All Commentary
Wednesday, April 1, 1998

Money for Nothing: Politicians, Rent Extraction, and Political Extortion by Fred McChesney

An Important Book in Any Comprehensive Economic Education

Harvard University Press • 1997 • 230 pages • $35.00

Roger Meiners is a professor of law and economics at the University of Texas-Arlington and senior associate at the Political Economy Research Center.

As F. A. Hayek explained in his introduction to The Road to Serfdom, a half-century ago the future of the world was bleak. Most economists believed in some form of state control of the methods of production, and more importantly, the rise and spread of fascism, communism, and other statist ideologies meant the loss of freedom and destruction of wealth.

Today, however, even many people who do not trust markets admit that they work better than state control of production. Economic analysis played a role in this victory (which was amply validated by evidence of what happens under state control). Unlike 30 years ago, when the virtues of state-controlled production were commonly preached, such sermons are now relegated to the Universities of Havana and Pyongyang and uttered by a few intellectually senile academics here.

But despite this victory for economic analysis, it has not penetrated as far in analyzing how government operates. Fred Mc-Chesney, a professor of law and economics at Cornell, has written an excellent book that enhances our understanding of the political economy of government. Money for Nothing neatly summarizes (in 170 pages of text plus 43 pages of notes and references) the research in the past 30 years (in which McChesney has played a key role) about “rent-seeking” and “rent extraction.”

“Rent” is an economist’s term that refers “to returns to the owner of an asset in excess of the level of returns necessary for him to continue using the asset in its current employment.” Rent-seeking is the process of attempting to obtain rents by manipulating the political process to grab the wealth generated or owned by another. For example, environmental groups commonly pressure legislatures or regulatory bodies to reassign property rights in a way that reduces the wealth of property owners while advancing the groups’ own goals (such as additional habitat for spotted owls). This is a nonmarket, but legal, transfer of wealth.

Paul’s desire to have the state rob Peter and give the money to Paul (rent-seeking) is well understood. Less understood is rent extraction, which is the receipt of payments in return for a promise not to take or destroy private wealth, in other words, extortion. Private rent extraction, such as a Mafia protection racket, exists, but is trivial (and illegal) compared to public-sector rent extraction.

Legislators have nearly unlimited constitutional powers to impose taxes and regulations that reduce or destroy the wealth of a business. Politicians can, therefore, extract rent from owners in exchange for not imposing destructive taxes or regulations (political extortion). Peter will be willing to pay something not to be robbed.

Who is the key player in the political protection market? The politician. A politician is a political entrepreneur with the legal authority to bestow favors on Peter or Paul. Exercising such power has, in recent decades, become the primary role of government. Productive functions of government—such as law enforcement and national defense—take a small fraction of government resources; most government now involves wealth redistribution via taxing and entitlement schemes, or regulations that favor certain firms at the expense of consumers and other firms.

McChesney’s book provides a readable and nontechnical explanation of the theory and practice of our political economy. His particular contribution to this literature is his work on politicians as entrepreneurs who manage the process that allows them to be “paid not to legislate—money for nothing.”

There is already a large literature about politicians transferring wealth to win political support. McChesney has expanded our understanding of the extent of the politicians’ damage done by focusing on how they can extract rents for themselves by promising to abstain from that activity.

His book is filled with stories of the kinds that will show ordinary citizens that politics is dominated by special interests. But as Mc-Chesney explains, politicians do not wait passively for rent-seekers to come to them with proposals. Politicians actively exploit the process, such as by giving taxpayer dollars to so-called “consumer groups” that request ever-more regulation at hearings run by the same members of Congress. That provides a rationale for members of Congress to threaten new regulations unless industry mounts makes the appropriate effort (by PACs, etc.) to “convince” Congress of the “wisdom” of not acting.

The politicians cannot lose. The losers are citizens who see their freedoms and wealth consistently chiseled away by those who have developed the finest skills for getting money for nothing. Given the massive and expanding scope of government, McChesney’s book is an important part of a comprehensive economic education.