The Agent-Principal Problem in Politics

The agent-principal problem is rife in politics. In the narrative that is the modern state, politicians are supposed to generate higher returns to citizens by increasing the value of the state’s assets and, therefore, of the state. In the context of politics, assets are both of the economic and of the geopolitical varieties. Politicians who fail to do so, goes the morality play, are booted out mercilessly.

The misconduct of politicians is one manifestation of the “Principal-Agent Problem”. It is defined thus by the Oxford Dictionary of Economics:

“The problem of how a person A can motivate person B to act for A’s benefit rather than following (his) self-interest.”

The obvious answer is that A can never motivate B not to follow B’s self-interest – never mind what the incentives are. That economists pretend otherwise – in “optimal contracting theory” – just serves to demonstrate how divorced economics is from human psychology and, thus, from reality.

The same goes for politics and political science, respectively.

Politicians will always rob blind the state. They will always manipulate electorates, political parties, legislatures, and the judiciary to induce them to collude in their shenanigans. They will always bribe constituents and legislators to bend the rules. In other words, they will always act in their self-interest. In their defense they can say that the damage from such actions to each citizen is minuscule while the benefits to the politician are enormous. In other words: such misbehaviour is the rational, self-interested, thing to do.

But why do citizens cooperate with such political brigandage? In an important Chicago Law Review article titled “Managerial Power and Rent Extraction in the Design of Executive Compensation” the authors demonstrate how the typical stock option granted to managers as part of their remuneration rewards mediocrity rather than encourages excellence.

But everything falls into place if we realize that citizens and politicians are allied against the state – not pitted against each other. The paramount interest of both citizens and politicians is to increase the value of their benefits (stake) regardless of the true value of the state. Both are concerned with the performance of their individual assets rather than with the performance of the state. Both are preoccupied with boosting the “share’s price” rather than the “company’s business”.

Hence the inflationary perks and pay packages enjoyed by politicians, directly (via campaign contributions, personal favours, an enhanced quality of lifestyle) and indirectly (via the revolving door between politics and business). Citizens hire “stock manipulators” – euphemistically known as “politicians” – to generate expectations regarding the future prices of their stakes in the state.

These snake oil salesmen and snake charmers – politicians – are allowed by the citizenry to loot the state providing they generate consistent “capital gains” to their masters. This they do by provoking persistent interest and excitement around the country and the nation and their prospects, both economic and geopolitical. Citizens, in other words, do not behave as owners of a firm – they behave as free-riders.

The Principal-Agent Problem arises in other social interactions and is equally misunderstood there. Consider taxpayers and their government. Contrary to conservative lore, the former want the government to tax them on condition that they share in the spoils. They tolerate corruption in high places, cronyism, nepotism, inaptitude and worse providing that the government and the legislature redistribute the wealth they confiscate. Such redistribution often comes in the form of pork barrel projects and benefits to the middle-class and the affluent.

This is why the tax burden and the government’s share of GDP have been soaring inexorably with the consent of the citizenry. People adore government spending precisely because it is inefficient and distorts the proper allocation of economic resources. The vast majority of people are rent-seekers. Witness the mass demonstrations that erupt whenever governments try to slash expenditures, privatize, and eliminate their gaping deficits. This is one reason the IMF with its austerity measures is universally unpopular.

Employers and employees, producers and consumers, voters and elected officials all reify the Principal-Agent Problem. Economists would do well to discard their models and go back to basics. They could start by asking:

Why do shareholders acquiesce with executive malfeasance as long as share prices are rising?

Why do citizens protest against a smaller government even though it means lower taxes?

Could it mean that the interests of shareholders and managers are identical? Does it imply that people prefer tax-and-spend governments and pork barrel politics to the Thatcherite alternative?

Nothing happens by accident or by coercion. Electorates the world over aided and abetted the current crop of venal politicians enthusiastically. They knew well what was happening. They may not have been aware of the exact nature and extent of the rot, but they witnessed approvingly the public relations antics, unnecessary wars, rampant malfeasance, media manipulation, opaque transactions, and outlandish pay packets. People remained mum as they witnessed the mounting corruption of the political-corporate nexus.

Still, there is an even narrower and more worrisome interpretation of the politician’s comportment, in which he is answerable not to his constituents, but to party hacks.

It is a common error to assume that the politician’s role is to create jobs, encourage economic activity, enhance the welfare and well-being of his subjects, preserve the territorial integrity of his country, and fulfil a host of other functions.

In truth, the politician has a single and exclusive role: to get re-elected. His primary responsibility is to his party and its members. He owes them patronage: jobs, sinecures, guaranteed income or cash flow, access to the public purse, and the intoxicating wielding of power. His relationship is with his real constituency – the party’s rank and file – and he is accountable to them the same way a CEO (Chief Executive Officer) answers to the corporation’s major shareholders.

To make sure that they get re-elected, politicians are sometimes required to implement reforms and policy measures that contribute to the general welfare of the populace and promote it. At other times, they have to refrain from action to preserve their electoral assets and extend their political life expectancy.

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