Introduction

CONTENTS

1. Introduction
2. The Distributional Struggle and the Good Life
3. Political Rents
4. Governmental Methods of Rent Creation and Distribution
5. Implications of Rent Seeking
6. Reform of the Rent-Seeking Society

---

CHAPTER 1

This venture begins with a few simple observations.  Recent events in Australia have revealed that there is an increasing tendency on the part of public officials and entrepreneurs to use their position of power for their own identifiable private interests.  One need only turn to the pages of the Fitzgerald Report, or examine the media coverage of the Royal Commissions into malfeasance in Western Australia and Tasmania, to obtain an immediate appreciation of the extent of this phenomenon.  Public commentators have been quick to analyse the characters involved in this play on large.  The reasons why these activities are considered inappropriate have often been left unstated.  Furthermore, there is little or no discussion of what should be done about the problem.  Would an extension of the market reduce the degree of corruption or would this merely worsen the problem?  How can our public officials be made more responsive to the legitimate objectives of the collectivity they are supposed to serve?  One aim of the work here is to explore the corruption issue from the viewpoint of economics within the context of different institutional structures.

The problem of institutional design goes much wider than corruption in Queensland and Western Australia.  Australia is experiencing many social problems.  The debate of the 1990s should be about institutional reform, broadly interpreted.  For example, the newspapers in Australia have been replete with comments about a Turkish man who had sold one of his kidneys to a group of doctors in the United Kingdom.  Commentators were outraged by the prospect of a thriving market for body parts and British politicians have been quick to propose legislation to stifle the trade.  In several states of Australia there have been discussions about the decriminalisation of prostitution, to allow a market to exist for sex.  And in fact in the State of Victoria, the region where the wowsers once figured so prominently, prostitution was decriminalised several years ago.  It is of course true to say that these moves have not gone unopposed.  Both issues raise fundamental questions about the appropriate extent of market principles.  Although not all issues in Australia are as sensational as these, it is nevertheless clear that the conflict and debate continues.  It rages whenever entitlements are managed in the public sector.  For example, if mineral deposits are discovered on Crown land, there is then a debate on how the government should capture the returns from the deposit.  Should the land be sold to private developers?  Should the Federal government tax the profits of the mining companies?  What seems to be lacking in the public debate on all these issues is an understanding of the benefits and costs of the different modes of distribution.  A secondary objective of the work here is to explore the advantages and limitations of the market.  By providing such a framework, at least the participants on both sides of the debate should be able to see the other side's point of view.  Understanding is surely part of the road to consensus as opposed to conflict.

With this overall view of the objectives in mind it is perhaps useful to outline the major steps in our argument.  In Chapter 2 we introduce some basic but crucial preparatory groundwork for the later chapters.  There we show the importance of the market in the creation of the wealth of the nation.  We introduce the idea that rents or economic surpluses are essential to the smooth operation of a decentralised capitalist society.  These surpluses are like the grease on the wheels, without which the economy would come to a grinding halt.  Profit is not a dirty word!

In Chapter 3 we explore the idea that certain types of institutions will fail to allocate resources to those who value them the most.  We show how some actions by government can, at least in principle, increase the wealth of the nation.  Government need not be the dead hand on the economy.

In Chapter 4 we explore how some government actions can go awry and dissipate the wealth of the nation.  In each case the argument is presented in its simplest form and supported by graphical and arithmetic examples wherever possible.

In Chapter 5 we identify a further source of waste caused by the government's ability to redistribute the nation's wealth.  Individual agents in the economy perceive that the government can give and take at will, and these agents will rationally attempt to belong to the group of recipients rather than to the payers of the bill.  In their efforts to obtain government transfers these agents impose additional costs on society in the form of corruption.

In Chapter 6 the strands of the preceding analysis are drawn together.  Several general and specific suggestions for reform are proposed and analysed with the use of our framework.  It must be pointed out at this stage that there is not one simple panacea for Australia's woes in this respect.  As we indicated, the main objective is to explain the central elements of the case for one institutional structure over another.  From this knowledge the debate on reform can proceed.