that many of the smaller companies have either found a way, or the government has offered this as an opportunity: There's been a huge increase in the number of professions that require licensing. And, you've had a couple of people on the program to talk about this. That's sort of operating in the background. And the cases--the more egregious cases are pretty upsetting--but, in North Carolina, you have to have quite a few more hours to be a hairdresser than to be an emergency medical technician. So, the barriers to entry that it's possible to erect that we don't really notice very much--there's an accretion of these. I don't want to use a bat guano metaphor. But, it's piling up all over the economy. And, I worry that if you do a study of it, there is actually, has been, a big increase over time. So, I would worry both about the mature industries problem and the professional licensing proliferation: that, I think we probably are seeing more cronyism slowly creeping up than you might expect if you weren't thinking about it in those terms. Because it is easy to look at the large, dynamic parts of the economy and say, 'Everything's just fine.' Let's try to do something before it's too late. Even if you are right. Even if we are doing okay, let's make sure we don't go any farther in that direction.
Russ Roberts: Now, part of the reason I think that cronyism is, and the state of capitalism, are in the conversation, to the extent that they are, is a belief--which listeners will know, which I think is false--a belief that the rich have somehow captured all the gains for themselves, of economic growth. And, this is an insidious belief. I don't think it's true. But, if you think it's true--if you believe it--if you believe that the rich have rigged the system so that the average person doesn't get any of the benefits from the economy, then you've got to believe that, 'Yeah. Cronyism is rampant. Capitalism is corrupt. And some form of Socialism is desirable.' And I think that is part of what's underlying the current political conversation we're having in America, which is a widely-held view, certainly among mainstream media--pundits, columnists, and many academics--that over the last 40 years there's been no progress for the average person. If you believe that, then the system is corrupt. I don't believe that. I think that greatly exaggerates the--I think it's literally not true. And I think it greatly exaggerates the severity of the problem we face. And instead of thinking, 'Oh, I guess we need to be on guard about this,' it's like, 'Oh, we've got to tear down the system.'
Michael Munger: I feel like you are Grand Moff Tarkin and I've come in and said, 'I've analyzed their attack. There is a danger.' And, in fact, 2008 and 2009, the events in the financial industry shook my own faith. For just the reasons you say. That's--in fact, there was pretty good evidence that very substantial concentrations of wealth were just baldly protected by the state, in a way that has absolutely no justification. And we made up this false narrative about how it actually saved the world: It was good and moral that we repaid 100 cents on the dollar out of taxpayers who were the ones who had been ripped off in the first place. So, I think there is actually a danger. Now, you can say that, 'I think they over-estimate their chances.' I think they have a pretty good chance. And even if the next election results in a move towards the Left, economically, that isn't as far as I'm worried about. It isn't just the elections that are the concern. It's the sense that people have that the Left is winning this debate. And I think unless we bring back the notion that culture and the right thing to do--because the Left constantly talks about morals and the right thing to do. And, many people on the Right will just say, 'No, no. Markets are a better system.' They make a Consequentialist argument. And, we need to say, 'No; it's actually a better moral system, too. Because it rewards virtue and hard work; and here's the evidence for it.' I think, unless we can do that, we're ultimately going to lose the debate, because we're conceding the notions of character to the Left. Whereas, in fact, we actually have a good position.