Is Politics Efficient? A discussion of Filip Palda's "A Better Kind of Violence"

Illustrating why the political system can simultaneously do so much good while being "captured" by powerful interest groups; this book provides context to the Chicago School's "Total Theory of Power."

I’m trying to start writing more regularly, so I want to try and do a book discussion and/or a price theory problem every other week for this blog. I don’t consider these book discussions “reviews” because I’ll mostly summarize their ideas and give my takes on them — I don’t consider myself a good judge of quality yet, at least for more technical subjects. The hope for my economics blog posts will be to give a conceptual overview of a subject or area in a way that’s readable by a lay audience. But, I target these posts more toward people who already have an introduction to an area. Courtesy of my being a stickler for citations, these posts will also contain a good bibliography for a student looking for self-study. Also, it’s good to note that I’m not an expert on economics or anything. I have a Bachelor’s in Mechanical Engineering and a Master's in Economics (Technically social sciences, but my concentration was in Economics), so my readings are likely way more prone to error than someone with a Ph.D. in either field.

For the first inaugural post, we have Filip Palda’s A Better Kind of Violence: The Chicago School of Political Economy, Public Choice, and the Quest for an Ultimate Theory of Power. This excellent introductory book lays some context to the Chicago School of Political Economy (CPE). There are a handful of typos, and the book is too brief for any deep analysis but provides some much-needed context before one dives into the papers it discusses for a complete picture. Furthermore, the book is a very light read, clocking in at only 120 pages. In this blog post, I will summarize the history of thought that Palda lays out in his book and give my thoughts on his presentation and accuracy.

TLDR:

Despite the “free market” reputation of the University of Chicago — the school of political economy that comes out of the university emphasizes that for whatever objectives the government is undertaking, the aim is being pursued efficiently. This efficiency applies not just to democracies but to all governments. In the same way economists assume that a firm is “efficiently” producing private goods given its production function to maximize profit, CPE assumes government uses efficient methods to achieve its objectives. This school emphasizes competition among pressure groups and transaction costs in its explanation of government activity.

Palda explains how the germ of this idea started in Coase’s theory of transaction costs and then moves on to Stigler’s theory of regulation. Palda explains that Stigler’s approach of regulation as solely predatory ignores that the predators themselves have a vested interest in increasing the size of the pie — after all, more pie means more takings for the pie thieves! Then he shows how Becker’s theory of competition amongst pressure groups “closes the loop,” as it were, and shows that ceteris paribus, more efficient transfers will tend to win out over less efficient transfers. This final theory is what Palda calls “the Total Theory of Power. The emphasis on efficiency conflicts with economists’ intuitions and the competing Virginia School. Finally, Palda wraps up with a prescient take on the future of political economy.

Towards a Total Theory of Power: Regulatory Capture

The first step in the logic of CPE is framing what the government does: the idea that government is efficient is unintuitive to anyone who’s been to the DMV. CPE’s efficiency result doesn't require voter rationality or benevolent, omniscient politicians. We’re just going to look at cold self-interest. But we also need to discuss what “efficiency” means in economics, which is exactly what Palda does.

Palda starts by discussing the Pigouvian turn in economics in the early 20th century and the focus on social cost and “economic efficiency.” Economic efficiency is summed up by the idea that the economy is in a state where someone can’t be better off without hurting someone else. If we’re producing everything worth making — the only way for me to improve my lot is by taking some of the worthwhile stuff from someone else. Typically, this means “dead weight costs,” or costs that hurt someone without helping someone else, are zero. For example, take the regulation of requiring barbers to be licensed. There is a direct transfer to the licensed barbers from the consumers through higher prices. Yet, consumers don’t only pay higher prices; they change their behavior in unpleasant ways, such as not going to the barber as often. Long, unstyled hair costs the consumers as they would have preferred to have the previous prices to avoid this. This cost of long hair the consumer bears doesn’t benefit anyone — thus, they are called “dead weight.”

The next thing to note is Stigler’s Coase theorem. If you read Coase’s The Problem of Social Cost¹, the emphasis is entirely on the fact that the assignment of property rights matters deeply for the efficiency of a set of transactions if there are transaction costs. Stigler’s Coase theorem, which inverts that problem, states if there are no transaction costs, property rights assignments don’t matter. A good discussion of the Coase theorem can be found here on the excellent Economic Forces substack. However, these property rights are assigned by things such as law, the court system, and of course, other political institutions.

So what Coase did for CPE is just to set the stage for it: institutions matter, but what determines the institutional makeup? And why do local governments require licenses to sell Christmas trees? This is where Stigler’s theory of regulation² comes in and where Palda introduces it. Government programs and broader institutions are initialized in response to some interest: There are no “inclusive” and “extractive” institutions a la Acemoglu³. In the CPE view, all institutions are extractive: it’s just a matter of who the extraction is from and who it’s going towards. Stigler’s viewpoint claims that only industries and corporate pressure groups “capture” institutions and pervert them away from their initially noble goals. Thus the reason why local governments require licenses to sell Christmas trees is not due to some Christmas tree externality but that it restricts competition and benefits well-established vendors at the expense of smaller competing startups.

Palda then notes that Stigler’s theory helps explain much of the anomalous government behavior in the traditional public finance model of Pigou. However, this is hardly a complete view of the government. There are plenty of things government does that actively benefit consumers and aren’t captured by some industrial interest. One would hardly claim that government funding for orphaned children comes from the magnificently wealthy and politically powerful foster home industry screwing over taxpayers by raking in the big government bucks. The reasonable explanation for caring for orphans is that it just makes sense. It’s ethical, and preventing children from growing up in squalor pays for itself. But the Stigler theory doesn’t explain this well, but the Pigou story seems to work out quite well. But Pigou’s story doesn’t seem to explain the existence of Christmas tree licenses, but it explains the existence of foster home funding. We seem to be at an impasse.

This is where Peltzman’s more general theory of regulation comes in⁴. Peltzman proposes a relatively intuitive setup. The idea behind Peltzman's more general theory of regulation is that you have a "Regulator" whose job is to regulate a monopoly. He needs political support to ensure he stays in office. You can think of this as either an elected regulator or a regulator employed by elected officials. So to maximize his odds of staying in power, he can get support from the monopolist he is regulating or the broader public. However, support from either group is subject to diminishing returns. So a regulated price will generally be between the socially optimal competitive price and the profit-maximizing monopoly price. This kind of competition over transfers inspired Becker to create the "Total Theory of Power" that we've been building up to.

The Total Theory of Power

Before we get to Becker’s logic, let’s consider the following scenario. Suppose you are being robbed. What’s the best method of robbing you, from the thief’s point of view? Well, the primary cost to the thief is when the victim resists. Who knows, maybe the victim calls the police, and the robber goes to jail for a long time, or maybe even she gets killed. So, typically thieves operate in such a way as to minimize resistance from their victims, either by robbing someone when they are not around or using threats of violence to prevent the victim from resisting. Resistance is also costly on the victim's part; for example, by physically resisting the Robber, the victim could get seriously injured.

In the “transaction” depicted, the damage done by the Robber is partly the value of the items she steals and partly the “excess burden” imposed by the transfer where the victim gets injured in some form. The Robber only obtains the value of the goods she steals; however, the incentive for the victim to resist will be based on the total damage done by the thief: the value of items lost and the excess burden. In this way, victims have an innate “advantage.” Thus, to minimize the cost of the robbery, the thief is guided “as if by an invisible hand” to conduct her robbery in the most efficient way possible. Thus we would expect con men, who steal so that the victim hardly knows they're being robbed, to be much more effective than traditional stick-em-up muggers. Becker isn’t alone in using this logic either; Piccione and Rubinstein use a similar logic in their “jungle” economics papers.⁵

This is the fundamental insight in Becker’s “total theory of power⁶." Becker frames the government as merely a method to transfer income from one “pressure group” to another. There is no “general interest,” as in Peltzman’s theory, and the groups that can “capture” the government aren’t limited to just industry interests, as in Stigler’s theory. So, Becker's theory is just this concept of the importance of deadweight costs in power struggles but applied to a context reminiscent of Olson's "The Logic of Collective action⁷."

There are a lot of additional insights in the paper, and I highly recommend you read it. But the gist of the paper is that pressure groups' relative abilities to produce political pressures induce the government to transfer income from one group to another. Generally, there's a bias in favor of efficient transfers for the same reason that the thief in the above example is biased toward "efficient" means of stealing from her victims. This doesn't mean "what is, is efficient," as many people criticize CPE⁸, but rather "the government is transferring income as efficiently as possible." This doesn't mean that sugar or oil subsidies aren't inefficient, but they are the best way for the government to transfer money from the public to the sugar and oil lobbies that demand such transfers under the CPE view.

Virginia vs. Chicago

However, CPE is not the only perspective on political economy, as Palda notes. The other major perspective being built simultaneously is Buchanan and Tullock’s public choice theory, also known as the Virginia school of political economy. This school emphasizes government failures in various forms — wasted expenditures on rent-seeking competitions⁹, inefficient revenue-maximizing bureaucracies¹⁰, and leviathan governments¹¹. There is some tension with the concept that the government does what it's trying to do with supreme efficiency.

Another source of conflict are the schools’ views of the economist's role in government. The CPE view is that there essentially is no such role — pressure groups make all policy, and the competing pressure groups will duke it out to equilibrium. The Virginia school, by contrast, thinks that governments have a large role to play in analyzing and determining the efficiency of various governmental institutions. Take, for example, the Mercatus Center — one of the largest institutions most explicitly aligned with the Virginia school:

“Our goal is to bridge the gap between academic research and public policy problems, advancing an understanding of the economics of public policy. We do this through education (graduate student training), research (peer-reviewed academic publications and policy studies), and outreach.”¹²

If CPE is correct, these institutions have no such point, and all the money that goes to think tanks such as Mercatus is wasted. However, Chicago’s “tight prior” indicates that these think tanks come from a competitive equilibrium for manipulating government policy. If CPE is correct, and there’s nothing academics can do to influence policy — why do think tanks exist? Perhaps they are official-sounding propaganda machines, or perhaps there’s some information provision problem they help solve? It does not seem reasonable to me that all money spent on think tanks is wasted.

A Synthesis of Sorts: “Formal Theory”

Palda closes out his book by noting that mechanism design and game theory may overtake the old-hat Chicago-Virginia debate. Palda published his book in 2016, which was still somewhat in the adolescence of the modern “formal theory” that is still rising to dominate political science; after all, Scott Gehlbach’s book¹³ only came out a few years prior, and the APSA only got its first formal theory society in 2020. Some readers may already be familiar with more modern treatments of political economy coming out of this so-called ‘formal theory.’ Formal theory relies on game theory and mechanism design to determine the outcomes of various political games. For example, you can see some of the seminal studies from scholars such as Scott Gehlbach¹⁴, Ethan Bueno de Mesquita¹⁵, and Scott Ashworth¹⁶ for examples of how modern "formal theory" is done. The modern treatment of political economy relies on searching for equilibria in games that mimic whatever institution is under study. This way, it is closer to the old Virginia school than Chicago’s a-institutional attempt at a “total theory of power.”

Overall, I quite like the book. It helps iron out my intuitions on the history of political economy — and it makes the CPE view of government efficiency seem much more reasonable in context. My biggest complaint is that the writing is confusing and waffling at points — sometimes, he gives in to the anti-CPE complaint of “what is, is right and just,” which is not what his reading of Becker says! For example, look at the following passage at the end of the book:

“No one summarizes the Chicago view better than 18th-century poet Alexander Pope. In his Essay on Man he wrote:

‘All Nature is but Art, unknown to thee
All chance, direction which thou can’st not see
All discord, harmony, not understood
All partial evil, universal good:
and spite of pride, is erring Reason’s spite,

One truth is clear; Whatever is, is RIGHT’.”

Now compare that to Palda’s discussion of the total theory of power here:

“In stating that ‘political policies that raise efficiency are more likely to be adopted than policies that lower efficiency,’ Becker sowed confusion. He would have done better to qualify this sentence by adding ceteris paribus. All other things held constant. These ‘other things’ can overwhelm and negate the efficiency Becker spied sprouting amid conflict between interest groups.”

This inconsistency is incredibly annoying. Which is it? Is CPE a Panglossian rose-tinted viewpoint, or is it the view that it merely claims that governments are instrumentally efficient in the same way that firms are profit-maximizing? I think the correct reading of Becker is the latter.

Overall, I think Palda’s book is good for what it does — give context to the CPE program for those interested young people like me who weren’t aware of all the debates. The handful of typos in the book is also a minor annoyance.

Feel free to criticize the post, book, or my take on it in the comments or to recommend a different book I should cover next time. I’m trying to flip between an engineering book and an economics book every other week.

For my next post, I think I’ll use a price theory problem or cover some of the endogenous growth literature. After that, I’m considering discussing one of Thomas Schelling’s books on conflict and Petroski’s To Engineer is Human.

1. Coase, Ronald Harry. "The problem of social cost." The Journal of Law and Economics 56, no. 4 (2013): 837-877.

2. Stigler, George J. "The theory of economic regulation." In Chicago Studies in Political Economy, pp. 209-233. The University of Chicago Press, 1988.

3. Acemoglu, Dar”n, Simon Johnson, and James A. Robinson. "Institutions as a fundamental” cause of long-run growth." Handbook of economic growth “ (2005): 385-472.

4. Peltzman, Sam. "Toward a more general theory of regulation." In Chicago Studies in Political Economy, pp. 234-266. The University of Chicago Press, 1988.

5. Piccione, Michele, and Ariel Rubinstein. "Equilibrium in the Jungle." The Economic Journal 117, no. 522 (2007): 883-896.

6. Becker, Gary S. "Public policies, pressure groups, and dead weight costs." In Chicago Studies in Political Economy, pp. 85-105. The University of Chicago Press, 1988.

7. Olson, Mancur. The logic of collective action. Vol. 124. Harvard University Press, 2009.

8. Pasour, Ernest C. "Economists and public policy: Chicago political economy versus conventional views." Public Choice 74, no. 2 (1992): 153-167.

9. Tullock, Gordon. "Rent seeking as a negative-sum game." Toward a theory of the rent-seeking society 16, no. 36 (1980): 8.

10. Niskanen, William A. Bureaucracy & representative government. Routledge, 2017.

11. Brennan, Geoffrey, and James M. Buchanan. "Towards a tax constitution for Leviathan." Journal of Public Economics 8, no. 3 (1977): 255-273.

12. “About Mercatus.” Mercatus Center. Accessed January 15, 2023. https://www.mercatus.org/about-mercatus.

13. Gehlbach, Scott. Formal models of domestic politics. Cambridge University Press, 2021.

14. Gehlbach, Scott, and Konstantin Sonin. "Government control of the media." Journal of Public Economics 118 (2014): 163-171.

15. De Mesquita, Ethan Bueno. "The quality of terror." American journal of political science 49, no. 3 (2005): 515-530.

16. Ashworth, Scott. "Reputational dynamics and political careers." Journal of Law, Economics, and Organization 21, no. 2 (2005): 441-466.