Friedrich Hayek viewed the subject of rent-seeking not from the usual welfare economics perspective, but from a constitutional economics perspective. In a new paper, Daniel Nientiedt shows how Hayek’s approach to the rent-seeking issue was influenced by the work of legal scholar Carl Schmitt and, indirectly, the historical experiences of Weimar Germany.
When Gordon Tullock first introduced the concept of rent-seeking in 1967, he was prompted to think about this issue by considering the welfare implications of certain barriers to competition, namely state-sanctioned monopolies and tariffs. Tullock’s insight was that businesses will spend money to convince politicians to erect such artificial barriers— and that their lobbying costs must be added on top of the welfare losses that generally result from monopolies and tariffs.
Friedrich Hayek is not often associated with the rent-seeking literature (for an exception, see here). However, as I argue in a recent CHOPE working paper, Hayek clearly lays out the issue of rent-seeking and rent-granting in his discussion of democratic decision-making procedures of the 1970s. What makes Hayek’s discussion particularly interesting is the fact that it draws on the previous work of controversial German legal scholar Carl Schmitt, an enemy of liberal democracy whom Hayek called “[Adolf] Hitler’s chief legal apologist.”
In 1920s Germany, Schmitt observed that the laws adopted by the Reichstag (the lower house of the Weimar parliament) often catered to the interests of narrow economic groups rather than those of the public at large. He wrote: “Small and exclusive committees of parties or of party coalitions make their decisions behind closed doors, and what representatives of the big capitalist interest groups agree to in the smallest committees is more important for the fate of millions of people, perhaps, than any political decision.” Schmitt’s analysis was shared by classical liberal economists such as Walter Eucken and Wilhelm Röpke, but also by left-leaning politicians such as Gustav Radbruch. Röpke coined the expression “the state as prey” for a situation in which laws and regulations are written to benefit specific influential groups.
Schmitt pointed out a legal reason why special interests were able to influence lawmaking in this manner. In his view, it was because the Reichstag was able to adopt two different kinds of laws: Laws that are general and abstract in character and laws that discriminate between societal groups, making some people better off at the expense of others. Thus, he highlighted the Reichstag’s large amount of discretion to favor certain interest groups. It seems that Schmitt’s main motivation for doing so was to question the legitimacy of the political system of the Weimar Republic. After the Nazis came to power in 1933, he did not go on to further promote generality in lawmaking.
Hayek started engaging with Schmitt’s arguments in the 1950s while working at the University of Chicago. He placed Schmitt’s distinction between two kinds of laws prominently in his treatment of the rule of law principle (which is a normative description of what good law looks like). An example of this engagement with Schmitt can be found in Hayek’s book The Constitution of Liberty. But it wasn’t until the 1970s that Hayek connected Schmitt’s account of interest group influence in Weimar Germany to the current political situation.
Hayek argued that Schmitt’s observations from Weimar Germany were not only accurate but indicative of a larger problem that concerned all Western-style democracies. He emphasized that modern parliaments are typically charged with making both kinds of laws identified by Schmitt. Because of this, Hayek referred to modern parliaments as “unlimited” democratic institutions. The connection between unlimited democracy and rent-seeking is then made in Hayek’s three-volume work Law, Legislation and Liberty.
As Hayek sees it, rent-seeking simply results from the fact that parliaments are able to adopt non-general laws. Because laws can benefit specific groups, there will be lobbying efforts directed toward the creation of such laws. Hayek further assumes that politicians will succumb to lobbying pressure because granting favorable treatment to other groups is the only way in which they can obtain support for the demands of their own constituents: “[Democratic government] will be forced to bring together and keep together a majority by satisfying the demands of a multitude of special interests, each of which will consent to the special benefits granted to other groups only at the price of their own special interests being equally considered.”
Implicit in Hayek’s discussion is the notion that there could be alternative legal-institutional arrangements that would limit or prevent rent-seeking. Indeed, a substantial part of Law, Legislation and Liberty is devoted to describing such an alternative scheme. Abstractly speaking, Hayek wants to put into place constitutional provisions that limit the ability of politicians to grant privileges to economic groups. This motivates his proposal for institutional reform, the so-called “model constitution.” Here, one chamber of parliament would be charged with making only laws in the sense of general rules of conduct, while a second chamber would be responsible for making all other laws. However, rules laid down by the first chamber would restrict the discretion of decision-makers in the second chamber.
The entanglement of state and economy that Schmitt witnessed in Weimar Germany and his analysis of its causes were important in shaping Hayek’s view of the challenges of liberal democracy. Following Schmitt, Hayek understood rent-seeking behavior as resulting from the specific institutional environment in which laws are made. As evidenced by his model constitution, Hayek believed that democratic societies could counteract rent-seeking by devising constitutional limits to politicians’ discretionary power.
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