Cronyism, & the demand for redistribution

Is actually-existing capitalism a fair or a rigged game? The answer matters a lot for attitudes towards redistribution, as some recent experiments by Matthias Sutter and colleagues show.

They got people to choose between a safe investment and a risky one. After the pay-off to the risky investment was seen, they asked third parties whether they wanted to redistribute.

When the pay-off to the risky asset was determined fairly – by the toss of a coin – few people were complete egalitarians. However, they then tweaked the experiment so that subjects who chose the risky asset could toss the coin themselves and report the result without anybody checking it. In this experiment, the number of third parties who were egalitarians tripled.  

Even the suspicion of cheating – let alone the reality – creates a big increase in demand for equality.

It’s in this context that we should read three things I’ve seen recently:

 - A survey of CEO pay by Alex Edmans, Xavier Gabaix and Dirk Jenter finds that high pay cannot be entirely explained by maximizing of shareholder value, and that rent-seeking plays a part.

 - Luigi Zingales argues (pdf) that corporate and political power are becoming increasingly intertwined, and this is a threat to the free market, prosperity and democracy.

 - Graeme Archer calls on the government to fight the “crony corporatism” which has seen bosses’ pay soar without any increase in economic efficiency.

What we have here are mainstream and rightist writers acknowledging that the game is rigged, at least partly. Rhetoric about capitalism is changing. Even outside the left, the rich are no longer seen (only) as talented public beneficiaries whose rewards are the product of free markets, but also as thieves who exploit power for their own ends.

Sutter’s experiments suggest this should cause a big rise in demand for redistribution. We don’t need to prove that theft and rent-seeking are widespread; the mere suspicion of it creates many more egalitarians.

But there’s a quirk here. Sutter’s experiments also found that even where there is that suspicion of cheating, many people remain libertarians who refuse any redistribution. This isn’t wholly unreasonable. They might judge that the danger of stealing money from the honest risk-taker outweighs the desire to punish cheats. Or – to translate Sutter’s results into the real world – they might not want to deter beneficial risk-seeking entrepreneurship.

Professor Sutter and colleagues infer from this that the suspicion of cheating creates political polarization.

I draw another inference. It’s that we need much more than redistributive taxation to tackle cronyism. We need to change institutions to prevent rent-seeking. Whether Archer’s relatively mild suggestions – more transparency and shareholder power – are sufficient is something I very much doubt.

Comments

[TickyW]

Yes. Institutional change. No tinkering at the edges

[Mark]

As a Red Tory I would much rather see the labour market fixed to eliminate rents than paper over the cracks with more redistribution.

While there are limits to the power of the market, we have never come close to testing the parameters when it comes to remuneration.

I hope someone writes a paper about the fall-out from this week's publication of BBC pay rates. My guess is that aggregate rates will fall and inequities will be reduced.

Why don't big firms advertise executive board posts publicly and invite candidates to submit their business plans and quotations outlining what they'd charge to do the work? Then put it to a shareholder vote.

My guess is this would drive down exec remuneration and make it very much more contingent on genuine value creation.

[Dave Timoney]

@Mark,

"As a Red Tory I would much rather see the labour market fixed to eliminate rents than paper over the cracks with more redistribution".

One thing that Tories of any colour tend to discount is that it is a lot more difficult to eliminate rents than it is to redistribute.

Indeed, the claim that redistribution is a blunt tool (e.g. that universal benefits are wasted on the better-off) is a feature, not a bug.

[Simon]

I'm reading Socialism by von Mises at the moment, and while he thinks human nature needs to change for communism to work, the assumption is that capitalism is the most efficient and fairest way to redistribute funds. What we have actually seen, as this all shows, is that we actually need checks and balances to ensure this, even if any sense of justice is, essentially, arbitrary...!

[gastro george]

"the assumption is that capitalism is the most efficient and fairest way to redistribute funds"

In which direction?

[Lord]

Or they may assume, they can 'cheat' as well as anyone, it not really being cheating if everyone knows the rules and use them to their advantage in so far as capable.

[Mike Huben]

Games can be rigged without cheating as well. Musical chairs is rigged to deliver the payoff to only one participant, when it could just as easily be redesigned to give payoffs to all and a slightly larger payoff to the "winner".

Plenty of things are "winner take all" in our economic system: I think most people would say such a system is rigged to produce inequality.

[reason]

I think the theme of "winner take all" needs to be more strongly investigated than it is. I think winner take all, not all tends to make people feel cheated (because reward is not proportional to effort), but it can have perverse effects on investment in skills if people are risk averse (which they notoriously are). Consider that if tennis tournaments were winner take all, the sport might essentially revert to amateurism and very few people could afford to stay on the tour.

[reason]

P.S. Re winner take all and amateurism - think about what unpaid internships are all about (and why they are pernicious).

[Blissex]

«Consider that if tennis tournaments were winner take all»

Oh please, "winner take all" does not mean *literally* "all", it means that the distribution of winnings is extremely skewed.

The real winnings of tennis tournaments are not the prizes, are the corporate advertising and sponsorship contracts, which are worth thousands of times the prizes.

«very few people could afford to stay on the tour.»

The long tail of "first loser" (second place) and lower place prizes indeed exists almost only to enable the tournaments to happen so that there be a winner who then becomes an advertising and sponsorship vehicle for the benefit of the corporations needing them to promote their products by association with "success".

If there were ways to have people with the title of "winner" without bothering to have competitions only amateurs would bother having tennis tournaments.

[Blissex]

«As a Red Tory I would much rather see the labour market fixed to eliminate rents than paper over the cracks with more redistribution. [ ... ] Why don't big firms advertise executive board posts publicly and invite candidates to submit their business plans and quotations outlining what they'd charge to do the work? Then put it to a shareholder vote.»

This is not a "Red Tory" attitude, it is startlingly excessive otherworldly naivete. Quite amusing to see.

The so-called "economy" and "free markets" are just an overlay on the real social relationships underlying, which are based on ethnicity, family, alliances, and organizations are dominance hierarchies competing with other dominance hierarchies before being economic entities.

Right-wing propagandists always talk of the "free markets", that is *unregulated*, not *perfectly competitive*.

Because the only way to have perfect competition a very large number of very small suppliers and buyers is needed, and that can only be achieved with ruthless and pervasive government suppression of the tendency of practical people to gather themselves in larger and more powerful organizations.