Gary M. Anderson

On the Incentives of Judges to Enforce Legislative Wealth Transfers

THE relative independence of the judiciary in the American political system is taken for granted by both its critics and its defenders. Most would agree that the courts are effectively insulated from daily politics as a consequence of constitutional provisions that tend to reduce the ability of other government branches to influence their decisions. At the federal level, for example, judges are given life tenure and can only be removed by means of impeachment; at the state level, most judges serve for more limited periods but generally have a high level of security of office because they are very difficult to remove from the bench prior to the expiration of their terms. Both state and federal justices face heavy sanctions in cases of detected corruption, and it is therefore not surprising that most observers accept that bribery plays a negligible role in the process of judicial decision making. There are two major noneconomic views concerning judicial independence. The independence of the judiciary is sometimes portrayed as necessary to ensure that this branch of government functions as an effective counterweight to the legislative and executive branches. Put crudely, the role of the judiciary is to protect society from unconstitutional actions by the other branches, and judges are motivated in this pursuit by concern

Soviet Venality: A Rent-Seeking Model of the Communist State

While the recent Fall of Communism has focused the interest of economists on the admittedly fascinating problems associated with the ongoing economic reform process, the study of the functioning of actual communist economies still seems mired in the conventional model of central planning. This model is predicated on the assumption that communist rulers are unselfish drones who single-mindedly maximize the public interest. Our article proposes an alternative, public choice model. We suggest that the Soviet-style system represents a modern incarnation of the mercantilist economies of sixteenth- and seventeenth-century Europe, and that venality, not ideology, drives these economies in practice.

Adam Smith's Analysis of Joint-Stock Companies

We defend Adam Smiths theory of the firm from the standpoint of positive economics. We argue that his evaluation of the joint-stock firm was not moralistic but instead based on available empirical evidence. The record showed that joint-stock companies had a poor survivorship record, even when granted legal monopoly status. His analysis contained an explanation of the role of agency costs within the firm. Finally, he did not discuss the East India Company as an ordinary joint-stock firm but rather as an aberrant form created by government.

Educational achievement and the cost of bureaucracy

Abstract It is the purpose of this paper to test the following proposition: holding other important factors constant, does the size of the educational bureaucracy have any effect on the efficiency of school systems in producing educational achievement? The empirical results suggest that this is indeed the case. Using 1984 data from the states, we find that public school students in states having relatively large educational bureaucracies are less likely to graduate from high school, and those who do tend to perform more poorly on standardized achievement tests.

A public choice theory of the great contraction

ConclusionThe conventional (Chicago) wisdom about the Great Contraction is that it was the result of a massive policy failure. According to this view, the collapse of the economy was brought about mostly by the fact that the monetary policymakers of the day were more concerned with internal power struggles than with supplying reserves to member banks — an explanation which, with apologies to Professor Stigler, must have elicited uproarious laughter at the Bankers Club.It has been our purpose in this paper to suggest an alternative theory. Briefly stated, the restrictive monetary policy pursued by the Fed from 1929 to 1933 was motivated by the economic interests of member banks. The Feds policy produced a massive differential failure rate between member and nonmember banks in which the latter were eliminated at a rate at least five times higher than the former. Fed member banks faced substantially less competition in the banking market after the ‘house-cleaning’ than before. Although all banks suffered net losses in the short run, in the long run member bank profitability was enhanced by the reduction in the number of nonmember competitors. At the same time, the Fed itself benefitted from a substantial increase in the proportion of the total banking system within its bureaucratic jurisdiction and from a change in its method of finance.Putting the Great Contraction in interest-group terms, we suggested that the Fed was acting as the agent of congressmen serving on important oversight committees, who in turn were representing the interests of the member banks in their states. (Due to interstate branching restrictions, the state is the relevant geographic market within which banks compete.) We tested this hypothesis using bank failure rate data across states and found that, holding other things equal, the failure rates of nonmember banks in the early 1930s were significantly higher in states with representation on the House Banking and Currency Committee.Of course, not even Friedman and Schwartz (1963: 299, 301) argue that Fed policy was the sole direct cause of the Great Contraction, but instead maintain that the Fed acted in such a way as to take a ‘relatively severe’ contraction and turn it into ‘by far the most severe business-cycle contraction ... in the whole of U.S. history.’ But to the extent that the Great Contraction was worsened by Fed policy, and this in turn led to the succession of events called the Great Depression, the latter was a side-effect of economically rational interests of Federal Reserve member banks.To say the least, this would appear to have been an enormously inefficient method of obtaining the postulated benefits. Certainly, there were other, less costly methods available by which member banks could have reduced the number of their nonmember rivals.This is perhaps the most difficult problem our theory of the Great Contraction confronts. We can offer two responses. First, although the literature on the Great Depression tends to focus on fluctuations in national macroeconomic aggregates (e.g., the money supply, unemployment, and so on), it is clear that the severity of the Depression differed radically across states. States with relatively large agricultural sectors tended to be especially hard hit, suffering the highest rates of unemployment and the most significant numbers of bank failures. By contrast, states in some other areas (most notably New England and the Southeast) seemed to be less seriously affected. We note that in some of our regressions, the number of nonmember bank failures was negatively and significantly related to state unemployment rates in 1934. This is certainly not conclusive evidence, but it does suggest a pattern of differential costs associated with the Great Contraction. That is, the costs of providing benefits to Federal Reserve member banks in states with representation on the relevant oversight committees may have fallen more heavily on the economies of states not so represented. If so, this would cast a very different light on the actual costs of these policies to the relevant political decision-makers.Second, the potential dilemma in this case is no worse than that encountered in the application of the economic theory of politics to many other kinds of government behavior. Economists since Adam Smith have ascribed protectionist trade policies to the influence of special-interest groups, who benefit modestly at the cost of relatively huge economic inefficiencies. Many other government actions that might be plausibly explained from an interest-group perspective would similarly seem to involve costs to the economy which grossly outweigh the benefits special interests might reasonably expect. (Presumably, even in such seemingly extreme cases, marginal benefits equal marginal costs to the relevant actors.) Some writers have suggested that the political marketplace in modern democracies is characterized by much larger transactions costs than are normally encountered in ‘ordinary’ markets (see Demsetz, 1982); this might help explain the seemingly huge discrepancies we observe between apparent (concentrated) benefits and (diffused) costs in Depression-era monetary policy. In any event, this problem is not peculiar to our theory, but is shared by many applications of the interest-group model of government.It is worth emphasizing that the events we have described do fall into the interest-group models stylized depiction of concentrated benefits versus diffuse costs. Moreover, without having a complete picture of all of the options available to the monetary policymakers, we cannot be sure that any of the alternatives was in fact more efficient. We do know the path that was chosen and that, contrary to the conventional wisdom, this path had a rationally-motivated, interest-group basis.

Drafting the competition: Labor unions and military conscription

This paper applies the interest‐group theory of government to the question of what determines the choice by a government to employ conscription as a recruiting device. We model the governments choice of the draft as a function of various potentially significant influences on that decision, including the extent of unionization of the labor force. We argue that unions may expect to benefit from the presence of conscription in much the same way as from a minimum wage rate — both are devices that tend to protect union‐members from low‐skilled, younger competitors. We find that, controlling for other influences, countries where union influence is greater are indeed more likely to employ the military draft.

The economic organization of the English East India Company

Abstract Alfred Chandler and Oliver Williamson pioneered the argument that the invention of the multidivisional firm in the 1920s in the U.S. was a major organizational innovation. In this paper we argue that the organizational principles underlying the multidivisional firm appeared much earlier in history, specifically, in the organization of the English East India Company. We document the presence of multidivisional principles in the East India Company, and we argue that, most likely, the Company evolved to a divisionalized basis because of its monopoly status with respect to the sale of Asian goods in England.

Regulatory barriers to entry in the healthcare industry: the case of alternative medicine

Abstract To the extent that alternative medicine offers a substitute for mainstream physician services, physicians’ incomes are reduced by the incursion of alternative providers into the medical marketplace. State regulations restricting the practice of alternative medicine create rents for physicians whose incomes are protected from competition with alternative providers. Focusing on homeopathy as representative of an alternative therapeutic that potentially substitutes for conventional medicine, a cross-state empirical analysis reveals that mainstream physicians’ incomes are higher in states with more restrictive regulations governing the practice of homeopathy. This finding suggests that regulatory barriers to alternative medicine are motivated more by the interests of orthodox physicians in seeking protection from competition than by the interests of consumers in quality assurance.

Ideology, Interest Groups, and the Repeal of the Corn Laws

On March 27, 1846, the House of Commons voted to repeal the Corn Laws by a vote of 327 to 229 (Thomas, 1929, p. 57). The repeal of the import duties on corn (meaning cereals, including wheat, oats, and barley) was one of the most significant economic events of the nineteenth century. This action has long interested economists because it represents one of the few apparently unambiguous examples of the influence of economic theory, specifically, the theory of comparative advantage, on economic policy. Free trade policies were enacted by Parliament “in the end due to the devoted efforts of a few men who dedicated themselves to spread the message” of the relationship between free trade and economic efficiency (Hayek, 1978, p. 128).

Welfare Programs in the Rent-Seeking Society

Over the past fifteen years the interest-group theory of government behavior has shown itself to be an empirically rich and powerful explanatory tool. Applications have included environmental regulation [14; 17], Federal trucking regulation [15], the output of state legislatures [12], and numerous other government programs and activities. But one important subset of government programs has been consistently neglected in the literature: meanstested transfer programs. As a group, the poor are not well organized for political lobbying; they are dispersed and consequently face high organization costs. Further, as a potential lobbying group, the poor face potentially overwhelming free-rider problems (i.e., all of the poor stand to benefit from poverty programs that some subset of the poor achieve via lobbying). For this reason, the interest group theory of government seems to offer meagre explanatory power in the case of poverty programs. Many who otherwise typically interpret governmental activity from the perspective of rent-seeking analysis make an exception when it comes to welfare programs, and argue that here ideology (mostly, egalitarian ideology) has for some unexplained reason dominated the political process. There is sometimes a reference to the imperialism of the welfare bureaucracy which benefits indirectly from any expansion of the poverty program system, and admittedly this seems to be a plausible partial explanation for the rapid recent growth of welfare spending. Finally, Tullock [19] has adopted a radical reinterpretation, arguing that the welfare state does not really transfer net wealth to the poor at all, but actually represents a thinly disguised system of net transfers to better organized middle class interest groups. The Tullock hypothesis is designed mainly to explain major patterns of government transfer spending. It represents an attempt to reinterpret the net effect of transfer spending on the wealth positions of different income groups, and does not attempt to explain specific welfare programs from an interest group perspective. While this approach has merit, an interest group analysis of specific welfare programs must concern itself with the functional consequences of particular programs and the interest groups which benefit from them, both directly and indirectly. But such an analysis should not necessarily presuppose that the poor themselves are the most important politically relevant interest group involved in the lobbying process, or even that they play a major role. Very substantial transfers to the poor, or to any other recipient group, may ultimately be the result of interest group pressure in the