You decide (well not you, but someone you know) to give $100 to the kid who can produce the best business plan for a lemonade stand. So all the neighbourhood kids go off and make business plans, and come back and present them, and your neighbour gives $100 to the kid with the best plan.
Great. All the kids thought about how to run a business, etc., etc. and the best kid won. Healthy competition and they weren’t just wasting their time.
At this level, it really is great. I think....
But for the kids who didn’t get the money, maybe their time would have and could have been better spent than competing for free money. The generous impulse certainly does not scale. When you raise the example up to a government level, where say the City is looking to do some putative good by giving out a grant, and they have a selection process, to make sure it is fair, the people who apply will put more and more effort into the application process, until they spend just under what the grant is worth. And all these people are all bidding for the same little piece of old pie, instead of being out there baking new pies.
It gets much worse as the amounts of money on offer get larger. If a subsidy or grant is worth $100K a year, for 10 years, it is worth spending a considerable amount of money to land it. Money spend legally or illegally - the moral hazard side is another layer of the onion. For example, one can wonder how much being governor of New Jersey was worth to Monsieur Corzine, who apparently spent $100 million of his own bucks to land the “job”. And one can save for later deciding just how many deviant labels we can apply in attempting to understand how he can look in the mirror each day. (Maybe there is no reflection?)
Back to the economics. So a firm decides to spend at least $100K to land a million dollar government grant, let’s say. How many firms will bid for that big a grant? As the numbers get larger and larger, more and more people will bid and be willing to spend more and more money on the fancier and fancier presentations and bribes in their attempt to win the grant. And the fairer and more demanding the selection process becomes, ironically, the more money will be spent trying to get the money. So each firm will spend a little more, until we are up to a bunch of firms spending $99,999 to try to get $100,000. And the entire effort will all be wasted, except for one company. But they too will have spent almost the amount of the grant to win it.
We can extend this model, unfortunately, to politics. And this is actually what reminded me of that economic lesson about the perils of giving out free money, even for a good cause. (No wonder Austrian economics is so hard to make popular!)
Why, we ask, did so many people support such and such a politician? Let’s call him Carpe Deum for a Day. Well, before Carpe gets elected, he has the potential to help an awful lot of people. They are the ones bidding for the grant, be it money, favours, or power, and he is the one who will give it out. An incredible amount of money is spent trying to get one’s own man elected, but once he is elected, he ceases to be a potential giver out of grants and favours and power, as he has mostly given them out; shot his bolt, so to speak.
For every failed green energy company, to pick an example at random, Carpe funded, there were hundreds who bid to be that failed company. And who tried to get the guy elected who would fund their line of business, and of course, changed their line of business so it would be sexy and help Carpe get elected if he was seen to be supporting them. In Northland, where elected people give out ship-building contracts, or might think the economy is fueled by military procurement, for example, the supporters of Carpe North are different, but similarly motivated. But once elected, again, only a few can be satisfied. The rest have wasted their time and money.
In business, they go slowly bankrupt as more and more of their resources go into bidding for free money, and it always appears sensible to spend $99 to get $100, so the maximum amount of money will in fact be wasted, logically.
In politics you get a disgruntled group of supporters who now feel duped. And they were. And then the back-stabbing begins as they begin the hunt for the next Carpe who they will attempt to put forward as he will surely reward them this time.
And so much of it goes into glossy presentations presented in glossy office buildings by glossy people with glossy cars that it helps fuel growth in all the wrong directions. It is an appalling waste of human potential.
So from thinking wouldn’t it be nice to reward the most deserving with x amount of money, and strangely worse, creating a competition to guarantee the selection process is fair, one actually create a bidding war for that free money that will mostly likely more than offset the good one was intending to do. What is a bad idea economically, is much worse politically. For when we create a bidding war for a politicians favours, we have surely found a waste of time and money that is also extremely attractive to a rapacious segment of society, hazardous to one’s moral compass, and generates bitter, disgruntled factions. What could go wrong?