WEALTH TRANSFERS IN A RENT-SEEKING POLITY

Richard F. Wagner

IntroductionThat the “Waron Poverty” that commenced in the late 1960s would

have retarded and perhaps even reversed the rate at which peopleadvanced above some arbitrarily established poverty level wouldhave been commonplace to nearly any economist from the late 18thcentury until the mid-2Oth century. It was clear to those economiststhat the receipt of transfers would reduce the efforts of recipients toearn income, and so would slowtheir economic advancement. It wasequally clear to those economists that the payment ofadditional taxesto finance income transfers also would reduce the efforts of thosewith higher incomes, and this reduced effort further would dampencapital accumulation and economic progress. Arguments and evi-dence presented by such people as George Gilder and Charles Mur-ray would have been eminently reasonable to classical economists,as Henry Fawcett’s 1871 work shows.

At the same time, however, the enactment of such programs bylegislatures despite, and perhaps even because of, their conse-quences is fully consistent with our knowledge of public choiceprocesses. Because it is difficult to attribute the enactment of suchprograms to faulty economic understanding by legislators, even thoughthere is always room for improved understanding, it would seem tofollow that significant reform requires more than better analysis ofthe consequences ofparticular measures—and requires instead sometype of institutional or constitutional reformation in the processesthrough which public choices emerge.

In this essay I explore some political and economic sources ofthedisparity between the rationalizations orjustifications for the transfer

Cato Journal, Vol. 6, No. 1 (SpringlSummer 1986). Copyright C Cato Institute. Allrights reserved,

The author is Professor ofEconomics at Florida State Uuiversity.

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programs ofthe so-called welfare state and what appears to be a quitedifferent reality. In doing so, I focus on the insights provided by thecontemporary literature on rent seeking and public choice. There isa growing body of literature that suggests that the policies that havebrought about such consequences are actually natural outcomes ofan institutional regime of unlimited or majoritarian democracy. Thisessay seeks, first, to describe and explain some aspects of the chasmseparating the common justifications for the various programs of thewelfare state from their actual consequences and, second, to set forthsome of the resulting implications for constitutional reformation.

Justifying Wealth Transfers in a Liberal DemocracySince people have developed numerous justifications for wealth

transfers, it is first necessary to give a brief description of commonapproaches to these justifications. Moreover, within the basicallyliberal framework of the American political order, approaches tojustification must be grounded in some argument about why peoplemight agree to programs for wealth transfers. As compared with aprotection-choked economy, a free economy allows people toachievea higher average level of wealth. But a free economy also entailsgreater uncertainty about the future value of present investments inhuman and physical capital, because ofthe quickened pace of changeit entails. The more open the economy is tocompetition, the quickerwill be the flow of disruptions and new opportunities from suchthings as inventions, the introduction of new products, and changesin personal wants. The realized value of any investment in physicalor human capital will be more fullyopen to future challenge in a freeeconomy. The quicker the pace of change, the less likely are skillsacquired in youth to be serviceable throughout one’s lifetime. Cer-tain enterprises may be left behind by new technologies, changingconsumer preferences, or population relocations.

The generally progressive character of a market economy is a sourceof uncertainty against which people might plausibly like to insure.Consequently, some type of income insurance might be agreeableto all participants from an ex ante perspective, and would therebyserve as a rationale for some type of income-sharing program thatwould appear ex post to constitute a transfer program. There areseveral ways this idea might be expressed. Buchanan and Tullock(1962, pp. 189—99), for example, used such reasoning as a possiblejustification for progressive income taxation. Faced with uncertaintyabout future income prospects, people might prefer progressive over

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proportional income taxation because progressive taxation allowsthem to attain smoother time-paths of consumption than would oth-erwise be possible. Ifpeople are aptly characterized as having dimin-ishing marginal utility of income, the ability to concentrate their taxpayments in years when their income is relatively high will reducethe utility sacrificed through taxation, as compared withwhat it wouldbe if the same amount of taxes were extracted at a proportional rate.Moreover, uncertainty about future income surely looms larger whenfuture prospects are projected forward from youth than when theyare seen from the perspective of middle age or the hindsight of oldage. Therefore, the younger people are, the greater will be the scopefor their reaching some agreement about the type of tax system theywill live under,

Another justification, which was given a strong impetus by thework of Hochman and Rodgers (1969), treats the provision of charityas a public good, through the use of presumptions about utility inter-dependence. In that literature, income transfers are seen as voluntarytransfers from donors to donees. State participation in the transfer ofincome, rather than exclusive reliance on private charity, is ration-alized by the presumption that free-rider problems would plagueprivate charity. Although people might like to act charitably, no oneperson acting alone could significantly improve the conditions ofrecipients without some guarantee that everyone would contribute,and so few or none would do so. Therefore, the use of governmentto transfer income is rationalized as a vehicle for overcoming thefree-rider dilemma.

It is also possible to justify transfers as being necessary for thepromotion of domestic tranquillity, a line of justification that is per-haps observationally equivalent to the preceding approaches to jus-tification. Consider James Buchanan’s (1976) Hobbesian reformula-tion of John Bawls’s difference principle. Bawls advanced the nor-mative argument that inequalities should be pemiitted only to theextent that they result in an improved position for the least well-offperson in society. In Buchanan’s formulation, however, somethinglike the difference principle is necessary for domestic tranquillity. Aminimal condition of social stability is surely a requirement thatpeople receive higher returns by adhering to the rules of a particularsocial order than they could receive by violating those rules andreverting to some form ofHobbesian anarchy. Hence, the differenceprinciple can be interpreted as a positive statement of one necessarycondition for the stability of a particular institutional order, and socan provide ajustification for some level of guaranteed income.

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Dissonance Between Rationale and Reality?To advance a rationalization for wealth transfers is not, however,

equivalent to advancing an explanation for them, because there maybe other, more satisfactory explanations of why such transfers aremade. For instance,justifications grounded inanalogies with incomeinsurance would seem tohave some obvious flaws. If insurance werepurchased retrospectively, those who fared well would want no cov-erage, and those who fared poorly would want extensive coverage.Insurance is possible only because it is purchased prospectively. Taxinstitutions and transfer programs, on the other hand, are to a largedegree chosen retrospectively. Compared with the choices they wouldhave made prospectively, people with high incomes will desirereduced coverage, while people with low incomes will desireexpanded coverage. In such a setting, there is good reason to expectexcessive transfers toemerge from democratic processes ofcollectivechoice. So long as the modal income is below the mean income, amajority of people will have below-average incomes and can thusgain by choosing fuller insurance (that is, larger transfers) than theywould have chosen under a prospective choice setting. Even thoughthe social insurance justification might explain some aspects of thesupport for wealth transfers, those transfers are likely to be moreextensive than is consistent with the justification.

Public charity justifications forwealth transfers encounter a similardissonance when compared with actual processes for the productionof wealth transfers. The public charity justification envisions anagreement among donors that allows them to escape the free-riderdilemma they would confront ifcharity were a purely private activity.Wealth transfers emerge from a collective choice among donors, andthe resulting transfer budget will depend on both the extent of utilityinterdependence and the rules for making collective choices. Assume,for example, there are three donors and two recipients, with thedonors preferring transfer budgets of $100, $200, and $300 respec-tively. If the donors choose a transfer budget by majority rule, amedian voter model would yield a transfer budget of $200, or $100per recipient. flut when the recipients are able to vote on the size ofthe transfers they receive, the size ofsuch transfers is likely to expandbeyond the amount that would be consistent with the public charityjustification. In this model recipients would surely prefer the $300budget to the two smaller budgets. Thus the $300 budget would bethe collective choice. Even though utility interdependence mightexplain some elements of the demand for wealth transfers, actualprocesses of collective choice are likely to prodnce excessive hans-

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fers as compared with the postulated normative standard; as Tullock(1981) argues, the interest of recipients in receiving transfers is surelythe most substantial component in any explanation of wealth transfers.1

In like manner, the justification for wealth transfers as being theprice of domestic tranquillity also confronts a disjuncture betweenthe setting envisioned and the actual setting within which the per-tinent choices regarding wealth transfers are made. It is surelyreasonable to think that the sustainability of a particular social orderdepends on its participants believing they are better offliving underits rules than they would be under some such alternative order asHobbesian anarchy. However, in seeking to reconcile justificationwith reality, it is necessary to examine the processes through whichsuch a determination would be made. Any such process would largelyoperate through complaints and protests. But once such activity comesto be rewarded, the aitount of that activity will increase until themarginal return from the activity equals the marginal return fromordinary types of economic activity.

The question, ofcourse, is how todistinguish legitimate grievancesfrom tactics chosen to ci~olesomeone else into giving up something.If complaints are automatically treated as legitimate and subse-quently awarded some form of compensation, the volume of com-plaints will increase until the ability tocompensate has been destroyed.Similarly, if complaints about an existing social order are automati-cally treated as legitimate and interpreted as evidence that peopleare being unjustly treated as compared with, say, Hobbesian anarchy,and ifcompensating payments are thereby made, the volume of suchcomplaints will increase because complaining becomes a profitableactivity. Parents, ofcourse, encounter this problem regularly in deal-ingwith children. Parents who reward complaining children will berun by their children. Sometimes,of course, children have legitimategrievances. And wise (and lucky) parents will be able to distinguishbetween the legitimate complaints and those that represent tacticsfor changing the distribution of wealth within the family. There isnecessarily a tension between the two types of judgment, and it iseasy to go too far in either direction. But, and for reasons to beconsidered more fully below, democratic governments are muchmore prone than parents to reward complaints, because governments

‘See Roberts (1984) for an examination of how, because of the political power ofrecipients, government transfers have crowded out private charity and have becomeexcessive in comparison with the Paretian criterion on which the presumption ofcollective charity is based. See Pasonr (1981) for a critical treatment of the publiccharity perspective.

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bear a minuscule share in the resulting cost, whereas parents bearthe entire cost.

Constitutional Regimes, Legislation, andWealth Transfers

The collective choice processes by which wealth transfers actuallyarise differ in important respects from the processes that would berequired to produce outcomes fullyconsistent with the justificationsfor those transfers. The literature on public choice has importantimplications for the conduct ofwealth transfer programs and, indeed,forpublic policy in general. The production of public policy followsan economic logic: policy outcomes are a product of the interactionofpeople pursuing various and diverse interests, and with that inter-action shaped by the opportunities offered and limitations imposedby a particular institutional-constitutional order.

Policy outcomes are seldom the result of inadequate knowledgeand unforeseeable events impinging on good intentions, and aremore often the understandable working out of people’s pursuit oftheir interests within the incentives presented by a particular insti-tutional order. Consequently, so-called policy failures are rarely fail-ures from the point of view of those people who control the policyprocess. In this regard George Stigler’s (1975) summary dictum isparticularly apt: “The announced goals of a policy are sometimesunrelated or perversely related to its actual effects, and the trulyintended effects should be deducedfrom the actual effects” (p. 140,emphasis in original).

It is conventional toview the transfer programs ofthe welfare state,as well as other government programs, in a partial equilibrium con-text, in that one policy market is examined in isolation from otherpolicy markets. Hence, the programs of the welfare state are regardedas reflections of charitable interests, while other government pro-grams reflect the operation of narrower versions of self-interest. It iswell recognized that many conclusions from partial equilibrium anal-ysis are negated or even reversed when analyzed from a generalequilibrium perspective. I would similarly suggest that we take ageneral equilibrium perspective on the collective choice of policymeasures. All programs and policies are produced by the same leg-islative institutions operating under the same constitutional rules.The mix of legislation that maximizes the value to a controlling setofpoliticians will be adjusted toequalize support at the margin fromdifferent programs. Tullock (1971) is surely correct in observing that,while people may be charitable, they are not charitable very much.

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His observation, in conjunction with a general equilibrium perspec-tive on legislation, suggests that the welfare state does not reflect theoperation of our charitable side, while we become our normal, moreselfish selves in regard to such other governmental activities as mil-itary spending, highway construction, and safety regulation.

The central characteristics of contemporary public policy in gen-eral, and that subset that is called the welfare state, are natural andinescapable consequences ofa system of unconstrained, majoritariandemocracy. Under such a system, legislative majorities are essen-tially unconstrained in making rules for others, as against beingconstrained to operate by the same rules as the other persons andorganizations in society.2 A system of unlimited or majoritariandemocracy produces a variety of wealth transfers, some of whichconstitute the subset of programs called the welfare state; the pro-grams that constitute the welfare state ariseout of a particular politicalsystem, through the operation ofthe incentives contained within thatsystem.

It is misleading to assess the welfare state without consideringwhatever else is produced by that system, and so it is inappropriateto assess transfer programs by looking only at that subset ofprogramscommonly referred to as the welfare state. Those programs are notproduced in isolation, but are part of a process that produces all theother programs as well. The outcomes that constitute the welfarestate are simply nonseparable components of policy outcomes ingeneral: the reduction in labor force participation and the increasein teenage pregnancies are produced by the same forces that produce$400 toilet seats for the military and fill caves in Missouri with cheeseand milk—all are products of the incentives contained within a sys-tem of unlimited or rent-seeking democracy.

Rent seeking explains how a variety of regulations and marketrestrictions become natural outcomes ofour prevailing political order.3

These restrictions arise as part of a process in which legislation issold to highest bidders; the rules by which this is done give strongsurvival value to outcomes that diminish the average level ofwealthas a by-product oftransferring wealth to the subset of people favoredby that legislation. The outcome is a protection-riddled economy.Yet we must not forget that a protection-riddled economy is also anencumbrance-bound economy.

‘See, for example, Norton (1985) on the development of this theme with respect totaxation.‘Tullock (1967) is the seminal work. For a selection of papers on rent seeking, seeJames Buchanan, RobertTollison, and Gordon Tnllock. SeeTollison (1981) for asurveyof scholarship on rent seeking.

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Shelters and Encumbrances in a Rent-Seeking StateThe course of public policy over the past half-century has been to

restrict liberty by awarding entitlements and foreclosing options.Restrictions on liberty are consistent with the awarding of entitle-ments. One cannot protect unionized garment workers from lower-priced competition without also preventing people from making gar-ments at home for resale, or preventing consumers from trying to findthe best buys. One cannot award food and shelter to some peoplewithout forcing others to labor to provide that food and shelter. Andone cannot improve another’s returns to carpentry by restricting ave-nues of competition without, at the same time, preventing othersfrom improving their situations through the practice of carpentry.One person’s sheltered position is necessarily someone else’s obsta-

cle to improvement.Consider, for example, restrictions on working at home. One case

that has received attention recently concerns a 1943 regulation for-bidding people to work at home in seven types of garment manufac-ture: knitted outerwear, women’s garments, embroidery, handker-chiefmanufacturing,jewelry manufacturing, button and buckle man-ufacturing, and gloves and mittens.4 Promulgation of this regulationwas based on the Fair Labor Standards Act of 1938, which authorizedthe establishment of minimum wages. The ability to work at homeis, of course, particularly beneficial to women with young childrenand people with physical handicaps. Mothers can care for their chil-dren at home while they work, and the physically handicapped canreduce the high costs of transportation to and from ajob. Yet womenwith young children and the physically handicapped are among thosefor whom the welfare state is generally rationalized as seeking tohelp. The ban against homework is surely as much a product of rent-seeking legislation as is any transfer program ofthe welfare state.

The major beneficiaries from such restrictions are the members oflabor unions and the producers of high-priced items who would bein competition with people who work at home. By preventing suchmanufacture at home, the supply of lower-priced alternatives to gar-ments manufactured in factories is reduced. This increases the demandfor factory-produced garments. To the extent the supply of labor tothe manufacture of garments is less than perfectly elastic, the pro-hibition ofhomeworkwill increase wage rates in unionized factories.This program is equivalent to placing a tax on homeworkers andusing the revenues to subsidize factory workers.

4See Germanis (1984) for a discussion ofthe prohibition against working at home.

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It is well documented that minimum wage legislation reducesemployment opportunities and contributes to the maintenance oflow incomes. By raising the cost of labor, minimum wage require-ments reduce the number of people that employers will hire. Mostlow-wage jobs are entry-level positions, and there would be manymore such jobs if they were not foreclosed by minimum wage leg-islation. Further, if entry-level jobs are foreclosed, the opportunityfor learning skills necessary to move onto higher-paying jobs is alsoforeclosed. Work experiences contribute toa person’s human capital,and thereby increase earnings potential. Without the experienceafforded by entry-level employment that would pay less than theminimum wage, human capital accumulates at a lower rate, which inturn means that people are consigned to a lifetime of earning lessthan they would otherwise have been able to earn.

Minimum wage legislation is a good illustration of the wealth-transfer outcomes of majoritarian democracy and the dissonancebetween the justifications for the welfare state and the reality of whatit actually accomplishes. Moreover, it is impossible to attribute suchoutcomes to ignorance; they must be attributed to intent. The effectsof minimum wage legislation in aiding some people and harmingothers fit sensibly within the emerging economic theory of legisla-tion. A welfare state that discourages work and capital accumulation,and encourages instead the reliance on transfer payments for support,would seem to be complementary to rent-seeking legislation thatalso tries to maintain the value of particular investments in humanand physical capital by curtailing competition. Any creation of anentitlement or sheltered status concomitantly entails a limitation onthe ability of someone else to earn a livelihood. The position ofhigh-cost garment manufacturers is sheltered by preventing people frommanufacturing garments in their homes for subsequent sale, and theability of the latter to earn a livelihood, in this case by sewing, isimpaired.

Such restrictive legislation fits comfortably within the theory of arent-seeking polity when applied in a general equilibrium setting.Furthermore, such legislation has certain insurance-like properties.Rent-seeking legislation creates sheltered, protected status positionsfor some people but imposes disabilities on others, because thoseexcluded from the sheltered position have fewer options. If legisla-tion is to increase the payments that some people receive for theirservices, it must be through activities that restrict entry andlor establishminimum prices. But the better such shelters work, the greater thedisability to others. To some extent the payments of the welfare statemight be thought of as disability payments that are a nonseparable

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aspect of the rent-generating activities of a constitutional order ofmajoritarian democracy.

Status v. Opportunity in the Social Provisionof Security

Despite the explosion in transfer spending over the pasttwo decades,or perhaps because ofit, the number of people whose money incomewould place them below the poverty line has generally increased(Cwartney and McCaleb 1985). Throughout the postwar period, pov-erty was declining due to general economic growth. But since 1968the overall rate of poverty has increased about 20 percent. Althoughit is commonly presumed that the activities of the welfare state rep-resent efforts to alleviate conditions that are presumed toaccompanya free economy, there are strong grounds for believing that the activ-ities themselves are actually a means of creating those very condi-tions. This possibility is made more plausible by the recognition thatforeclosed opportunities are an inescapable component ofa state thathas the ability to award entitlements. In this case the welfare statewould serve largely as a substitute for income that could have beenearned, rather than as a provider of income that could nothave beenearned. Poverty would not so much be a “natural” feature of a freeeconomy as it would be a product of the restricted, neomercantilisteconomy, of which the welfare state is one component.

People clearly have substantial interest inproviding some measureof security for their future. One way that people can reduce theuncertainty they face is by trying to gain control of such sources ofuncertainty as might arise from the actions of competitors in intro-ducing new products, new techniques ofproduction, newapproachesto business conduct, and the like (Wiseman 1953). The creation ofsheltered or protected wealth positions and the awarding of entitle-ments or transfers are complementary facets of the existing welfarestate. The welfare state, as one manifestation of a rent-seeking polity,operates within the market for legislation by awarding subsidies andentitlements and by imposing taxes and limiting options. The stateis involved in the extension of principles of status rather than theexpansion of principles of contract and opportunity. The status-extending welfare state operates by trying to prevent the erosion ofwealth positions by retarding the operation of forces for change withinsociety.

There are understandable reasons why, ina system ofmajoritariandemocracy, a status-oriented approach dominates an opportunity-oriented approach. In addition to rent seeking and the market forlegislation, there is also the fact that democratic political processes

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are characterized by shorter, electorally truncated time horizons. Thecreation of status positions through shelters and entitlements confersan immediate gain to recipients, while the costs are vague and to alarge extent reside in the future. When status positions are viewedfrom a short-run perspective, the programs of the welfare state seemprimarily toconcern the distribution ofincome and wealth. Proposalsto expand transfer spending appear centrally to revolve around ques-tions of whether some people should be taxed more heavily so thatothers can receive more benefits. But when they are viewed from along-term perspective, those programs, and possible alternatives tothem, primarily concern the creation and destruction of wealth. How-ever, in light of the absence of a political equivalent to a capitalmarket as a means of rendering a present evaluation of choices withfixture consequences, the political impact of wealth destruction wouldbe weaker than its magnitude would seem to warrant.

The conflict between an emphasis on status and an emphasis onopportunity can be illustrated by James Buchanan’s (1975) formula-tion of the “Samaritan’s Dilemma.” In the original story the Samar-itan aided a man who had been robbedand beaten by thieves. Althoughthat story described a unique event to which the Samaritan responded,the Samaritan’s dilemma arises once the conduct ofthe Samaritan isgeneralized as a rule of conduct for all such situations. As the prin-ciple behind the Samaritan’s choice is expanded from that ofofferingaid to beaten travelers between Jerusalem and Jericho to that ofoffering aid to people in a variety of circumstances that are regardedas misfortunate, supply elasticities are likely to increase. In the con-text of the welfare state, the Samaritans become those who wish toaid others they regard as relativelydisadvantaged. The recipients ofaid become analogous to the beaten traveler.

The nature of the Samaritan’s dilemma is starkly simple. Oncerecipients recognize that the amount of the donation they receivevaries inversely with the amount they earn on their own, they willhave an incentive to reduce their own earnings so as to elicit largercontributions from the Samaritans. This is a relatively inferior out-come for the Samaritans, who want to supplement but not replacethe recipients’ efforts to care for themselves. The only way the Samar-itans can get the recipients to increase their own earnings is bywithholding aid, which threatens the Samaritans with an even lesssatisfactory outcome.

Status, Opportunity, Rent Seeking, and RacePerhaps one of the best illustrations of the Samaritan’s dilemma,

and of the conflict between status and opportunity, is the racial aspect

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of the welfare state. This conflict appears regularly, for instance, inthe contradictory assertion of being an “equal opportunity/affirmativeaction’ employer. One can be an “affirmative action” employer oran “equal opportunity” employer, but not both. Affirmative actionprograms give preferential treatment to favored groups and therebyrepresent the extension of status relationships. Employees are hired,

retained, and promoted on the basis of minority status and not on thebasis of performance vis-à-vis other competitors. A policy of equalopportunity, by contrast, dictates that everyone be treated accordingto the same criteria, and represents the elevation of opportunity overstatus. Status is represented by the affirmative action award of priv-ileged positions and is therefore a further manifestation ofrent seek-ing. In contrast, equal opportunity means that restrictions on theability of people to employ their talents are abolished and as suchrepresent a restriction of the scope for rent seeking.

Although free competition tends to eliminate general racial differ-ences in income and wealth, one can ask whether a regimegroundedin opportunity or one grounded in status offers the shorter transitionfrom the large racial income differentials to the absence of differen-tials that would eventually characterize a freely competitive econ-omy. There are several economic reasons why the granting of afavored status, which might appear to be a means of speeding reduc-tion of income differentials along more quickly, actually retardsaccomplishment ofthat goal. Suppose, for example, several newcom-ers join a running club. None of them is in particularly good shape,

and initially they finish far behind the other members of the club.What [s of concern is whether affirmative action (the extension ofrent seeking) or equal opportunity (the curtailment of rent seeking)is the better approach to getting the newcomers to become compet-itive with the old-timers. The old-timers might, for instance, want toimpose restrictions on the ability ofthe newcomers to train on week-ends and evenings or for more than 40 hours per week. The equalopportunity approach would allow the newcomers to train as hard asthey choose, free of restrictions imposedby the other members. Theaffirmative action approach, in contrast, would establish a set of hand-icaps and head starts. In a five-mile run, for instance, the newcomerscould be given a one-mile head start and the old-timers could havefour-pound lead weights strapped to their ankles. And the lengths ofthe head starts and weights of the lead anklets could be readjusteduntil the desired composition of newcomers and old-timers in thevarious finishing brackets had been attained.

Alte:rnatively, suppose some of the newcomers lived under equalopportunity rules while the others lived under affirmative action

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rules. Under which set of rules would the newcomers more quicklybecome competitive with the old-timersP Which set of rules is moreconsistent with the fuller and quicker development of people’s tal-ents? Economic principles suggest clearly that itwould be the equalopportunity regime; but at the same time public choice principleswarn of the prevailing biases toward rent-seeking regimes. As com-pared with the equal opportunity regime, the affirmative action regimediminishes the incentives ofthe newcomers to become competitivequickly, because it becomes possible for them to win races withoutexpending as much effort on training.

An additional problem arises once we recognize that the newcom-ers will differ in their own interests and abilities. In the equal oppor-tunity regime, those who are best suited for racing because they havethe ability and the interest will train hard and catch up with theothers. But those who are weak on talent or interest will probablytire of finishing in the rear and will switch to some other activity. Butthe affirmative action regime diminishes the ability of such self-selection to reveal comparative advantages. Ifthose with lesser inter-est or talent among the newcomers are given longer head starts thanthe other newcomers, self-selection processes will notwork as stronglyto ensure that those newcomers who are best suited to racingwill bethose who engage in it. Therefore, not only does affirmative actionreduce performance levels, but it also reduces the extent to whichthe assignment of people toactivities reflects comparative advantage.

Moreover, the rent-seeking regime ofaffirmative action might havelong-run consequences that threaten to undermine it, at least withrespect to race, though perhaps not with respect to other forms ofrent seeking. Receiving a sheltered position is wealth-enhancing forthe recipient. But it also reduces the luster of winning, becausehaving defeated a lead-footed racer is surely less satisfying thandefeating an unencumbered racer. In most cases this diminishedluster is probably unimportant; I doubt ifthere are beauticians whofeel haunted by the thought that there are others who could havedone better than they, but were precluded by their weaker ability topass exams on the histology ofthe hair, skin, and nails.

The negative side-effects of preferential. treatment may be morepronounced with racial matters, however, where the issue is not oneparticular occupation among many but the very basis for first-classcitizenship. Being excluded by someone else’s sheltered status isperhaps a more sensitive issue in racial matters than in ordinaryeconomic matters. Whereas many individuals are unaware of theextra money they pay for butter or sugar as a result of special privi-leges granted those producers, there is more general awareness of

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the problems represented by the Bakke case, and various relatedinstances.

ConclusionMy purpose has been to examine some insights that the theory of

public choice can bring to bear on some ofthe primary characteristicsof wealth transfers and the welfare state. It has not been to advanceor to discuss particular suggestions for reform. As for such reforms,it shou][d be clear that I think both reason and evidence support thecase for rejecting our neomercantilist economy, of which the welfarestate is one inescapable component, and moving toward a free econ-omy guided by principles of property and contract rather than byprinciples of entitlement and status.

If the welfare system or welfare state is viewed in isolation fromother policy outcomes, it is relatively easy to articulate the types ofreforms that would help soften the clash between the welfare stateand the common welfare. Security can be provided only throughcapital accumulation within awell-integrated capital structure. How-ever, the welfare state, in its status-extending manifestation, acts incontradLictory fashion by awarding entitlements, conferring sheltered

wealth positions, and generally attenuating and otherwise abridgingownership rights. In consequence, people are discouraged fromworking, saving, and accumulating capital, and are encouraged tobeless responsible for the conduct of their lives, A welfare state that isconsistent with the provision of security cannot rest on a foundationof taxing and transferring capital. Such a foundation undermines therequisites for genuine security on the part of all participants. Thosewho are taxed are discouraged from working and saving, and so tooare those who are subsidized fornotworking andnot saving. Genuinesecurity requires creation of the opposing type of incentives; work-ing, saving, and accumulating capital must be encouraged and notdiscouraged.

But neither my purpose nor my main interest and competence liein the practicalities ofwelfare reform. What is raisedmost pertinentlyby the public choice perspective are some questions about possibil-ities fo:r reform that go beyond the technical merits of various pro-posals. The central message of this perspective is that the actualoperation of those institutions we call the welfare state will dependon the pattern of costs and gains that exist for different courses ofconduct. What gets produced is what rewards the producers themost—in politics, in the transfer programs of the welfare state, andin economic life generally.

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However, an opportunity-oriented welfare state would run afoulof the incentives of legislators within a rent-seeking polity. Thestatus-extending welfare state is a natural component ofa system ofmajoritarian, rent-seeking democracy. A legislature that simplyawarded various sheltered positions by imposing restrictions on theability of people to employ their talents would create a caste system,with those left outside being unable to provide for themselves. Theaward of support for notworking and not saving is a natural accom-paniment to policies that, for example, prohibit people from workingfor less than $3.35 per hour or in their homes, prohibit them fromusing their vehicles for transporting passengers or freight, and pro-hibit them from pruning trees, selling home-baked bread, or install-ing sprinkling systems for lawns. Such programs make it ever moredifficult for people to support themselves as a by-product of theconferral of protected statuses on others. To some extent, then, thewelfare state serves to mollify the social unrest that might otherwiseerupt. Aggregate wealth is reduced, and more of a castelike societyis created as income mobility lessens,

Although it is possible to articulate a general principle about thenature of a contract-extending welfare state whose rnodus operandiwould be congruent with the underlying conditions for security withina society, welfare reform of the contract-extending type seems gen-erally inconsistent with the system of incentives contained withinour existing institutional-constitutional order. Our political systemhas become one in which government is a maker of rules for others,rather than being an adherent to the same rules as others. Sincegovernment is then able to make the rules to which others mustadhere, a “market” will naturally arise to secure favorable rules andfavorable interpretations ofthose rules. Consequently, the problemsassociated with the welfare state and its reform should not be viewedin isolation from all other political outcomes, but rather as a subsetof a general pattern produced within a system of unlimited, majoni-tanian democracy.This is not to deny that some deregulation of welfare could be

achieved through ordinary political processes. But any such dereg-ulation would be precarious in the absence of constitutional refor-mation. It is, of course, inconsistent with the theory of rent seekingto explain deregulation as the outcome of economists providing bet-ter knowledge; such an explanation is a public interest explanationofpolitics in conjunction with the ignorance that economists struggleto reduce. Deregulation is also attainable in a rent-seeking polity.What is required is that the value of opposing policy measures beequal to different sets of people, and with those people facing equal

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costs of political organization. But this makes deregulation, on theabsence of regulation, or still more generally the maintenance of afree economy, a matter of the accidental constellation of politicalforces and not a central default setting of a constitutional order. Toachieve this latter position requires constitutional reformation.

Once it is recognized that policy outcomes are primarily a resultofthe interplay ofpeople pursuing their interests within a particularinstitutional on constitutional regime, it becomes difficult to attributeto error or ignorance the disparities between the goals that rhetoricsets forparticular policies and the often quite different reality of whatthose policies actually accomplish, Rather, policy outcomes must beregarded largely as a natural outcome of the pattern of costs andrewards contained within any particular institutional or constitu-tional regime. The transfer programs of the welfare state are chosenas just one subset of outcomes of a political process, and it is unlikelythat those programs will diverge greatly from the essential charac-teristics; ofpolitical outcomes in general. As Anderson and Hill (1980)have documented for the United States, political institutions thatincreasingly reward rent-seeking activities relative to genuinely pro-ductive activities weaken the prospects that those same politicalprocesses will generate a welfare state that operates in contrary fash-ion. Those interested in promoting welfare reform should recognizethat the concerns they address arise out of an institutional order inwhich the outcomes to which they are responding have positivesurvival value. Therefore, any effort to narrow the gap between jus-tification and reality requires some change in the incentives withinwhich the market for public policy operates—that is, political refor-mation-—and not just more and better studies ofthe consequences ofdifferent policy options.

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