A Profit-Seeking Government?

taking a North, Wallis, Weingast perspective

Robin Hanson writes,

why don’t we have a lot more for-profit orgs that run cities, states, nations, etc.? This type of org is generally the best at most of our smaller-scale org tasks, and we also have many for-profit orgs that now do well at government-like tasks. Such as for-profit corporate campuses, housing complexes, resorts, cruise ships, company towns, and startup cities. But not only do we have almost no for-profit cities or nations, the idea almost never even occurs to anyone.

Let me start with the perspective of North, Wallis, and Weingast. They distinguish between a Limited-Access Order (L) and an Open-Access Order (O).

Throughout history, most states have been of type L. The government resembles an organized crime syndicate that has suppressed all of its rivals. In order to do so, it probably had to negotiate an agreement among the most powerful gangs. Type L governments are free to take what they want from their subjects and use it for personal pleasure, to build monuments, to fund armies, and to promote development within their territory. As long as the general public feels a combination of comfort with their condition and fear of the force of government, the L will not face rebellion. As long as the agreement among the more powerful gangs holds up, L will be stable.

Type O is a modern state, usually a democracy, in which pretty much every citizen accepts the legitimacy of the government. Although the benefits supplied by the government may be distributed unevenly, it does not operate like an L where a ruling coalition gets whatever it wants and everyone else has to accept whatever the ruling coalition gives it.

The most fundamental difference between L and O concerns who is allowed to form a significant organization. The organization could be a corporation or a political party. In L, no one outside of the ruling coalition can form such an organization. For example, in China, all major corporations are aligned with the Chinese Communist Party. The restriction against forming an organization is what is meant by limited access.

In O, you do not have to be aligned with the current rulers in order to form a political party or a corporation. Of course, in the United States, it is difficult for a new political party to succeed. But you will not be thrown in prison for trying. And people can and do form lobbying groups and pressure groups, which can sometimes succeed in affecting policy. The right to form an organization is what is meant by open access.

In L, the ruling coalition does seek profits to some extent. The rulers can extract resources from government directly, but they also gain indirectly because they have the ability to form corporations while most people are excluded from doing so.

In O, there are also profit opportunities for government officials from capturing resources directly or for private businesses from getting favorable government treatment. Lyndon Johnson and Joe Biden ended up with personal fortunes that far exceeded their lifetime salaries in office. The spineless bureaucrats who become university presidents get their big paychecks in large part because higher education has one of the most effective lobbies in Washington, which has lavished funding on universities through student aid programs and research grants. But in O, political organizations can emerge that mobilize public support to provide a check against too much corruption or favoritism.

Strong forms of profit-seeking and L go together. A profit-seeking corporation will not allow its employees to form organizations that could undermine or compete with the business (of course, an unwanted labor union might have to be accepted under US. law). By the same token, a one-party jurisdiction will be riddled with corruption and favoritism. I describe the government of Montgomery County, Maryland, where I live, as a wholly owned subsidiary of the teachers’ union. It is a one-party jurisdiction, and no prizes for guessing which party.

If you want a profit-seeking government, I do not see how you can end up with anything other than an L. Maybe if there are enough such entities competing with one another, and people are mobile, then the competitive outcome among profit-seeking governments will not be so bad. But if we had multiple profit-seeking governments, there would be strong incentives among them to form mergers and cartels.

So I am afraid that profit-seeking government aligns with one-party government. And one-party government tends to degenerate. For that reason, I see a competitive, open-access order as preferable.