Economics of Corruption

Corruption has been maligned by everyone as if it is something bad and has to be condemned and removed from society forever. Transparency International defines corruption as,

We define corruption as the abuse of entrusted power for private gain.

Corruption erodes trust, weakens democracy, hampers economic development and further exacerbates inequality, poverty, social division and the environmental crisis.

They also discuss three different forms of corruption,

1. public servants demanding or taking money or favors in exchange for services,
2. politicians misusing public money or granting public jobs or contracts to their sponsors, friends, and families,
3. corporations bribing officials to get lucrative deals

Although corruption per se is bad and it must be eliminated from society, doing that requires a sound understanding of causes of corruption. This is important because without removing the cause of corruption, if we try to eliminate corruption – which is a mere symptom of the underlying problem – then instead of making life easy for people we will make it difficult or even impossible. We must understand that corruption is the vent through which market, and with it people, breathe life. Corruption is a life saving mechanism when government is big and tyrannical. To understand this let’s imagine two alternative scenarios.

Scenario 1: Society without a tyrannical government

Suppose society A is a society where there is no tyrannical government. Government is very small and uniustrustive. It doesn’t wield any control or regulation over the society or its economy. People are free to interact with each other in the market and outside the market. Free market is the norm. In such a free market economy consumers will buy whatever they want to at the market price and producers will produce and make available those goods which consumers are demanding. No trade is illegal in such a society, and no trade needs to go underground in such a society. This is because there is no government burden which people need to avoid. There are no public servants so no one is demanding bribes or taking money for favors. People will only take their activities to an underground economy because they’ll want to avoid or by-pass government controls and regulations, which are very costly for them.

Scenario 2: Society with a tyrannical government

Now imagine society B where the government is big and tyrannical with all kinds of controls and regulations over the lives of ordinary citizens. For one or the other excuse, like public goods or externality etc., politicians and bureaucrats have banned or controlled the society and economy at large. Buying and selling in the market is not free. In such a society individual buyers and sellers are compelled to take their activities underground e.g., if the government has banned the use of alcohol then selling of alcohol will take place in the black market at higher prices; higher prices because the government ban has reduced the supply of alcohol. Consumers want to consume booze so sellers will provide it. The reason why government has banned consumption of alcohol has nothing to do with changing the habits of people or health reasons. Public health is a myth. As we have seen time and again, the areas where an alcohol or drug ban is implemented, that is the place where the most alcohol, or drug, is being consumed under the aegis of the government itself. Governments get money from bootleggers and other mafias who now enter illegal trade. We know most of the time the best quality booze in a prohibition area can be obtained from the policeman only! This is the reason why politicians, police, and mafia are the three groups who most oppose lifting alcohol prohibition because that will take away one avenue of their income. Also, where prior political and bureaucratic permission is needed to start any business, i.e., licenses, businessmen will be forced to pay bribes to state officials just to obtain the license to start his trade or he will be encouraged to give kickbacks to state officials to stop his competitors from entering the market.

In all these cases corruption is an end result of having a tyrannical government; of having politicians and bureaucrats ruling our lives in the name of “democracy”. It becomes necessary because of the presence of the state and its interventions in the free market enterprise system.

This implies that if anyone is interested in ending corruption from their society and economy then they should unequivocally demand removal of the state and its interventions into said society and economy. Free market capitalism is the solution for corruption. As Prof Rothbard said,

… given the unfortunate and unjust laws prohibiting, regulating, and taxing certain activities, corruption is highly beneficial to society. … Corruption greases the wheels of trade. The solution, then, is not to deplore corruption and redouble enforcement against it, but to abolish the crippling policies and laws of government that make corruption necessary. (P. 107 Rothbard A to Z).