Tuesday, May 16, 2006

OVERLOOKED BUT IMPORTANT -- Posner discussing corruption: "Since public corruption seems on balance inefficient, the question arises why it is so common. The answer is that corruption flourishes where the economy is heavily regulated but the legal framework is weak."

And Becker's response: "Posner points out that corruption flourishes with a weak legal system, and with larger government. Obviously, if governments strongly regulate many activities, then companies, unions, and other groups that are regulated can do better if they can "bribe" officials to overlook or relax these regulations. So the wider is the reach of governments, the greater is the corruption potential. There was relatively little corruption in the Federal government of the US in the early 19th century primarily because the government did so little then."

It seems a feat of strength to suggest that the answer to public corruption is to reduce the scope of government regulation. Obviously, if the government did not regulate a particular area, it would reduce the necessity for corruption. Carried to its logical conclusion, it seems that we could eliminate crime entirely by deregulating all conduct.

Perhaps the corruption question should be viewed through a different economic paradigm. Perhaps corruption could be viewed as imposing a transaction cost on law-abiding citizens. Perhaps the reduction of corruption promotes efficiency by reducing a transaction cost. Perhaps there is some economic value associated with trust, and that value is realized more efficiently when we reduce fraud and corruption in business and government. Perhaps?