Reform of the Rent-Seeking Society

CHAPTER 6

6.1 INTRODUCTION

One clear conclusion to be drawn from the discussion so far is that the competitive market process has a good deal going for it.  If the market is competitive and property rights are well-defined and enforced, then the degree of waste associated with rent seeking is reduced;  resources are allocated efficiently and the level of bribery is reduced.  The purpose of this chapter is to examine some of the policy reforms that might achieve that end.

6.1.1 How to mitigate corruption

As became clear in Chapter 5, not all distribution and allocation problems can be solved satisfactorily by appealing to the market.  For example, in some settings there is a need to regulate the market process.  But in finding a solution to one problem, another emerges.  The regulatory process itself may lead to the emergence of socially wasteful rent seeking.  Resources will be dissipated by special interest groups in the attempt to shape the form of regulation.  Corruption may also emerge as a result of the infeasibility of the market approach.  Take, for example, the case of the police force.  For various reasons, the notion of competitive supply of certain policing activities such as enforcement of the criminal code seems unwarranted.  Modem day Australians do not seem to accept the notion of a system of bounty hunters to enforce the criminal code.  And nor does the government seem prepared to give up the exclusive right to the revenue it gains from the application of certain laws.  As a result of the lack of a well-defined competitive "market" for policing activities, corruption is a possible outcome.

Economic theory can be used to analyse possible institutional responses aimed at cutting down the incidence and extent of corruption and waste.  In other words, even though the market solution is impossible, the disagreeable side-effects of the non-market solution can be mitigated (but not eliminated) by putting the appropriate institutional framework in place.  Retaining the central idea of man as a rational egoistic maximiser, the correct institutional framework consists of altering the individual agent's environment in such a way as to make non-corrupt behaviour the optimal strategy.  In colloquial terms, we must make corruption not worthwhile for those most in temptation.  This does not, of course, eliminate corruption altogether.  As we argued above, in many cases there may a socially optimal (non-zero) amount of corruption and reductions beyond this level would be undesirable, at least from the standpoint of efficiency.

It might be thought that it would be possible to reduce the degree of corruption if "better" individuals were attracted to occupations which may involve graft, with "better" being defined in the sense of having higher moral standards.  If we were only willing as a collectivity to pay our police officers, judges and officials a higher wage, then we could attract these sort of individuals.  Part of the recent antagonism to the Guardian Angels, who wish to set up an organisation in New South Wales, seems to rest on the suspicion that this organisation attracts low-income individuals who hold dubious moral standards.  This argument is problematic.  First, there is the obvious point that high-income individuals do not hold an inherent monopoly on the high moral ground.  Low-income individuals may hold the same moral standards as the richer members of the community.  There would seem to be no clear relationship between an individual's income level and degree of morality.  It would be wrong to conclude from this argument, however, that there is no relationship between the number of individuals who act as if they hold high moral standards and income.

Consider the following example in which, say, half the people have such high moral standards that they are beyond corruption.  The other half can be bought for a price.  In terms of Figure 6.1, suppose that the supply curve for both groups is given by S₀.  This curve indicates the amount of labour that the two groups are willing to supply at various wage rates.  The total supply curve of labour, obtained by summing these curves horizontally, is given by S.  If the government is willing to pay each employee a wage rate equal to W₀, then OB units of labour will be employed for a total wage bill of OW₀CB.  In this particular case, the proportions of ethical and unethical employees matches the proportions in the labour force:  half of the employees in the bureau will hold high moral standards while the other half are unethical, in other words, OA equals OB/2.

Consider now the situation when the unprincipled employees can increase their remuneration by accepting bribes.  In addition, assume that there is no way of monitoring the behaviour of the malfeasant or trustworthy.  The individuals are free to follow their own moral codes.  Suppose the amount of the bribe per unscrupulous employee is OD.  The payment of the bribe has the effect of shifting the supply curve of the unscrupulous employees to the right, to S_C.  For example, prior to the malfeasance, OA unscrupulous employees were willing to offer their services to the government at the wage rate W₀.  These individuals would be willing, however, to supply the same amount of labour, if the government were only prepared to pay a wage rate of AE dollars, since their gross income, inclusive of the bribe, is equal to W₀, that is, AE plus OD dollars.  The total supply curve, inclusive of the effect of the bribe, is given by S₁.  The total number of individuals forthcoming now at the government wage rate, W₀ is OF.

What is of particular interest is the change in the percentage of unscrupulous individuals working now in the bureaucracy.  The proportion of unscrupulous employees in the organisation is now more than half of the total work force, in other words, OG/OF is greater than 1/2.  It is not hard to see why this result must hold.  Since there has been no change in the official wage rate, the number of trustworthy employees has not increased.  This means that the expansion in the number of employees comes solely from the group in the population which lacks the scruples to refuse a bribe.  It follows that the proportion of unscrupulous workers in the bureaucracy will be more than half.

Interestingly, the proportion of unethical individuals in the bureaucracy will be larger than the proportion of unethical individuals in the community.  It is not difficult to see why this result holds either.  The untrustworthy and honest individuals are identical in the decision to work for the government save for their attitude to graft.  But it is the dishonest who can obtain the larger take-home pay, consisting of their government wage topped up by the bribe.  A greater percentage of unethical employees will therefore be attracted to the government employment at any given wage.

It is worth noting that the point about the percentage of unethical employees in the organisation holds for all wage rates.  This is not surprising.  If the government bureaucrats were paid, for example, a higher wage, then they would still continue to take the bribe as an added bonus of the job.  It is therefore clear that the problem of corruption in the bureaucracy cannot be solved here by merely paying government officials a higher wage.  It will not necessarily attract a 'better" class of government agents.  An assumption made in the discussion here is that the unscrupulous individuals can receive their bribes without any penalty.  Is it possible to reduce the degree of corruption by either lowering the expected benefits or raising the costs of such activity to the participants?

In order to explore the measures which may be taken to reduce the degree of malfeasance, it will be useful to set out the individual calculus of a government representative.  A risk-neutral ⁽⁴²⁾ official will accept a bribe (B) if his expected income [E(Y)] including all costs and penalties (F) exceeds the income he receives for certain as his salary (Y₀).  In mathematical terms, the agent accepts the bribe if E(Y) > Y₀, where E(Y) = P(Y₀+B) + (1-P)(Y₀+B-F) - C.  Here, P represents the probability of committing the offence undetected, F represents the fine or penalty imposed on the individual when he is caught, and C represents the costs to the individual of engaging and hiding his involvement in the activity.

It may be useful to illustrate the principle here with a simple arithmetical example.  Suppose his certain annual income is equal to $30,000, the probability that this offence will go undetected is 0.9, and he is offered a bribe of $5,000.  Assume, furthermore, that if he is caught, he will bear a penalty valued at $10,000 and that his own costs in executing the crime, such as the time he spends in gathering the information and concealing his deeds, is $200.  Under these conditions, the risk-neutral agent will undertake the graft as he expects to be better off by $38,000. ⁽⁴³⁾

An examination of the above equation reveals that there are two major ways to reduce the incentive of the representative individual to undertake the corrupt activity.  First, society may undertake monitoring and policing activities which are designed to reduce the probability that the crime will go undetected.  Second, society can raise the size of the penalty.  Both measures are designed to decrease the individual's expected income associated with accepting the bribe.  These measures will have the additional effect of raising the costs of engaging in corruption itself, C, which will reduce the level of malfeasance.

There are several ways of reducing the probability that the offence will go undetected.  First, the bureaucracy can hire additional personnel to undertake monitoring and policing activities.  Second, in order to reduce the possibility of friendships arising which tend to diminish the enforcer's judgements about other individuals, it would be useful to constantly rotate partnerships and individuals at various posts within the organisation.  Third, employees could be encouraged with the prospects of promotion if the information they offer on the nefarious dealings of other persons in the organisation leads to a conviction.  In terms of the arithmetical example presented above, suppose these measures lower the probability of being undetected to 0.5.  In this case, the individual's expected income associated with malfeasance would be $29,800. ⁽⁴⁴⁾  Since the individual would be worse off by $200, he will decide it is better to follow the straight and narrow path of honesty.

It is important to fully recognise that this reduction in the incentive to engage in corruption comes at a cost.  The personnel required for the increased monitoring activities will increase the cost of supervision to the government.  Encouraging individuals to inform on other people can harm the degree of trust that is important to the efficient performance of the bureaucrat's dealings.  Individuals will waste time and money in following false information on other individuals.  Since there is a cost to stamping out the costs of corruption, society should undertake monitoring activities up to the point where the marginal benefit from policing equals the marginal cost of monitoring the level of malfeasance in the organisation.

There is one significant indirect cost of the increased monitoring that should not be overlooked.  If the policing is effective, then malfeasant individuals will sustain a loss in their income.  They will no longer be able to augment their official income with bribes.  This means that there will be a reduction in the number of individuals who are willing to supply their labour to the government agency.  This means in turn, that if the agency is to maintain its numbers it will have to increase the wage bill, thereby adding to the explicit costs of the public sector.  For example, in terms of Figure 6.1 the additional cost of continuing to attract OF employees would be WIHW₀.

It is useful to depict geometrically some of the basic elements of the argument presented so far.  It will also provide a framework for the subsequent discussion about how to reduce the degree of corruption.  In Figure 6.2, panel A represents the demand and supply curves for corruption within a government agency.  The supply curve indicates that N₁ officials are willing to offer their services for corrupt activity when they are paid at least W₀ dollars.  The demand curve indicates how much individuals are prepared to pay for the corrupt activities, that is, to have the officials turn a blind eye to their criminal activities, for example, or contort the agency's rules in the criminals' favour.  In this particular example, the malfeasant government officials receive a bribe of OW₁ dollars.  In panel B the marginal benefits and costs of reducing the number of corrupt officials are depicted.  In this panel, the horizontal axis measures the reduction in the number of corrupt officials in the organisation as a result of increased monitoring.  In the absence of any costs of policing, the number of corrupt employees would be reduced to zero, that is, to the point at which the marginal benefit of monitoring falls to its lowest level.  The marginal cost is assumed to increase as the level of policing is increased.  The efficient level of policing is determined by the intersection of MC and MB, given by P*.  The efficient level of monitoring is less than when the cost of policing is not taken into account.  It is not efficient to reduce the level of corruption in the organisation to zero.

The second major way of reducing the incentive to engage in corruption is to increase the value of the penalty upon employees who are convicted of malfeasance.  Any increase in the value of the penalty will reduce the expected income from malfeasant activity and therefore reduce the incentive to engage in criminal activities.  There are a number of specific options which can be used to raise the value of the sanction.

6.1.2 Performance bonds

One system which would raise the value of the sanction is to use some form of bonding.  The central idea of bonding has emerged from the literature on principal and agents. ⁽⁴⁵⁾  It is, perhaps, worth introducing at this juncture the concept of the principal/agent problem.

A principal/agent relationship exists if one party (the agent) agrees to act in the interests of another party (the principal).  The relationship is only worthy of attention when there is a conflict of interests between the principal and the agent.  Secondly, the information available to the two parties must be asymmetric.  If both conditions are met, then the principal is faced with devising a method which provides the agent with the incentives to act in the principal's interests, rather than his own.  The parallel with the case of a corrupt police force is immediately obvious;  the collectivity is in this case the principal and the police force is the agent.  The conflict of interest between principal and agent exists in the sense that the principal wishes a safe society, whereas the members of the police force wish to make a good living without too much dangerous chasing of suspected criminal elements.  There is an incentive for the police force to enter into an agreement with criminal elements not to "over-police" certain activities in exchange for bribes in money or in kind.  As a result, the principal's interests are not fully served.  It is clear that in the absence of informational problems, an omniscient public (the principal) would always be able to observe corruption immediately and respond by sacking the corrupt elements in the force.  In such a case, the principal/agent problem does not exist;  there is immediate measurability of the agent's output (policing services).  In the absence of full information, however, the problem can exist.

One way to reduce the incidence of corruption in the police force is, as mentioned, by using the method of bonding.  It is possible, for example, to specify in the employment contracts that the police officer in question will lose his job and his superannuation should he be found to have acted in a corrupt fashion.  This means that, in effect, the police officer posts a performance bond to be forfeited if his performance falls below the level set by the principal.  In such a case, there is a stronger incentive for members of the police force to act in the appropriate manner;  effectively, the opportunity costs of acting in a corrupt manner have been raised by the existence of the performance bond.  Since the bond raises the cost of engaging in malfeasance, the supply curve of corrupt officials will shift to the left.  In terms of Figure 6.2, if the cost of the forgone bond (in present value terms) is represented by W₂W₀, then the bonding will raise the minimum acceptable bribe to W₂ and the supply curve will shift upwards to the dotted curve W₂S.  The equilibrium bribe will increase to OW₂ dollars.  Individuals seeking corrupt officials will therefore find it more expensive to engage in corruption.  Consequently, there will be a fall in the level of corruption as measured in terms of the number of malfeasant officials.

The police trade union might claim that there is an opportunity here for the principal (the holder of the performance bond) to act in an opportunistic manner.  If the performance bond is in the form of a superannuation payout at retirement age, then an opportunistic treasurer could save the government some money by forfeiting the bond to all members of the police force just about to retire.  But forfeiting the bond unjustly would lead to a loss of reputation on the part of the principal and subsequent agents would take this opportunistic behaviour into account when dealing with the same principal.  As a result, opportunistic behaviour on the part of the principal would defeat the purpose of the performance bond to a large extent.  The rational agent would anticipate the loss of his performance bond at retirement age and would face even stronger incentives to act corruptly than if no performance bond had been posted.  For that reason, it is not in the principal's interests to act opportunistically.

Becker and Stigler (1974) suggest that implicit bonding can be achieved by paying the law enforcers a higher wage than they could earn in other occupations with the same risk structure.  They show that the wage premium depends positively on the gain from malfeasance (the size of the bribe) and negatively on the probability of detection of malfeasance.  This case differs from the one analysed in Section 6.1.l as there is now a positive probability of detection.  An illustration of the general principle is as follows.  Consider the case in which police officers are paid a salary of $21,000.  Suppose the officers' next best alternative occupation pays only $20,000 a year.  In this case, a risk-neutral police officer who estimates that there is a fifty-fifty chance that he will be detected and convicted would reject any bribe equal to or less than $1000.  In fact, the argument here offers one way of interpreting the horizontal segment of the supply curve of corrupt officials.  The officials must be paid at least W₀ (here $1000) before they will offer their services to criminal ends.  If the officers are paid a higher salary, then this increases the cost of engaging in malfeasant behaviour because the cost of getting caught would include the loss of the now more lucrative salary.  In terms of Figure 6.2, an increase in their salary would cause the supply curve of corrupt officials to shift upwards leading to a fall in the number of corrupt officials.

It is interesting to reflect on the recent public outrage when judges in Australia were granted an increase in their salaries.  The analysis here suggests that there might be a genuine case for paying them higher salaries when there is a probability that their transgressions will be detected.  The higher wage increases the expected cost of conviction and reduces the gain from engaging in corruption.  Consequently, these salary increases may not be unwarranted as the usual public cry would have it.  If we continue to pay our judges and public enforcers in general, relatively unattractive salaries, then we will continue to be plagued by the dead hand of the malfeasant;  if you pay peanuts, you'll employ monkeys.

An alternative method aimed at reducing malfeasance is to alter the pay structure of the enforcers.  Instead of paying the enforcers a straight salary, Becker and Stigler (1974) suggest that a "piece-rate" or "bounty" system would be superior.  Under such a system, the enforcers are rewarded on performance and there is a strong incentive to perform adequate enforcing activities, provided the piece-rate is sufficiently high to compensate for the bribes on offer.  But as we have already indicated, the competitive solution proposed here would not be seen as desirable by most Australians.

6.2 ON CORRECTING THE GOVERNMENT AGENT

Up to this point, the implicit assumption has been made that the will of the collectivity was accurately reflected by the politician.  That is, the politician accurately and faithfully reflects the will of the electorate.  In this case, there is no principal/agent problem.  The politicians' actions mirror precisely the actions that would be carried out if there were a system of direct democracy in which all policy decisions were made by a system of referenda.  But it is clear that the principal/agent problem applies also to the electorate and the politicians.  For various reasons, it is possible for politicians to pursue their own goals even when these objectives are in direct conflict with the general stance of the electorate.

First, the principal/agent problem emerges here too, as there is asymmetric information between the electorate and the politicians.  It makes economic sense for voters to be ill-informed about political events.  Each voter has little, if any, chance of influencing political events since his vote is only one amongst many in electorates involving a large number of voters.  In such a setting, individuals will reckon that any time invested in understanding political platforms and ideas is wasted. ⁽⁴⁶⁾  That individuals do invest time in reading the political columns is explained by the argument that time so spent represents a consumption activity no different from spending time reading the sports column.  In neither case is his knowledgeable choice instrumental in changing the outcome.

A second reason why the principal/agent problem emerges in the political sector is that politicians can use the political arena to further their own ends which may diverge dramatically from those of the electorate.

In the last decade, a number of suggestions have been put forward which aimed to improve the performance of the public sector.  One suggestion which has recently received a good deal of public attention is that electoral boundaries ought to be recast in order to make politicians more responsive to the majority of the electorate.  Indeed in the Fitzgerald Report on corruption in the State of Queensland, a recommendation was made to review all electoral boundaries in Queensland with an eye to correcting the gerrymander.  The argument behind this recommendation is that voters in Queensland had lost hope in getting the parliament to reflect the will of the majority and that this was instrumental in creating a climate in which malfeasance would be tolerated.  It should be easy to see that the argument put forward by Fitzgerald is consistent with one of the themes running throughout the chapters of this work.  A good many of our exchanges depend on some degree of trust between the agents.  From the taxi cab example in Chapter 2 to the discussion of the political corruption in Chapter 5, we have been at pains to point out that trust can be damaged if there is widespread perception that it is the strategy only of the loser.  There is considerable merit therefore in revising electoral boundaries in the attempt to restore the citizenry's faith in the fairness of the political sector.  Politics should be seen to be a process free of rorts.  There needs to be increased public understanding that trust is social overhead capital ⁽⁴⁷⁾ that has been seriously ravaged by recent events in Australia.  The rorts of the politicians and the chicanery practised by some of Australia's leading business people foster only contempt for the law in general and lead to the destruction of the social capital trust.  The widespread disregard of the maintenance of this social capital is a problem which besets the Australian economy on par with unemployment and inflation.  We ignore the problem at our own peril.

Yet while fully acknowledging the merits of Fitzgerald's arguments on this score, it must be recognised too that electoral reform alone does not offer sufficient protection for the electorate.  First, it is simple to demonstrate that redrawing the electoral boundaries is not sufficient to produce a government of the majority.  There can be a tyranny by the minority even when all electorates have equal numbers of voters.

In order to present a simple arithmetical example of the tyranny of the minority, consider a state in which there are eleven electoral divisions, each with 100 voters.  Six of the electoral districts are rural and the other districts are urban.  Suppose further, that there is a proposal to woodchip the native forests throughout the state.  In order to further simplify, assume the proposal will provide work only to rural timber workers.  In each rural electorate there are 51 timber workers in favour of the development policy.  All other voters favour a policy of conservation.  The political party that runs a development policy in a one-issue campaign will secure six of the electoral divisions required to form a government;  this is despite the fact that it has only secured about 28 per cent of the vote.  It is clear, therefore, that the support of a majority within the legislature need not imply the support of a majority of the electorate.  Evidently, the institution of representative democracy need not ensure protection to the majority from special interest groups.

6.2.1 Monitoring and the free press

If the redrawing of political boundaries cannot be relied upon alone to force government to reflect the will of the majority, then are there any other possible means of controlling the politicians' activities?  One way which has been suggested to increase the politicians' accountability is to foster a more competitive press.  It has been remarked by some that the degree of concentration in Australia of the media is not conducive to a wide and varied market for ideas.  In some ways this is true.  The ownership of the Australian media is held by a small number of individuals.  In such a setting, it is easier for corrupt individuals to control the information about the activity under question.  The malfeasant politician need only gain the cooperation of a small section of the media in order to effectively suppress information about the issue under inquiry.

There are a number of elements of this argument which demand comment.  First, a small number of enterprises in the media industry does not necessarily preclude competition.  In Tasmania for example, there has been of late a good deal of rivalry and competition between the media in the North and South of the state and this only involves two newspapers.  Equally clearly, small numbers do increase the chance of collusive behaviour.  Perhaps an investigation of the relationship between the degree of media ownership and the competitive supply of well-founded and well-researched ideas should be undertaken.  What is clear, though, is that the decision process should not be left in the hands of the politicians.  Politicians in power cannot be expected to bite the hand that writes of them in a favourable light.  Nor would we want politicians making decisions with an axe to grind against certain individuals.  There is therefore a case for an independent authority to examine the role of the media in the competitive supply of scrutiny of the public officials.  Our guess is that the outcome of such an inquiry would be a call for stronger and more independent media in Australia.

On this score, there might be some individuals who believe, at least on the basis of recent events, that our libel laws are not conducive to good investigative reporting.  In Australia a food critic had large damages levied against him as a result of a critique written about the quality of the restaurant's food.  Since the Court's ruling there has been a spate of criticism in the press claiming that the damages awarded to the restaurateur were excessive and that the decision will stifle the press since it places too large a cost on printing information subject to interpretation.

The statements in the press have been on the whole far too simplistic.  It is, of course, widely acknowledged that the reporter has an obligation to be careful about how he reports and finds his information.  He should not behave negligently by failing, for example, to take adequate precautions that his information was indeed accurate.  In terms of economics, the socially optimal degree of precaution occurs at the point where the cost of precaution at the margin equals the expected marginal benefit due to the precautionary activity.  For example, if the individual could have undertaken additional care at a cost of $10 and thereby avoided inflicting expected additional damages of $100, then the Court ought to award damages.  Individuals who take heed of the general ruling in their future activities will perceive that it is cheaper for them to take precautionary measures than to pay the damages.  In this way, the collectivity puts in place an institutional structure which minimises the total amount of resources forgone in careless or accidental behaviour. ⁽⁴⁸⁾

We do not wish to pass judgement on the particular case at hand.  Our comment extends only so far as mentioning the matters of concern raised by the rule.  We would be interested in whether it is costly for a food critic to take due care in writing and preparing his article on a particular restaurant.  Is the presentation of his critique likely to lead to damages?  In assessing the measure of damages, we would like to know whether the food critic is highly influential and whether the level of circulation of his opinion is widespread in the market niche of the particular restaurant in question.  Did the restaurateur's reputation sustain any damage?  Was there a noticeable decline in trade after the article?  Is it expensive for the restaurateur to restore his reputation?  We will leave it up to the reader whether the court was justified in awarding damages.

One implication that is worth drawing from this discussion, however, is that the courts ought to be more lenient in requiring reporters to exercise due care when the case involves politicians and well-known public officials.  Compared to the restaurateur, the politician has easier access to the media in order to present his counter argument and thereby reduce the damages of the allegedly false report.  The standard of care ought to be less for cases involving well-known figures than cases involving everyday citizens.  There ought to be a review whether the courts have muzzled an effective watchdog of the public official by requiring the press to meet the same standard of care in its treatment of politicians as that demanded of the average citizen.

6.3 CONSTITUTIONAL POLITICAL ECONOMY

To be sure, electoral reform and a critical press do offer some prospect of reducing the ability of politicians to advance their own interests to the detriment of the majority of the electorate.  But these procedural reforms will not carry the task alone.  The incentive structure within government must also be erected on the basis of constitutional rules.  The constitution should be redesigned to place restrictions on the ability of self-interested politicians to further their own ends while they carry out the desires of special interest groups.  Government must be subject to limits on what activities it can undertake, and for obvious reasons, these limits must not be under the control of the government of the day to change at its whim.

Two economists who have sought an answer to the problem of how to specify the rules that government ought to operate within are the Americans James Buchanan and Gordon Tullock.  Their seminal work on this issue is found in The Calculus of Consent:  Logical Foundations of Constitutional Democracy (1962).  There, they argue that unanimity ought to be the test of whether a rule is warranted.

The analogy of a card game may be usefully employed here.  Unanimity may be sought at the selection of the rules of the game.  This is the so-called constitutional stage.  Alternatively, it may be sought once the game has begun under a given set of rules.  This is referred to as the in-period stage.  Buchanan and Tullock claim that the possibility of reaching consensus looms large if decisions are taken not on the outcomes of the game, but on the rules under which the game will be played.  Individuals, for example, before the hand is played can agree quite readily whether an ace will count high, low or both.  Once the hand has been played agreement, if any, on the value of the ace in the absence of any prior rule is likely to lead to protracted and time-wasting debate.  It is easy to understand why this would be so.  Agreement before the game is commenced is easier to secure as the vested interests are yet to be drawn.  The individuals are searching for a set of rules that will lead to a good game of cards.  If all individuals agree prior to the game that the maximum bet should be, say, twenty cents a hand rather than the existing ten cent limit, then it is possible to say that this rule change represents an improvement.  If all individuals do not agree, then another proposal should be put forward until a consensus is reached.  The protracted debate in Australia at the turn of the century offers an example of how mutual agreement of the States was achieved by a process involving a good deal of give and take.

The political economist interested in the basic democratic attributes of implementing only those rules that have secured unanimous agreement takes on the same mantle as the card players reviewing the set of rules prior to commencement of the game.  The economist, for example, might propose a constitutional rule that government can enact outcomes if there is a simple majority for the proposal.  There may be unanimous approval for such a rule at the constitutional stage since individuals recognise that decision-making rules that approach unanimity will involve large decision costs at the in-period stage.  At the constitutional stage there may be universal agreement for a rule that will allow the redistribution of wealth from one individual to another at the in-period stage, since this is the price of saving on the costs of reaching a true consensus at the in-period stage.  So individuals who, for example, fume at the mere thought of giving government relief to some particular individual may, nevertheless, support the constitutional provision that such decisions need only secure majority support.

6.3.1 A case for the market

The discussion about the constitutional political economy has, up to this point, been at a fairly abstract level.  It is possible to illustrate the nature and importance of the constitutional perspective by re-examining the case for the price system.  It is fair to say that we have come out strongly in favour of the market system as the preferred method of distribution.  It should be acknowledged that there will be a substantial deal of consumer resistance to the idea that resources ought to be allocated by an unfettered price system. ⁽⁴⁹⁾  For purposes of simplicity, consider a market in which, for all intents and purposes, consumers are identical.  In terms of Figure 6.3, each individual is consuming Q units of the resource at a price represented by P₀.  Suppose there is an unexpected reduction in the amount of the good coming on the market.  There could have been an unexpectedly dry season in the Riverina resulting in a poor harvest and shortfalls in production and output over several seasons.  Alternatively, the recent flooding of agricultural lands has led to a reduction in the numbers of livestock coming to the market.  For simplicity, let us suppose that there is a reduction in per capita supply to M units.  If the market price is allowed to adjust, then individuals noticing the shortfall in their planned consumption will bid with each other for the available supply.  The market price would be P₂ and each consumer's loss in consumer surplus is equal to the area P₀P₂AB.

In this case, consumers appear to have an incentive to prevent the increase in the market price.  Consumer-voters will prefer a case for explicit rationing and price controls.  There will be a call to restrict the ability of producers to raise prices.  The call to control the gougers in these dire times will be strong.  If the politicians accede to the voters' demands and manage to keep the price at P₀, then consumers will be better off by the area P₀P₂AC.  This is the amount of income that would have been transferred from consumers to suppliers in the absence of price controls and quotas.  Consumers appear to have a clear preference for price controls to cure their immediate concerns.  The unfettered price system will emerge from the political battle bloodied and down for the count.

A moment's reflection might raise some doubts that are evident to all about the wisdom of price restraints.  The Australian media is currently replete with examples of the difficulties that can arise when there is too much central control over prices.  Indeed, the recent decision by Qantas to have the major servicing of its planes performed by Aer Lingus, rather than its maintenance crews in Sydney, is claimed to be the result, in part, of Qantas' inability to offer sufficiently higher wages to attract appropriate personnel.  The government's control over the rate at which remuneration can rise is causing problems for the efficient allocation of resources.

It is easy to observe the improvement in supply if prices are allowed to increase over time introducing the supply curve, S in Figure 6.3.  Here, there is some expansion of supply in response to the higher equilibrium price P₁.  The gain to each consumer from this expansion is represented by the area AHF.  So there is some meat in the argument of allowing the price to increase.  The consumers gain from the expansion in supply.

This gain does not come without a cost.  Each consumer is now paying a higher price for the units that were previously subject to the price control.  The net loss to consumers is represented by the difference between the controlled and market prices multiplied by the number of units that would have been consumed under the price control scheme represented by area P₀P₁HC.  In this particular example, the loss in consumer surplus from paying the higher free market price is greater than the gain in surplus anticipated from the expansion in supply. ⁽⁵⁰⁾  Consumer-voters, largely ignorant of the effect of the price control will provide an incentive for producers to expand operations elsewhere and will support calls to constrain market prices.  One need only look as far as the situation of the mortgage market to find evidence for calls on the government to control the prices;  here, the interest rate.  Our previous argument that rights ought be allocated by a price mechanism therefore seems to be vulnerable to the attack that it fails to recognise the political reality of consumers' apparent short-run preference for price controls in order to further their own ends.  Consumer-voters at the in-period stage are not interested in the overall gains to the economy that arise from the market method of distribution.  They are not interested in the beneficial effects of the invisible hand.  The hand that distributes resources is the one they will follow.

The case for the market is, however, strengthened if one adopts the constitutional-contractarian approach to policy matters.  There, individuals are concerned with the choice of rules under which the activity of trade should be conducted.  All individuals at the constitutional stage can recognise that they may, in fact, be producers after the rules of the game are determined.  The effect of price controls is to restrict the gains that can be earned by producers.  In terms of Figure 6.3, the producer surplus, from per capita sales, is reduced by an amount equivalent to the area P₁P₀CF when price controls are applied.  Individuals at the constitutional stage will recognise the potentially adverse distributional qualities of the regulation.  Accordingly, there can be general support for the principle that interference in markets ought to be kept at a minimum.  Parliament ought to be required to establish in the Court system whether its decisions to undertake new policy directives are constitutional or not.

One fundamental question which emerges from this discussion is how far the market process can be extended.  Is it truly the panacea for all our social dilemmas?  It will be instructive to analyse a few examples of the extension of market principles.  We then discuss some of the factors which ought to be taken into account when discussing the desirable extent of the market process.

6.4 INCREASING THE EXTENT OF THE MARKET

Throughout the economics literature arguments can be found for more extensive use of the market in areas such as adoptions (Landes and Posner, 1978) and the sale of genetic material (Buchanan and Prior, 1984).  Even more controversially, greater utilisation of the market process has been advocated as a means of diminishing the social dilemmas that beset the issue of abortion.  It will be useful to explore some of the issues surrounding the extended use of the market in such areas.  In doing so, the limits to how wide the market process may be cast will be explored.

In the debate about abortion, there is immense conflict about who has the right to abort the child.  Does the pregnant mother have inalienable rights to seek an abortion on demand?  Or must she first seek the approval of a medical practitioner or that of the biological father?  Groups such as Right to Life argue that none of these groups should have the right to an abortion and that the foetus should be carried full-term.  In the debate between the different sides, the foetus is either accorded no rights whatsoever (pro-abortionists) or an inalienable right to be carried full-term once conceived (Right to Life).  In both cases there is a good deal of conflict.  Individuals feel exasperated;  they feel powerless to alter the situation.  It is either all or none.  There is none of the push and pull of the market place.

Some economists feel that this is the wrong way of approaching the problem.  The idea has been advanced that there would be greater scope for the beneficial effects of the market if the right to abort a foetus were invested in some independent agent at a "Foetal Bank". ⁽⁵¹⁾  In this way, the foetus who, for practical reasons, cannot be given any direct representation, can nevertheless receive indirect representation from interested groups.  The final decision about whether a particular foetus would be aborted would not rest with the pregnant mother.  Rather, the right to make the decision would go to the individual who was prepared to pay most for this right.  The mother would have to pay a fee to gain the right to have an abortion.  Groups such as the Right to Life could outbid the mother and in doing so, they would gain the right to the abortion.  They would presumably hold on to this right until the baby had been born or until they received a higher payment to relinquish that right.  Efficiency would be seemingly met as the right to the foetus would be allocated to the individual who valued that right the most.

Somewhat less controversially, greater market freedom has been advocated in areas such as prostitution and drugs.  In recent times, there have been renewed calls to decriminalise drugs in Australia.  And in the last decade, there have been moves to decriminalise prostitution in some states in Australia.  In fact, the State of Victoria has already decriminalised prostitution and allows this industry to operate under a form of zoning.  In terms of economic theory, there is some justification for allowing greater market choice in these sorts of areas.  Where these activities are illegal, suppliers have to organise their industry in such a way that it is difficult for enforcement agencies to detect all the individuals in the industry.  The concomitant increase in costs drives up the price of the product or service.  This result leads to a number of costs to the community.  In the case of drugs, individuals who have a habit are forced to spend more for a given amount of drugs.  It has been claimed that drug addicts resort to theft in order to maintain the habit that is requiring greater expenditure.  While theft is an unpleasant phenomenon, the theft itself does not constitute a social cost to the community.  Measured in terms of income as opposed to utility, the theft merely represents a transfer of income from one individual to another.  Theft does, however, impose costs on the community in the form of rent-seeking and rent-protection costs.  The expenditure individuals undertake to protect their property represents a waste of resources to the extent that the drug addicts merely spend more time in devising new ways to break the bars on the window.  Both perpetrators and victims spend more on predation and protection without creating any net value in the process.  If decriminalisation of drugs lead to a fall in their price, then this would reduce the incentive of thieves to resort to burglary, which would in turn reduce the waste arising from the resources devoted to theft and protection.

The decriminalisation of drugs and prostitution would also reduce the degree of corruption of our law enforcement agencies.  Under the present system, individuals in these unlawful activities have an incentive to pay bribes to the law enforcers in order to avoid the stiff penalties imposed by the courts.  In Chapter 5, the costs of this form of corruption to society were discussed.  Some of the costs could be avoided if prostitution were, for example, decriminalised.  The police would have fewer incentives to become involved in the extortion of prostitutes and brothel owners.  There would be a reallocation of their enforcement activity to other criminal activities involving victims where there is less scope for extortion and corruption.  There seems to be a strong case for relaxing the government's control over the distribution of certain resources and extending the market principle.

6.4.1 How wide a net?  On the appropriate extent of the market

Individuals may well feel that the case here for the unbridled extension of market principles is incomplete.  It is also worth noting that not all economists would unequivocally accept the wholesale advancement of the market process.

First, some individuals believe that there ought to be limits on the extent to which the market is used to distribute resources.  There is the paternalistic argument that the government ought to be there to protect those unwilling/unable to make reasonable decisions.  That is, the mentally handicapped and minors should not be permitted to place themselves in certain situations.  There ought to be restrictions on what acts certain individuals may undertake.

Second, the decriminalisation of activities involving drugs and prostitution may lead to the inculcation of socially undesirable values.  Once the social stigma of a criminal record has been removed from drugs and prostitution, then there may be a number of individuals who will begin to consume drugs and frequent prostitutes.  As a collectivity, the choice may be made that trade in certain rights ought to be actively discouraged.  We do not pretend to have any easy answers to these social problems.  The concerns expressed by those against the decriminalisation of certain activities have some social merit.  We may not want to live in a society where everything and every act has a price.

Third, there are some activities that cannot be effectively administered under a market regime.  Some policies need to be performed by some bureaucratic structure.  It may not be possible to eliminate the problems of the non-market method of distribution by using a market for the simple reason that the market may not be a viable alternative.

In order to gain some appreciation of the problem here, reconsider the issue of abortion.  Recall that the argument was that the unborn would have its right to life decided by the highest bidder.  Property rights pertaining to the unborn child would reside with a "Foetal Bank".  The scheme would require the agent to represent the baby by placing a bid on its behalf.  In order to invoke even moderately purposeful actions on the part of the agent representing the child, it is clear that the agent will have to make a bid that is expressed in monetary terms based on the future income-earning ability of the foetus.  The foetus with genetic defects will have a relatively lower earning potential than a genetically normal foetus and it is here that the parents could, if they so desired, outbid the agent of the foetus and secure the right to abort the unwanted foetus.  One problem with the scheme is that the unborn child represents extremely poor security for a loan, even if it is genetically normal.  Anyone who has witnessed the difficulties teenagers experience in seeking a loan to finance their education will readily appreciate the fact that (in the absence of slavery) human capital is meagre collateral for a loan.  The greater level of uncertainty involved with the future income-earning ability of the foetus as opposed to the teenager raises the distinct possibility that an important participant, as represented by the foetal bank representative, may not be able to exercise his choice.  Moreover, it is not at all clear how the agent could ever gain the information of the foetus's willingness to pay for the right in question.  In the absence of such knowledge, it is not clear how this market will allocate resources to the highest bidder.

In addition, the specific issue of abortion raises a fundamental problem inherent to almost all of the methods of distribution discussed in Chapter 4.  The market can provide a solution if the property right is clearly defined in the first place.  If the collectivity cannot come to some agreement about whether or not the right to abortion or life of the foetus can be sold to any individual, let alone a "Foetal Bank", then the market will not allocate resources at low cost to the highest bidder.  Before the market process can be called on at all, the collectivity, through its parliament, has to specify the nature and initial distribution of rights in those situations where there is no clear answer to be found in the common law or past statutes.  Accordingly, there is the need for a constitutional convention to discuss the entitlements to be held by Australians in the next century.  The debate on constitutional reform needs to be much wider in scope than the one so far envisaged by our politicians.

6.5 AN AGENDA FOR CONSTITUTIONAL REFORM

Although it is certainly presumptuous to set out the rules that ought to form the constitution, it is nevertheless possible to indicate some of the broad proposals that might form part of the agenda.

6.5.1 Reforming the public sector

One proposal that ought to be put on the agenda is the requirement that all public officials and the members of their families should give up all interests in firms that are directly affected by the decisions of the public bureaucracy.  Public officials should be freed from the temptation of making decisions in the public domain which further their own narrow pecuniary interests at the expense of the electorate at large.  It is clear that if this requirement were set in place, then we should be prepared to increase the salaries of public officials in order to compensate them for the lost unofficial earnings.  There would still be a need to monitor the performance of public officials in carrying out all laws.  The higher salary may, over certain ranges, act as a substitute for increased and highly expensive monitoring and therefore, there may be some resource savings under such an arrangement.  To be sure, bureaucrats who would not ordinarily acquire shares will receive a bonus under our scheme at a cost to the public purse.  The additional cost of paying all officials a higher wage may be outweighed, however, by the gains of having a less corrupt government.

In Chapter 5 it was argued within the context of the Prisoner's Dilemma that cooperation is a good thing in that it exhausts the potential gains from trade.  It was argued that cooperation is more likely to occur in small communities where economic agents are constantly dealing with each other.  By turning this argument on its head, reforms are suggested that will discourage cooperation between corrupt individuals.  When cooperation leads to inferior outcomes, institutions ought to be designed to reduce the number of individuals who are in constant contact with each other.  Here lies a rationale for Fitzgerald's proposal to disband special squads within Police departments.  In large number situations, where all officers are responsible for the enforcement of laws against, say, vice, there is less chance of officers developing means to bypass the dominant strategy of the Prisoner's dilemma, interpreted in this context as defection from the police culture.

6.5.2 Fiscal discrimination

It should not be overlooked that special interest groups use the public sector to appropriate resources for their own ends.  A rather straightforward application of externality theory can enrich our understanding of the issue. ⁽⁵²⁾

In Chapter 2 it was argued that individuals may ignore the impact of their actions on other individuals and that, as a result, there is an excessive level of output in the market.  Much of the discussion in that chapter was devoted to showing how the institutional structure should be designed so that individuals will take account of the costs they impose on other individuals.

Under a representative democracy, operating to the tune of majority rule, the problem of externality arises too.  When the majority votes for a particular government program, it is true that the minority will have to live with the consequences of the majority decision.  In that sense, actions by the majority impose costs on other individuals.  Clearly, this raises the level of tension in the collectivity.  And more to the point, majority rule allows the winning party to foist some of the costs of its program on the minority.  Since the institutional structure here does not force the majority to take account of the costs it imposes on the minority, a very real danger exists that there will be an excessive degree of public sector activity.

It is well worth noting too, that politicians have a direct hand to play in the bias towards an overexpanded public sector.  Political parties are naturally interested in winning and retaining power.  So self-interested, vote-maximising politicians have a clear incentive to put forward policy packages in which the benefits are highly visible.  Naturally enough, the electorate is interested in any political party that promises much for little cost.  The pressure on expanding the size of the public sector therefore also arises from political parties.

There is little scope here for changing this bias against the market mechanism by appealing to the public-spirit of politicians.  Economists are rightly worried about relying on any proposal that places demands on one of the most scarce of all commodities, love.  As in the market setting, reform ought to be sought in designing an institutional structure that will blunt some of the excesses of human nature;  to design an institutional structure that harnesses the vote- maximising politician's action for the good of the electorate at large.

Those acquainted with some knowledge of the Constitution of Australia will recognise that the authors of this instrument did make some attempts to reduce the potential excesses of the Federal parliament.  One of the reasons why the debate on the constitution was so protracted in the 1890s was that the less populous colonies felt that they would be exploited by the more populous colonies of New South Wales and Victoria.

The participants in the debate recognised the potential tyranny of the majority.  The proposal put forward and finally accepted was that the Senate would be the States' house and that the House of Representatives would reflect the interests of more narrowly defined electoral districts within each State.  It was hoped that by drawing the electoral districts along radically different lines, the interests of the collectivity at large would be represented within the bicameral legislature and that State rights would be protected by the Upper House.

Put simply, it was felt that the Parliament had been organised to reduce the impact of any special interest groups or factional parties.  It is, of course, true with the benefit of hindsight that their hopes have not been met.  To a considerable extent, Senators vote along party lines.  The Senate does not act as the watchdog of the States.  The desire to achieve a consensual process that would reduce the degree of exploitation of minorities has not been achieved.

One institutional reform that would go some way to fulfilling the hopes of the statesmen of the 1890s would be to reform the Electoral Act.  In order to break the stranglehold of the two major parties over the Senate, what is needed is some institutional structure that will better reflect minority interests in the Senate.  One such reform is to use a strict Hare-Clarke voting system in all Senate elections, rather than the method of Proportional Representation that operates at present.  Under the Hare-Clarke system, official "how-to-vote cards" do not exist and there is no provision for a single "list vote" that distributes preferences in a manner pre-determined by the political parties.  The evidence -- in particular, from recent Tasmanian elections -- shows that the Hare-Clarke system reduces the impact of the "donkey vote", diminishes the influence of the major political parties and as a result, ensures that the electoral outcome better reflects the range of community interests.  If such a reform were introduced at the federal level, then the competitive forces within the Senate would limit the ability of the government to pursue their own interests and that of their supporters to the detriment of the citizenry at large.

6.5.3 Compensation

In order to provide a clear and viable incentive for individuals to undertake market based activities, limits ought to be set on the government's power to take.  If entitlements are poorly and inadequately protected, then self-interested individuals will attempt to use the political sector to redirect the resources in their favour.  The message of Section 5.2 is that the wealth of the nation may be dissipated in this process of rent seeking.  If rights are better defined and enforced, then the cost of engaging in rent-seeking behaviour will have increased;  individuals will leave the rent-seeking industry to search for profits elsewhere in the economy.

To be sure, the present Commonwealth of Australia Constitution Act already sets out in a number of sections limits on the power of the government to commandeer resources.  This set of rules enriches, of course, the definition of the set of property rights, a foundation stone of the market system.  And yet it is not at all clear that the Acts adequately cover the issues at stake.  When State and Federal governments make legislative changes, it is clear from the discussion found in Section 4.9 that certain individuals will sustain capital losses.  The question is whether these losses ought to be considered when evaluating the worth of a regulatory change.  That is, whether the property rights ought to be protected by some constitutional amendment that would require the government to compensate any losers.

It is worth noting from the outset that the notion of losses due to the actions by some other party is a general one.  The actions of one agent in a competitive market will affect the welfare of other suppliers and consumers.  Pecuniary externalities do not, however, warrant any government intervention.  As we indicated in Chapter 3 the reallocation of resources resulting from the agent's decision will be efficient, as long as prices fully reflect benefits and costs.  This argument, however, does not explain whether or not the individuals who have lost from the reallocation of resources should be compensated.

Economists, after duly noting that the external effect is transmitted through the market in the form of a price signal, for the most part ignore the question of whether compensation is required.  It is difficult, therefore, to discern the economists' reaction to the issue of compensation.  One response would maintain that in the case of pecuniary externalities, all that has transpired is that the economy has moved from one efficient allocation to another.  And that, as the new outcome is an efficient one, it would not be possible to compensate the losers without making someone else worse off.  Consequently, there is no case for compensation quite simply because there are no gains to be had from settlement.  The loss incurred by some agents due to the change in price is transferred to other agents.  This seems to be what economists have in mind when they argue that pecuniary externalities do not matter.  They fail to matter because there are no welfare costs associated with such changes.

This argument so far is incomplete.  It only tells us what is required if the economy is a purely static one, instantaneously moving from one efficient state to another when there is no net surplus.  What should happen if compensation is feasible (that is, if the gain exceeds the loss)?  Is compensation required for those individuals who have their rents eroded through the course of time?  Should the saddler receive compensation for the loss he sustains when farmers stop demanding his wares and start doing all their stock work on trail-bikes?  In a dynamic setting, should the gainers be required to compensate those individuals who have sustained a loss as a result of a change in prices?

A fruitful way of approaching these questions is to carry out a thought experiment along the line broached in the section on constitutional political economy.  Place yourself in an imaginary state where you have to make decisions about the rules that will be applied at some later date.  You do not have knowledge, however, of whether you will stand to lose or win as a result of the particular set of rules.  Most individuals would attempt to design a set of rules that eliminates the degree of exploitation that any individual or group can impose on them.  Think of a jury system where jurors have to reach an unanimous decision.  The individual is prepared to accept this sort of rule because there is some chance, ever so slight, that he will stand before the bench accused of murder.  In such a circumstance, each one of us will want to be treated fairly.  Moreover, each can be expected to desire a stringent decision-making rule as the cost of a mistaken decision can be relatively high.  Of course, such rules come at a cost.  We would not want all decisions to be made on the basis of unanimity.  Imagine the cost and disruption to a cricket game if the two umpires had to confer on all decisions.  Individuals will be prepared to accept a compromise in which the decision-making costs are weighed against the inefficiencies that arise from less than unanimous rules.  Individuals adopt this sort of procedure when they sit around a table to play cards.  The rules for the game are specified before the individuals know how the cards will fall that night.  The individuals agree to a set of rules in full knowledge that they may win or lose over the course of the game:  the rules are designed to make for a fair but interesting game.

It is possible to mount much the same argument for the losses which arise from changes in legislation.  Individuals have agreed to a decision-making process in which while they may sometimes gain and sometimes lose, they expect on the whole to be made better off in the long run, as a result of a more efficient institutional structure.  In that sense, compensation need not be paid to the individuals who sustain losses as a result of a change in policy.

Yet in the case of changes in the rules themselves, it need not be the case that changes should always be made without any restitution.  Unlike in the case of pecuniary externalities where changes do not lead to any net gain, the change in some constitutional rule designed to rid the economy of some inefficiency will result in a net gain.  In this case, those who gain should be able to compensate those who lose and yet still be made better off.  The difficult question then is to devise programs where these gains arising from the move towards the price mechanism as advocated in the preceding pages of this work are distributed across all participants.  And this should be the objective of consensual democracy rather than the plunder of the many to the benefit of the few.  But as we indicated in the introduction to this section, the suggested reforms remain our tentative proposals.  So let the discussion begin.

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ENDNOTES

42.  Risk neutrality has been defined in Chapter 4 above.  Basically, it means that the agent is equally happy with a fifty-fifty bet of $0 and $10 on the one hand, and a certain return of $5, on the other.

43.  Using the formula in the text, the expected income when taking the bribe is given by E(Y) = 0.9[$30,000 + $5,0001 + (1 - 0.9)[$30,000 + $5,000 - $10,0001 - $200 = $33,800.  His certain income is $30,000, leaving an expected gain of $3,800.

44.  Now expected income when taking the bribe is given by E(Y) = 0.5[$30,000 + $5,000] + (1 - 0.5)[$30,000 + $5,000 - $10,000] - $200 = $29,800.  His certain income is $30,000, leaving an expected loss of $200.

45.  See Ricketts (1987, ch. 5) for an excellent discussion of the agency problem and institutional devices aimed at cutting down shirking etc.  Becker and Stigler (1974) suggest different methods aimed at reducing malfeasance.

46.  See Downs (1957) for an extensive discussion of why it is rational for voters to be ill-informed about political events.

47.  See Coleman (1987, 1990) for the notion of norms as social capital.

48.  See Posner (1986, pages 629-33) for an extended view of this argument.

49.  The analysis in the next section draws on the arguments in Buchanan and Tideman (1974).

50.  Buchanan and Tideman (1974) demonstrate that this conclusion is not true in general.  One can envisage cases where the supply is highly responsive to price, demand is unresponsive to price and the shortfall in supply so large that the size of the gain from allowing the market to operate freely will exceed the loss from not being able to consume the rationed resource at the controlled price.  Their analysis shows, however, that consumers will continue to prefer the regulatory scheme under a wide range of values.

51.  See Macauly and Yandle (1977, pages 119-21) and Marks (1988, pages 175-7) who explore some of the relevant issues surrounding abortion from an economic perspective.

52.  The relevant theory here was first put forward by Tullock (1959).