Pirates! Politics! Perverse Incentives!

At long last I watched Pirates of the Caribbean 3 this past weekend. I had refused to watch it because the second was such a disappointment to me. I finally gave in, and I must say I rather enjoyed it. One aspect of the film particularly struck me: The most evil entity is not a band of thieves with a marked disregard for human life, not a sea monster the size of a ship, not even a heartless captain intent upon destroying souls, but a corrupt corporate executive.

This is probably another instance of Hollywood’s obsession with vilifying capitalists, but the East India Trading Company was actually far from a free-market organization. The EITC was granted monopoly rights over British trade with India, was uniquely exempted from customs tariffs and became a force for Britain’s colonization of India.

A system in which certain companies receive special status from governments is not a model of capitalism but rather the opposite of a free economy, one in which the lines between corporation and government are blurred. Yet this kind of pervasive military-industrial complex is what most people imagine and fear will result from unrestricted markets. A truly free market, however, is one little touched by government.

It is when government heavily interferes in business that business inevitably becomes involved in government. Once regulations and incentives are in place, corporations get greater payout by rent-seeking instead of serving their customers. (Rent-seeking describes activities directed toward acquiring favors from political entities; these activities do not produce any value to consumers but waste the resources used to garner the benefits.) Corporations expend more effort into gaining subsidies, monopolies or special tax- or tariff-free status, and in doing so become thoroughly enmeshed in politics. Politicians and corporate lobbies become interdependent, as each continually owes the other favors.

Lobbying takes competition out of the market – and out of the realm of the consumer – and moves it into politics. A company’s success is no longer tied to its service but to its political connections. While a free economy is based on voluntary exchange in which both traders benefit, a politicized economy is based on influence. It becomes easier to buy favors than to freely compete to satisfy customers. The winners are the well-connected corporations, and the losers are the competing businesses and the consumers.

We see this all the time and fear it; we tend to blame the greedy corporations for this state of affairs. But the responsibility for this situation is not with the corporations but with our government. In rent-seeking, businesses are merely following their self-interest; if they don’t grab the bone government offers, another company will. This is a prime example of perverse incentives.

The way to prevent oppressive corporate power is not to strengthen government’s economic influence but to let competition prevent excessive corporate power. As long as another business is free to unseat a de facto monopolist, consumers are protected from a monopolist’s coercion. Not so when governments protect existing corporations and restrict the entrance of new companies. The incredible power of the EITC was not the result of unleashed free trade but of a heavily restricted economy. With — and only with — extreme governmental special treatment, the EITC wielded dangerous economic and military power.

We can learn a lesson from PotC: The seas – and the economy – are only safe when government and business are kept separate. In a free economy, the possibilities are unrestricted. Now, bring me that horizon.

(For the pirate-junkies out there, George Mason University’s Peter Leeson has a fascinating array of papers on piracy.)

-HKMead, 2008 Summer Intern, Mackinac Center for Public Policy


4 thoughts on “Pirates! Politics! Perverse Incentives!

  1. “Without any intervention of law, therefore, the private interests and passions of men naturally lead to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

    “All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock.

    “. . . Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place; whether it be by repelling from a particular trade the stock which would otherwise go to it, or by attracting towards a particular trade that which would not otherwise come to it.”

    Adam Smith, Wealth of Nations, 1776

  2. As far as rent-seeking goes, is it not our responsibility as consumers to know about the companies we buy from and avoid those which rent-seek? If we did that consistently, the market, and maybe even the government, might learn that granting favors in the effort to centrally plan an economy just isn’t a good idea. The market wins again.

  3. In that case, it’s also our responsibility as taxpayers to know where all our money goes. But the fundamental problem is that there are large benefits concentrated on a few, while the costs are small and widely dispersed. Unfortunately, people just won’t rally in outrage at the steel protectionism that costs every household a couple of dollars per year… and so for all favored industries and corporations.

    There would also be a collective action problem: It is in each person’s interest for everyone to boycott protected companies, but it’s also in everyone’s individual interest to buy the cheapest/best products. If everyone else is boycotting, it doesn’t matter if I break it; but that reasoning shows that it’s in each individual’s interest to break the boycott. This relates to the famous “Prisoner’s Dilemma” that game-theorists get tied into knots over.

  4. My biggest problem with PotC 3 was that by this point, Johnny Depp’s drunken rocker inspired character was getting pretty frickin’ annoying. But also, like you said, yay capitalism! Boo protectionism!

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