Wednesday, September 12, 2007

Absolute Power Corrupts

Qu'elle surprise

It should come as no surprise that the previous New York state employees pension fund manager is under investigation for fraud. He and he alone was responsible for determining the investments for these public moneys. Of course why should he not give them to the highest "bidder"? When there is not even pretext of accountability in the incentive structure, why should anybody act any different? This is human nature.

And it is also an interesting cross-section between economics and philosophy. For some reason some people think that just because someone works for the government or is in public service that he or she will act benevolently, putting the public's interests above their own. This is counter to human nature, why should working in the public service turn someone into a saint or make someone act differently than they would usually?

In fact this is actually counter to logic because in one's day-to-day relations we know the people we deal with and therefore have the incentive to be honest, and if we sell something in the market it is the quality of the good, and the reputation of the merchant, which matters. In public service at the highest levels it is mostly impersonal relations or with those already part of the system. And even if a public servant goes in with the best of intentions, the incentives once in can change attitudes and behaviors.

This is what Public Choice Economics is, using the analysis of self-interested economic agents to predict behavior in the public sphere. Public choice can tell you for example why governments have a tendency to grow in size: because public managers get paid more when they control more public moneys and have larger staffs, thus have an incentive to ask for increasingly large budgets every year. And because they know more about their programs than overly busy politicians and oversight officials, they get this additional moneys through persuassive argument and asymmetrical information.

Public choice can also tell you why former Comptroller Hevesi may have not been completely thinking only of the public when he was in office, because he had no incentive to, and perhaps thought that he was not harming anyone (anyone in particular that is).

The Greek and Roman philsophers believed that it was a person's highest good to serve the state in that the state served the people. Perhaps they had it wrong, the state does not serve the people but only serves those people who make up the state.

But to cut the ancients some slack, states were much different then, the political class was much smaller and people knew, mostly, who was doing what in the public sphere. States have grown much larger now and are involved in so many more activities that the public is kept in the dark (perhaps rationally so, as who really cares about the state unless they come knocking on your door, or when it comes tax-time). Mr. Hevesy is under prosecution, just how many more are not?