The Centralization Flywheel #1: It's Not a Conspiracy - It's Incentive Structures

Public Choice as the Operating System of Power

Why would an individual, formed by the free market rules of maximizing personal gain, become a saint because they become part of the government?

This question is central to Public Choice Theory-the application of economic analysis to political science. It delves into how self-interested agents - politicians, voters, and bureaucrats - behave when it comes to collective decision making. The main assumption underlying this theory is that power, budget, re-election etc. drive the actions of individuals, as opposed to public interest.

Prior to this development, political science generally believed that private actors were selfish and pursued self-interested goals, whereas public actors had sudden changes of heart and decided to make collective decisions the moment they enter public office.

Design rules, not Saints

Buchanan/Tullock's book "The Calculus of Consent" established the field with their introduction of "Methodological Individualism", which posits that individuals are the ultimate decision makers, not collectives; that is to say, "the state" does not actually exist as a single body, it consists of hundreds if not thousands of individuals making choices within the confines of an institution.

To put it plainly:

The Government decided 𝓧

Actually means:

A group of individuals, all acting based upon their own incentives, came to the conclusion 𝓧 .

A crucial point to make is that Buchanan and Tullock differentiate between the "Constitutional Level" and the "In-Period Level". We spend far too much time within the confines of the In-Period Level, the day-to-day decisions of legislation, funding, etc. The Constitutional Level is what determines which outcomes are even possible to begin with.

This distinction is important because self-interested individuals will attempt to exploit the rules regardless of what they are. As a result, bad people are not responsible for bad outcomes, rational actors and poorly designed institutions are.

Why the Small Group Wins

So how is it that a small group of bureaucrats are capable of controlling the outcomes for the general population?

Mancur Olson's Logic of Collective Action explains this.

In large majorities, like taxpayers, we encounter the problem of the "free-rider"; if the personal gain in a collective decision is negligible, an individual's incentive to contribute their efforts are drastically decreased. Paradoxically, a small group with concentrated interests are incentivized to organize due to the higher per-capita payoffs.

Let us use a recent example to illustrate the free-rider conundrum: Fraud in Minnesota.

Please note this may not be the most accurate data, but it is here to make a point...

It is estimated that $9,000,000,000 of federal funding has been consumed fraudulently in Minnesota over the course of ~7 years.

Divide this by the population of the USA. Let's say 330,000,000.

$9,000,000,000 / 330,000,000 = $27.27

Divided by the 7 years or so this occurred over.

$27.27 / 7 = $3.89 per year.

This is the net benefit that each individual would get deposited into their bank account. After the protests, the phone calls and emails to their local representatives, the court cases, etc.

Let me be very clear here: no sane member of the majority would get out of bed, waste their time, take time off work, for 4 dollars. Especially if everyone else organizes, wins, and you get the money without lifting a finger.

However on the flip side, the benefit per fraudster was astronomical, in the millions if not tens of millions.

It is clear, the incentives for change do not outweigh the incentives the concentrated minorities get for exploiting the system.

How Regulation Protects Monopolies-Not you

"But this is what the Government is for, they create rules and regulations that limit the power and control of the private actors who seek to exploit us."

Unfortunately, this is not the case, however often it may be told to us.

Regulation has a cost, the cost of compliance; lawyers, paperwork, reports, emissions targets...

Who could ever afford to service this red tape?

Established actors.

Who cannot?

Competitors.

This looks like good governance and virtuous action, but it actually just throws up a wall around an industry that stops innovation and integrity. Complex regulatory environments benefit an established player more than a simple subsidy since subsidies can be repealed or found to be fraudulent, whereas unrealistic compliance removes your competition completely, all whilst looking like good governance. The knock-on effect of this is the consolidation of our industries into huge monopolies that exploit and take advantage of regulation that should be restraining them.

Not a Conspiracy-A System

The topics discussed here today do not exist independent of each other. They build on each other and create a loop in which we find ourselves stuck today.

Self-interested actors will act with their self-interests in mind, not collective good.

The incentives in the current system asymmetrically favour small, concentrated groups who benefit disproportionately.

The very regulations in place to protect us actually protect them.

So the question worth pondering is not who is in power, but why the system allows it to happen and who bears the cost? When we attach our emotions to such things, it is easy and natural to come to the conclusion that this is someone else's fault, when in actual fact, it is the very system that is at fault.

Change the rules. Change the power.