Nov 16, 2010

Posted in Public Choice, Rent-Seeking, Uncategorized

Republicanism, Rent Seeking, and Federalist No. 10

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I have always seen an implicit awareness in our republican (lowercase r) form of government of the perils of rent seeking, and an attempt to curb these deleterious–yet unavoidable effects. James Madison phrased it perfectly in Federalist No. 10:

There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects. There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests. It could never be more truly said than of the first remedy, that it was worse than the disease. Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency. The second expedient is as impracticable as the first would be unwise. As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other; and the former will be objects to which the latter will attach themselves. The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.

Factionalism is not that much different from classic interest-group based rent seeking. Small groups unite to use their collective clout to extract benefits from the government. Madison provides classic examples of various interest seeking rents from the legislature to enact favorable legislation in Federalist No. 10:

Is a law proposed concerning private debts? It is a question to which the creditors are parties on one side and the debtors on the other. Justice ought to hold the balance between them. Yet the parties are, and must be, themselves the judges; and the most numerous party, or, in other words, the most powerful faction must be expected to prevail. Shall domestic manufactures be encouraged, and in what degree, by restrictions on foreign manufactures? are questions which would be differently decided by the landed and the manufacturing classes, and probably by neither with a sole regard to justice and the public good. The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.

As Madison wrote, factionalism and rent seeking cannot be eliminated without eliminating liberty itself. All you can do is “control[] its effects.” With classic republican representatives in office, one need not worry so much about the effects of rent seeking. But this will not always be the case. Madison recognized this inherent failure in elected officeholders:

It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole. The inference to which we are brought is, that the causes of faction cannot be removed, and that relief is only to be sought in the means of controlling its effects.

So how does our Constitution “control[] the effects” of factionalism,or rent seeking?

By what means is this object attainable? Evidently by one of two only. Either the existence of the same passion or interest in a majority at the same time must be prevented, or the majority, having such coexistent passion or interest, must be rendered, by their number and local situation, unable to concert and carry into effect schemes of oppression.

This last sentence has always intrigued me, especially when I consider it against the backdrop of the document the Federalist was championing–our Constitution. If republican principles fail, how do you render majorities “unable to concert and carry into effect schemes of oppression.” The answer to this question lies in what I see as part of the genius of our Constitution–structure. Federalist 10 focuses heavily on our federalist system, with the checks of the states on the federal government.

There are several other features of our Constitution that fit neatly into Madison’s asserted goal of limiting the ability of factions to operate. First, I see the single greatest check on rent seeking is the limitation of what the Federal Government can, and cannot do–namely through the enumeration of powers in Article I, Sec. 8. For example,  if the United States Congress could no longer do X, an entire lobbying industry to promote legislation governing X would immediately vanish. No campaign finance laws can accomplish this. Most campaign finance laws equate to putting a bandaid on a virus. The issue is the ability of Congress to do certain things. Interest groups seeking legislation that benefits them, and not their competition, is purely rational. Debtors want laws that favor debtors. Creditors want laws favoring creditors. This is nothing new.

However, if Congress has a general police power, and can do whatever the heck it wants, interest groups recognize this, and seek favorable rents from all areas. Second, the appointment of judges with lifetime tenure serves as a way to shield judges from the deleterious effects of rent seeking and lobbying. Judges with fixed salaries and tenure during good behavior are arguably free form influence of factions. In contrast, judges who have to stand for elections are easily susceptible to the impacts of rent-seeking. Is this undemocratic? Absolutely. Is it republican. Yes. As Professor Zywicki put it:

As for me, I don’t claim to be a democrat.  I am a constitutional republican.  And by that measure I am completely untroubled by the way in which the federal Constitution provided for the appointment of judges as well as the way it originally provided for selection of Senators as systems designed to fit within the constitutional scheme of protecting individual liberty and limiting rent-seeking by special interests and agency costs by politicians.

Third, the appointment of senators by state legislatures aimed to limit the ability of factions to rush a candidate into national office. I am not an expert on the 17th amendment, so I’ll stop there, but this anti-democratic initial rule was quite republican. I have been thinking about this topic since 2L. One of these days I will get around to writing something on this point (assuming someone has not already done so).

Update: I would also add to this analysis Hayek’s The Constitution of Liberty and Law, Legislation, and Liberty talks a lot about how the common law evolved as a method to protect liberty. Plus, as I’ve written in my work on Pierson v. Post, the common law tends to mirror economic efficiency. I hope I return to this at some point in the future.

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