Thursday, November 06, 2014

Gordon Tullock’s Contributions to Economics Will Always Live On

I am saddened to say that economist Gordon Tullock passed away on Monday in Des Moines, Iowa at the age of 92. Professor Tullock is often considered one of the fathers of public choice theory, which is the use of economics to solve traditional problems of political science.

Professor Tullock formulated the idea of “rent-seeking,” which most often is associated with the act of individuals and/or firms lobbying government for handouts, exemptions, or even regulations.  Rent-seeking is inefficient not only because it amounts to the government picking winners and losers in the marketplace, but also because the money used to lobby government could have been used in other ways to enhance consumer welfare.

Public choice theory is very applicable to the rule-making process. Voters, politicians, and regulators are all rational, self-interested individuals. Without questioning the intentions of FCC regulators, we should consider that adopting Net Neutrality rules would increase the FCC’s responsibilities, future budget, and overall power within the United States. Public choice theory tells us that public officials respond to incentives, such as these, in the same manner that private individuals do.

Professor Tullock also created the theory of the “transitional gains trap,” or the trap that individuals or firms fall into when protectionist government regulations are lifted. This is evident today in the sharing economy. (See “The Sharing Economy: A Positive Shared Vision for the Future”) Traditional hotels and taxicab drivers are worse off in regions where applications such as Airbnb and Uber have emerged absent government interference. These traditional businesses have spent thousands (or sometimes millions) of dollars to be protected by regulations and licenses, while Airbnb hosts and Uber drivers have not been subjected to the same rules. Even if regulations on traditional hotels and taxicab drivers were lifted (as they should be), it would still put the traditional businesses at a disadvantage due to the regulatory burdens they already have incurred. This is why traditional businesses have been calling for regulations to be levied on the sharing applications, despite that such regulations would inhibit competition and ultimately hurt consumers. The proper response in the face of new competition is to “regulate down,” not to “regulate up” to try to “level the playing field.”

As FSF Board of Academic Advisor Don Boudreaux said in a blog on Tuesday:

[Tullock had] one of the most creative, original, pioneering, fruitful, and insightful minds of the last 100 years. He deserved the Nobel Prize, but never got it.

Although Professor Tullock is gone, his contributions to the field economics will always live on.