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John Maynard Keynes in Modern Macroeconomics Education

January 14th, 2011 Comments off

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It is of interesting note that Paul Krugman and Paul Samuelson, in their dismissal of John Kenneth Galbraith’s The New Industrial State, mentioned that Galbraith was a talented writer (Duhs, 2009, p123). Perhaps it would not be too far-fetched to suggest that such a comment was motivated by the fact that both Krugman and Samuelson were Keynesians. John Maynard Keynes was not known for being an easy read, with scholars and economists alike criticizing The General Theory of Employment, Interest and Money for its complex writing despite its largely practical nature. Keynes, whose fame peaked with the publication of The General Theory heralded some sort of revolution in the economics of the late 1930s. The General Theory created a change in the way governments handled the recessions of a post-Depression era. Once economies were lifted out of depressions, Keynesian policies gradually disappeared and in the 1970s were mostly displaced by Milton Friedman’s monetarism (Stewart, 1993). Keynes may have lost his popularity towards the end of the 20th century, but he returned to attention recently in light of the global financial crisis. Seeing as long after his death Keynes remains a big name in economics, it is only natural then to expect his teachings introduced in a standard macroeconomic course. Hence this essay will examine the content of textbook macroeconomics and how much of it agrees with the economics of Keynes, primarily through the analysis of introductory macroeconomics textbooks.

Looking at the history of Macroeconomics textbooks, we can see that Keynesian economics began to saturate economics textbooks since as early as the 1940s. A study of Paul Samuelson’s Economics shows that Keynesian economics was gradually assimilated into mainstream economics syllabus, starting with its first edition which was loosely structured around Keynes’s concepts. Samuelson’s text was the principle introductory economics textbook of the USA and today it is built around ideas from The General Theory alongside other relatively recent economic concepts such as the Phillip’s Curve. Pearce and Hoover (2005, p186) additionally notes that today’s macroeconomics textbooks are mostly Keynesian. However, it is worth mentioning that most textbook Keynesian economics are not necessarily teachings of Keynes but rather other economist’s interpretations or understanding of Keynes. There exists a difference between (as Alex Leojohnhufvud famously put it) “Keynesian Economics and the Economics of Keynes” (Garrison, 1994). Colander observes that textbook Keynesian policies were not exactly Keynes but rather Abba Lerner’s interpretation of Keynes while Caporaso and Levine (1992, p101) notes that economists such as textbook writer Samuelson placed Keynesian ideas into a neoclassically inspired framework. The latter supports the notion put forward by Littleboy that textbook writers merely picked up bits of Keynes that fit into its neoclassical vision.

Things take a fascinating turn when the discord between Keynes’s own teachings and textbook macroeconomics are made visible. A quick review of standard macroeconomics textbooks is sufficient to show that Keynes was not purely “watered down” or “bastardized” as claimed by some economists, but rather eliminated completely in certain crucial parts. The most obvious would be the lack of the political side of Keynes due to the textbook writer’s pursuit of the measurable and results-oriented components of Keynesian economics. Keynes did not trust the market system to perform satisfactorily on its own, and this forms a core section of Keynesian economics. Sharing a similar opinion with Karl Marx (who is completely absent from most modern macroeconomics textbooks), Keynes denied the ability of the market to keep a steady rate of employment and production. However, Marx went on to claim that the free market system is “violently unstable”, a thought that Keynes disagreed upon (Caporaso Levine, 1992, p101-2).

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John Maynard Keynes in Modern Macroeconomics Education (Part 2)

January 14th, 2011 Comments off

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According to Keynes, too often has Adam Smith’s “invisible hand” been let off with a slap on the wrist despite its ineffectiveness in keeping economies above water and this forms the basis as to why Keynes sees the need for some form of government intervention. Keynes’s pessimism regarding markets was never taken seriously by textbooks, with most writers attributing it to the turbulent period he lived in.

One particularly big predicament for Keynes was the development of the private corporation. A part which the standard macroeconomics textbook fails to give coverage on, the private corporation is to Keynes the cause of faults in the financial market. The distribution of shares as a method enabling individuals to hold wealth in a liquid form generated instability in the accumulation of wealth. Caporaso and Levine (1992, p110) observe that this makes long run commitment to a particular productive enterprise no longer compulsory and places a premium on short term capital gains. As Keynes (1936, p156) put it, those who profit from this are those who best forecast “what the average opinion expects the average opinion to be” a short time ahead of the general public. This in turn encourages speculative activities and in the end results in price instability. Keynes (1936, p159) likens these investors to gamblers, stating that “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”. Keynes advocates share market transaction taxes in order to solve this problem. Simply put, the ultra-short term nature of financial market exchanges would be heavily dampened by a tax that is capable of raising transaction costs. This shifts investor perspectives away from the short run side of the spectrum and reigns in the pace of transactions. This reform along with Keynes’s proposal for an International Clearing Union was never mentioned in textbooks, possibly for their radical nature.

Taking things a little further, it is perhaps fair to say that Keynes would not agree to the content of today’s macroeconomics textbook even if they are based on derivations of his concept. Firstly, the way in which textbooks today present content can best be portrayed as being of mainly mathematical and diagrammatical manner. Today’s textbooks are neoclassical, combining Keynesian theory and classical theory. Macroeconomics textbooks take an engineering approach at seeing the world, resulting in society being projected as a highly mechanized structure to ruling technocrats. This is much in line with the Benthamite movement where society’s utility is given a value and governmental decisions are made to maximize collective utility. On the other hand, we have Keynes who was not just an economist, but was additionally a social reformer and a philosopher. He had a more earthly view of the world and concedes that uncertainty remains an integral part in everyday life. He took note of the way people discount what they don’t know from making future decisions, and how this posed a flaw in the decision-making process. Then there is also the concept of “animal spirits” where Keynes believed people are often governed by their whims and fancies rather than cost-benefit calculation. This is perhaps consistent with his personal life in which he was known to enjoy artwork, have affairs with men, and finally marry a famous ballerina. This quirky side of Keynes contrasts sharply from the rigid economics of textbooks.

In the end, Keynes’s writings and beliefs were to guide people towards what he thought would be an ideal state of society. Before The General Theory, he wrote Economic Possibilities for our Grandchildren in 1930 which dealt with the potential of future living conditions and society.

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John Maynard Keynes in Modern Macroeconomics Education (Part 3)

January 14th, 2011 Comments off

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Ohanian (2008, p10-11) notes that Keynes’s 100 year prediction was highly accurate despite the lack of empirical record and insufficient theory at the time he wrote the essay. Keynes wanted a society where production was no longer a problem and there was equal choice for everyone. To put it simply, all wants can be satisfied due to increasing productivity from constant technological progress. Keynes even forecasted that eventually society will reach a point where too much leisure becomes a problem. Ohanian states that Keynes’s forecast of dramatically decreasing work hours in the future was near to that predicted by a modern growth model, and this was a stunning achievement for his time period. However, his prediction of the future state of leisure is still very far off the mark and for the time being does not seem very likely.

Keynes was no doubt a brilliant contributor to economics, and one that was far ahead of his time. The oversimplification and exclusion of much of his work in textbooks could be seen as insulting by some scholars, but perhaps it is of necessity to the technocratic age that we live in. In an era where the focus on results and technology dominate the analytical process, it is most probably best if the neoclassical vision of textbooks remained for the time being. In conclusion, it can be said that the content of macroeconomics textbooks does leave a lot to be desired particularly when it comes to Keynes and in general, the political economy. By reducing macroeconomics to mainly calculations and forecasts to maximize wellbeing, the more thoughtful and challenging side of economics has been left out. If prior to Keynes textbooks were planned around Adam Smith’s teachings, it would be very interesting to know which economist would be the next to mark a revolution in macroeconomics education.

(approximately 1480 words)

References

Duhs, A. 2009. “Course Notes”, Political Economy and Comparative Systems, The University of Queensland, Queensland, Australia.

Garrison, R. W. 1994. “Keynes was a Keynesian”, The Review of Austrian Economics, Vol. 9 No.1, pp. 165-171.

Littleboy, B, Taylor, J. 2006. “Macroeconomics 3rd Edition”, John Wiley Sons Australia, Queensland.

Littleboy, B. 2009. “Commentary on Keynes”, The University of Queensland.

Ohanian, L. E. 2008. “Back to the Future with Keynes”, Federal Reserve Bank of

Minneapolis Quarterly Review, Vol. 32, No. 1, pp. 10–16.

Pearce, K. A, Hoover, K. D. 2005. “After The Revolution: Paul Samuelson and the Textbook

Keynesian Model”, History of Political Economy, Vol. 27, pp. 183-216.

Stewart, M. 1993. “Keynes in the 1990s”. Penguin Books, Middlesex, England.

Taylor, H. 1936. “Mr. Keynes’s General Theory”, New Republic 86 (April 29): 349

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Stupidity or Satire?: "Restore Economic Confidence by Robbing Banks" at the Huffington Post

March 26th, 2009 No comments

I was actually turking, working on Amazon’s Requester’s “Ask a Question” task when this article popped up: Restore Economic Confidence by Robbing Banks by Spencer Green. The article draws a parallel between our current economic crisis and the 60s bank robbing duo Bonnie & Clyde, suggesting that a new brand of “populist criminals stand up for all of us.”

The interesting thing about this article is that I can’t tell whether it’s a parody of Keynesianism, or it’s someone with a Keynesian viewpoint simply being facetious but still oblivious to the absurdities of his position. Reading it like a libertarian, I see good satire (which is basically true of any statist piece read as a consistent libertarian; it’s either something someone really written or really good satire of the nonsense people believe). Reading it as a real statist piece, it makes my stomach turn.

It’s posted under “Comedy News,” so I’m really thinking it’s satire, but I don’t know. Someone advise me?

More on the hilarity of "mixed economies": Hawaii quits out on child healthcare

October 18th, 2008 1 comment

Apparently, Hawaii’s hailed “universal child health care” initiative has been, well, uninitiated.

http://news.yahoo.com/s/ap/20081017/ap_on_he_me/child_health_hawaii

HONOLULU – Hawaii is dropping the only state universal child health care program in the country just seven months after it launched.

Gov. Linda Lingle’s administration cited budget shortfalls and other available health care options for eliminating funding for the program. A state official said families were dropping private coverage so their children would be eligible for the subsidized plan.

“People who were already able to afford health care began to stop paying for it so they could get it for free,” said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. “I don’t believe that was the intent of the program.”

Basically, this is an illustration of why mixed economies don’t work effectively. If the government guarantees a good or service of certain value to those who don’t have it, it will be exploited. More broadly, any entitlement system will be exploited because it’s simply economically stupid to do otherwise. If you can foist the cost of anything you need onto someone else and you don’t notice or have no moral qualms about the force involved, why wouldn’t you?

Read more…

Some politicians really care about the bailout plan: precisely, 54% in campaign contributions more than those who voted ‘no’

October 6th, 2008 No comments

In the ludicrous atmosphere of platitudes, slogans, and cliches, we certainly hear plenty about how the boys in Washington are off drafting a bailout, er, rescue, err, investment to save the U.S. economy. Yes, I’m sure Barack Obama and John McCain have some idea about how to spend $700 billion that doesn’t even exist – at least more than those banks do! And what about That Congress? Why, nothing but the amassed intellectual wealth of America, legislating for the common good.

They’re doing such a great job that the financial sector decided to throw a little "bonus money" their way – you know, to reward them for working for the common good and all.

This is how the government ‘protects’ the economy. The empirical evidence is in: large corporations don’t spend money for nothing.

But hey, "more regulation" and "the government needs to do something" are the calls of the day, especially among those young people. I wonder if they’ve noticed our national debt lately, have considered the notion of legislative corruption and regulatory capture, or thought about how a bailout might encourage companies to undercapitalize, even decades into the future, allowing them to play the upsides of risky investments and letting taxpayers take the rest. Oh wait.

The government should totally do something, like really.

The Contingency of Socialist Utopias: Some Problems of Central Planning and Rationalist Design   [Part 1]

June 30th, 2008 Comments off

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From time to time an author or thinker will create a work, often in the Utopian genre, which lays out a detailed design of an ideal society. Fourier’s phalanestères are one example: they are described as the structure of a social unit, all the way down to the number of inhabitants and to the shape of the actual buildings that house them.

The general problem with these plans is that they lack generality over time and space. They fail the test of universality. The following will be my random walk through some of the problems with rationalist institutional construction and the subsequent problems of central planning. –more–>Most people would recognize that a particular building design or architecture can become obsolete. Many would laugh if there were an actual plan to actually construct Campanella’s City of the Sun or Fourier’s phalanxes in the present day. Their reasoning would be obvious: those things were designed in an entirely different time, under different circumstances. This is not to say that those authors and many like them put forth their ideas as timeless and never requiring change (some occasionally have had the delusion of technological growth simply stopping at one point), but a large degree of universality is frequently attached to more abstract kinds of social planning.

Some examples of central design are much more concrete than others, but central planning when it involves a particular kind of physical engineering is not the only instance in which central design encounters severe problems. It can also include institutional design. For a long time, it was thought to be sound business strategy to always have a middle-man for many kinds of transactions. With changes in technology, the middle-man has frequently been cut out, and with good reason: he’s no longer needed. Yet what would happen if, in my ideal construction of a society, there were always a middle man between wholesale and retail? What if I claimed that this middle man led to the greatest well-being of my society’s members? Economics would most certainly stand against me.

Despite that, all kinds of social manifestos, utopias, and even national constitutions establish permanent institutions as a feature of the society. It can be a ruling council of Thirteen, a Guardian class, or a president, a 480-member congress, and a 11-member judiciary. They make the mistake of integrating information available at the current time and creating a set of concrete institutions that are to be held as universal, but are not in fact universal. This is symptomatic of a general problem with leftist thought, which is that it is often too concrete-bound in its approach to society. Those contingent concretes – such as the current distribution of income and power in society – are then used as premises from which “universal principles” are derived, like: there’s always the class of the rich and the class of the poor, and the former always oppress the latter. The problem is that those supposedly universal principles only apply in narrowly contingent cases, which makes them not universal (not even considering whether the derivation of those principles is valid). They ignore changing circumstances and technology (never mind all the other fallacies, like the total fabrication of principles of justice, ignorance of actual factors that cause poverty, etc. )

The general empirical principle underlying this is that no mind or group of minds can ever gather, process, and coordinate all of the information necessary to perfectly govern complex human conduct. Even without any normative principles relating to individual autonomy, the idea of governance – especially economic governance – by few over the many is riddled with problems, in theory and as it has been demonstrated in practice. Every economic agent has a delicately unique and complex set of circumstances and preferences, and has direct access to his own set. Supposing that someone trying to make economic decisions for this person was acting totally altruistically (another very generous premise, again as demonstrated in practice), he would require a means of translating that agent’s changing circumstances and preferences (closely related to subjective experiences of pain, pleasure, etc. into usable information which he then must process to prescribe a course of action which must be then executed correctly. Multiply this process over thousands or millions of people, and there is quite a huge problem. It is wishful thinking already that one person can make decisions for another effectively (people already have enough problems making decisions for themselves), so it must be even more wishful to think that some people can do it for many others, even suspending for a moment the selfish interests of those decision makers.

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The Contingency of Socialist Utopias: Some Problems of Central Planning and Rationalist Design   [Part 2]

June 30th, 2008 Comments off

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Only the free market (which is run by, precisely, nobody) is capable of coordinating the largely diffuse information spread among economic agents into forming an optimum output. This is not just an optimum regarding maximal manufacturing output for the lowest possible cost, a common straw man constructed against the free market to paint it as a cutthroat institution of total efficiency. That notion is just a Platonic hangover as if goods are produced for the goods’ sake which ignores why those goods are created in the first place: to enhance an individual’s well-being. The free market forms an optimum output with respect to the amount of resources available, and, more importantly, to the totality of the individual preferences of all market participants.

Very closely related to the information problem of central planning is pricing or, more broadly, valuation of goods, services, or virtually everything whose control and consumption can be transferred from one individual to another. Valuation by demand is self-defining: what someone is willing to pay for something is what it’s worth. No Platonism necessary, no intrinsicism, just pure empirical fact. In a centrally planned system that prohibits free association, value must be decided; otherwise, there is no meaningful way of allocating produced goods among the members of society. Again, suspending the selfish interests of the appraisers, this leads to bizarre information problems and to the humorous possibility of the “value” contributed by producers exceeding the amount of goods and services available in an economy, resulting in people deserving more than is possible to provide.

Another problem with central planning is, in brief, the actual presence of human beings. Markets can’t be avoided; the free market is all about incentives. Proof in practice of markets is the responsiveness to incentives embedded in human nature, no matter what system prevails. Black markets develop in response to government prohibitions; defying the law becomes a business, where risks are taken but large profits are reaped. In totalitarian systems (especially those with distributive wealth patterns, like in communism) individuals use their positions as or connections with bureaucrats and politicians in order to gain a bigger share of the pie. Even in our purportedly “free” economy in which the government intervenes to harness the “dangers” of the free market, interest groups spend billions of dollars yearly lobbying federal, state, and local governments getting laws passed in their favor to the detriment of others and electing politicians and bureaucrats who use the force of the law to increase business profits.

(Incidentally, the few errant cases in which people’s preferences are static and minimized do not undermine this universality of the human condition, for the reason that incentives can be structured to shun accumulation of material possessions or other conventional measures of well-being. Some tribes have a social value of personal prestige over wealth, and thus individual members will often spend all of their wealth on extravagant feasts for the tribe or on constructing large memorial edifices. )

Up to this point I’ve freely switched back and forth between central institutional design and central planning. Though there is a distinction between the two, they ultimately suffer from the same problems. First, even in a static environment, central design and planning simply lack the coordination of information necessary to achieve anything close to efficiency. Gathering the information is either next to impossible or is so costly to achieve that it defeats the purpose of establishing any institutions in the first place. Then, not only must the institution measure up to the circumstances of the time, it must be resilient and adaptable to the rapidly changing and non-ergodic world. The environment changes. Technology changes. People change. If the institution itself entails an active form of intervention (such as value arbitration, as in Marxism), the central planners constantly face the problem of incomplete and changing information.

Any societal plans that establish hard-and-fixed institutions and that rely on constant governance are prone to disaster, especially when abuse of power is considered. Up to this point, I’ve neglected to address that fact, which is the most important of all: much of the preceding discussion generously takes for granted that those involved in the central planning have no interest but doing their job the best they can. For the most part, that means that I’ve ignored an even more fundamental flaw in central planning. Yet even with that, it still had problems, didn’t it?

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Lobbying, Subsidies, and U.S Multinational Corporations (Part 2)

June 30th, 2008 Comments off

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Prior to any government assistance, a firm makes a certain level of profit; they can then receive more profits via subsidy from the government, but must count their expenditure in attaining those subsidies against them. EL is not only meant to contain formalized lobbying spending conducted through institutions established for that purpose, but any expenditure of resources on attempting to influence political outcomes (the primary means being appeals to officeholders’ individual interests). EL includes election campaign contributions to candidates who promise to reflect their contributors’ interests and any promises of special employment or other benefits after a policymaker’s term in office. It also consists of the payment of lawyers to assist policymakers in drafting the language of policies and experts to assist in implementation.

Next, we must consider the interests of the policymaker, and his obligation to the public:

Ug rEL f(Cp)a (2)

The government policymaker’s utility, Ug, is the difference between the benefits received from private interests and a penalty caused by institutional mechanisms for public accountability. The first component is the product of some proportion r times the firm’s lobbying expenditure EL, representing the amount of EL that government agents “capture” for their own gain. Lower values for r tend to indicate more reliable institutional structures separating private from public interests. If r had a value of one, lobbying expenditure would essentially be direct bribery in exchange for arbitrary decree. The more that a firm has to spend in figuring out how the law works, what kind of law would benefit them the most, and other institutional intricacies, the lower r is.

The second component constitutes the role of the public in holding policymakers accountable for their decisions. It is the product of some proportion f times the perceived cost (to the public) of a policy, raised to an exponent a. a can be taken to represent the level of public attentiveness and responsiveness to how their tax dollars are used, and it is assumed that a ≥ 1 (if it were otherwise, the public would penalize the government marginally less for each extra dollar it spends- an absurd outcome). f represents the institutional manifestation of the public’s attitude: the higher it is, the more sensitive policymaking must be to public opinion. We also constrain this parameter between 0 and 1, for practical purposes.

Thus far, we only defined public opinion as a function of the perceived cost of a subsidy, which is actually defined by the actual cost of the subsidy minus some error:

Cp Cs ui (3)

Moreover, the cost of a subsidy is the quotient of the subsidy’s value over some efficiency proportion F > 0:

s F*Cs                                                                                                                (4)

Thus, substituting (4) into (3) and then into (2), we have

Ug rEL f(S/F ui)a (5)

F represents how cost-effectively the government can perform the policy at hand. ui indicates the level of misinformation the public has about the cost of a subsidy.

Taking the first-order conditions of each equation (i. e. optimizing firm profits and government utility with respect to the choice variables, s and EL), we attain an equilibrium level of s:

s ((r*F/a*f)1/(a-1) ui)*F                                                                                      (6)

From this, general intuition can be drawn about how each parameter affects the equilibrium subsidy value- in more plain language, how institutional, economic, and political environments determine the incentive structure for policymakers’ behavior. In short, differentiating with respect to each parameter individually yields the following results: greater government efficiency increases subsidies (dF/ds > 0); structural corruption increases s (dr/ds > 0); misinformation increases s (dui/ds > 0); Public responsiveness decreases s (da/ds < 0); and strong public institutions decrease s (df/ds < 0).

The model operates on a short-run, ad hoc basis; the equilibrium value reflects optimization from a single firm’s perspective at a particular point in time. Appropriately, the parameters differ depending on the specific firm’s (or industry’s) case, the institutional nature of the policy in question, the public attitude toward the symbolic issues, etc. For the most part, this is concordant with the reality of the assumed profit-maximizing firms: they are willing to gain at anyone else’s expense. Overall, the model given above is not intended to deal with quantitative specifics, but to create an overarching cost-benefit analysis of one method of altering a firm’s profits: exploiting politics. It is sufficiently abstract to accommodate any form of government which allows for some degree of private property, whether it is a dictatorship or a modern liberal democracy; the parameters are what change, but not the logic.

With quantitative reasoning in mind, we can begin to examine the qualitative aspects of the lobby-subsidy process. The distinction between “symbolic” and “instrumental” policy, a concept outlined by Murray Edelman in The Symbolic Uses of Politics (1964), is critical to fully understanding how MNCs (or any special interests, for that matter) can successfully have their private interests supported by government policies, even when those policies are detrimental to the public as a whole. He discusses the reality of the gap between the symbols invoked when policy decisions are being made and the actual instrumental, material status of such policies (i. e. what kinds of resource transfers the policy entails). These symbols are aimed at triggering conditioned responses, and are meant to be a substitute for the actual things they represent. For example, “the elimination of poverty” is supposed to trigger a positive response in favor of a policy, but its implementation may in fact be a tax break for the wealthy.

In accordance with that idea, important lobbying strategy lies in promoting favorable ideas to support firm or industry-specific goals. The aim is to achieve ideological or empirical consensus in policymakers and in, more importantly, the public. While some expenditure for this objective is through private organizations, the end result when it is successful is a favorable alteration of the law. [3]

Besides the standard range of direct government benefits which multinational corporations seek for their domestic markets (direct subsidies, tax breaks, etc. MNCs often pursue policies that positively affect their standing as international companies (or negatively affect their competitors’). This could mean, for example, arguing for a tariff that may not be necessarily to inhibit a rival’s trade, but to make its production inputs more expensive if it depends heavily on outsourced components. MNCs can lobby for direct negotiations or even the use of force between its home country and a potential host country in order to increase its stock of investment abroad. These are but two examples of the many ways in which MNCs can attain indirect subsidies, whose legislative elements frequently obscure their ultimate beneficiaries who, in public discussion, are supplanted by symbolic language.

U. S. MNC Lobbying in the 90s to the Present

American institutions have a long history of lobbying, beginning in essence with the first amendment of the Constitution: “[Congress shall make no law abridging] the right of the people peaceably to assemble, and to petition the government for a redress of grievances.

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Lobbying, Subsidies, and U.S Multinational Corporations

June 30th, 2008 Comments off

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In 2006, U. S. interest groups spent $2. 44 billion on reported lobbying expenses- approximately $5 million per Congressman. [1] A large portion of that expenditure came from multinational corporations (MNCs), the famed special interests who generate and control large amounts of money and are behind the sinister conspiracies in action thrillers. Notwithstanding fantastical story-telling, it is important to investigate why these corporations spend so much money on Capitol Hill. For a basic starting point, if we know that an agent is profit-motivated, and time after time he spends money on an activity, there lies only one inevitable conclusion: that he believes he would be worse off without doing it. Furthermore, long histories of political lobbying in the world also have shown that, on average, such expenditure pays off. For all the literature on corporate strategy, one area of theory that has been covered in comparatively less detail is that of the political relationship between a MNC and its home country, specifically in terms of the role of the MNC in ultimately affecting its home government’s policies. –more–>Lobbying can be generally defined as the expenditure of resources by a firm or group of firms in order to secure a favorable political or legal environment for their activities. Though lobbying actions are most frequently geared toward achieving preferable domestic policies, larger governments with regional or international influence can be petitioned for favorable foreign policies. Domestic interest groups attempt to gain, often indirectly, economic benefits through a government’s exclusive diplomatic channels. Governments often hold a great deal of information unknown to the private sector, as well as direct contacts with officials and lawmakers of foreign countries. As monopolists of force, states also reserve the threat of war as a means to their ends. Economic interest groups can, instead of expending resources on adjusting their business to market conditions, expend those resources on adjusting market conditions to their business (“rent-seeking”).

For markets, lobbying has profound implications. The law has nearly limitless potential to interfere in the economy. Where there is this capability, laws become a commodity to be bought and sold. A fundamental error to make is to think that politics are non-quantifiable and non-economic. To quite the contrary, political structures are simply markets in which the rules are different (albeit radically at times). “Political entrepreneurship” becomes as much a skill as innovation in one’s industry: if the principal goal is profit for a group of people, then a dollar earned productively or coercively is, other things equal, the same.

The United States is the prime example of a powerful nation whose foreign dealings and economic policies are highly responsive to special interests. Both the structures of the electoral system and the government’s coercive powers grant a significant level of policymaking access to private organizations. A thorough examination of the government’s scope of powers, the structure of policymaking institutions, and the long-term trend of increasing reported lobbying expenditure reveals considerable evidence that political proficiency is part of an essential set of skills for the modern U. S. multinational corporation.

General Theory Concerning Multinationals and Lobbying

The political sphere is even more immensely complicated in the absence of the premises upon which the free market functions. Political structures frequently alienate the agent from the results of his actions (or inaction) in some way. The chief structure that causes this alienation is bureaucracy, partly via “diffusion of responsibility” effect. While this phenomenon occurs to some degree in free markets with large firms,[2] it is less of a problem, because productive deficiencies are more quickly answered by declines in profits and labor market adjustments. The obstacle is most often described as the principal-agent problem, which is especially pronounced in government. Whereas in the private sector, the “principal” at hand is concerned with easily quantifiable profits, the objectives of government institutions are much more specific, varied, and difficult to measure. On one hand, firms are naturally controlled by productivity, and in turn, profits; on the other, governments are validated simply by force and by the cost inefficiency of rapid change (revolution). Though democracies require input from the entire population, their input is channeled through a central decision-making and enforcement process; this should not be mistaken for the kind of integration of dispersed information that markets have. The end-state of a market is the product of an aggregation of many individuals associating in ways that benefit them individually, each person possessing a small amount of resources (relative to the rest of the economy). Alternatively, the end-state of government is the product of a pre-established institutional structure (e. g. a constitution) determining how to allocate a large amount of resources.

That the agents involved in government seek the maximization of their individual utility should not be ignored. In fact, this is the core assumption that does not differ between private and public activity. The agent does not change; only his constraints do. Though this view may appear to some as cynical, the basic intuition behind it is that while the costs of some kinds of choices may differs, an agent’s preferences generally do not change upon attaining public office. As might be argued, a sense of duty or responsibility (conscience? may develop, altering the agent’s utility function. Nevertheless, it is clearly too limited to overcome the bureaucratic risk-reward gap.

For purposes of simplicity, we will assume that firms as a whole attempt to maximize their profits, without the risk of individual actors in the firm placing their own individual benefit above the firm’s profit (e. g. no corrupt CEOs trying to swindle shareholders). The objective of this investigation is to examine the specific nature of the relationship between rational market actors and government institutions.

It was stated earlier that laws can function as a commodity to be bought and sold. Beyond mere metaphor, we can construct a model that recognizes that political institutions are entities that possess the ability to, ceteris paribus, exogenously impose any desired condition of operation on market processes. Because these institutions are operated by individuals who are factually no different than market actors, the result is that these individuals possess some degree of that exogenous power for use at their own discretion. They are liable for what they do with it, but not completely. It is this discrepancy that subjects policymaking to a certain level of autonomy, and thus subjects it to market forces. From these assumptions, we can model the lobby-subsidy process.

The interaction between firms and the government can be summarized by the following model, beginning with a firm’s basic profit function:

pd pm s – EL (1)

A domestic firm’s profit, pd, is a linear function of the firm’s exogenous market profit (pm), plus subsidies (s), minus lobbying expenditure (EL).

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