“Romance, Realism, and Economic Reform:” A Tribute to Professor Richard Wagner

There are rare instances in one’s life where one can reflect back and say that they were in the presence of greatness and were aware of it. As I reflect back on my experience as a student of Professor Richard Wagner in his Ph.D. courses at George Mason University, this was certainly one of those rare instances for me. His ability to communicate simple yet profound points in economics (for example, “prices are a set of traffic signals, not a set of marching orders” or “the magic number in markets is 2, and the magic number in politics is 3”) is unmatched by any living economist from whom I have had the privilege of learning. Moreover, if I have learned anything from Professor Wagner, it is imperative to take our existing body of knowledge and be creative as a teacher to communicate such knowledge in new and effective ways. Therefore, in this reflection, in honor of Professor Wagner on the occasion of his retirement, I wish to highlight from his prolific scholarship one of the most important contributions to transitional political economy made by him, and one that has had a profound impact on my teaching and research.

One way in which I have tried to honor Professor Wagner is by carrying his message forward in a manner that will impact students for generations to come, namely by illustrating crucial lessons he provides in his scholarship through various examples in the classroom and pairing them with some of my favorite movies. On this occasion, I will do so by pairing his article “Romance, Realism, and Economic Reform” (co-authored with Robert Tollison)[1] through the lens of the 1997 science fiction film, The Fifth Element.

The basic lesson here is to recognize, first, that the process of economic development is fundamentally one of institutional transition, particularly one of eliminating political and legal privileges that redirect entrepreneurship from unproductive to productive activities. However, such a transition implies a concentrated cost imposed upon the current beneficiaries of the existing system, the benefits of which are dispersed across the population. The counterintuitive policy implication for transitional political economy, which may be particularly frustrating for a pro-market policy reformer, is that attempts to change the rules of the game, and eliminate monopoly privileges through political discretion, will only incite rent seeking, generating greater dissipation of wealth than if the transfer had not been initiated. The key point here is that, since political discretion is the very source of monopoly privileges created by the state, political discretion cannot also be the source of its abolition. Political discretion used as an instrument to abolish legal privilege cannot occur without simultaneously creating another legal privilege, since political discretion, by its very nature, intends to benefit one party at the expense of another.

How is this lesson illustrated in The Fifth Element? The plot of the film recounts a story of the discovery of a divine figure, referred to as “The Fifth Element” (hence the name of the film), which appears every 5,000 years to combat the return of evil, which is depicted as a sphere, much like a great fireball, at the beginning of the film. However, knowledge of this great evil, and the return of The Fifth Element, is a secret handed down from generation to generation by a secret order of priests, among whom is the character, Father Vito Cornelius, in the film. The parallel to Wagner’s article is that The Fifth Element is the entrepreneurial market process, the great evil is rent seeking, and Vito Cornelius is analogous “the economist” who attempts to warn the President of the Federated Territories in the film not to take military action against the great evil (i.e. not to exercise political discretion). The key quote from Father Cornelius is the warning: “evil only begets evil, Mr. President.” Rather than heed Father Cornelius’s advice, the President instead orders that evil be attacked, resulting in only expanding the size of the diabolical sphere, and expanding the scope of evil, to the utter surprise of the President and his military advisors. The lesson here, “evil only begets evil,” is the same as the lesson illustrated by Professor Wagner: political discretion is itself a form of rent-seeking, since it is the use of political resources attempting to transfer existing wealth, in this case at the expense of a special interest group. Therefore, it will only incite further rent-seeking by a special interest group to protect itself from the removal of the monopoly privilege upon which its existence depends. The unintended result is only to expand the size and scope of the government.

Does this imply that the classical-liberal minded reformer should be left to “do nothing”? Quite the opposite. At the very end of the article, Wagner argues that “the most efficient instrument for ‘reforming’ existing monopolies is the competitive market process itself” (Tollison and Wagner 1991, p. 69, fn. 10). The counterintuitive implication here is that monopoly privileges are the very source of their own erosion, since barriers to entry intended to shield a special interest group create the very profit opportunities to evade and innovate around the good or service shielded from market competition. Countless examples to illustrate this point are the rise of Uber and Lyft over monopoly privileges created by taxi-cab medallions, the adoption of the ATM to evade regulation preventing banks to branch outside the state in which they are chartered, or the pioneering of containerization to innovate around trucking regulation imposed by the Interstate Commerce Commission. The list of examples is infinite, but the general lesson here is that if there the market-oriented reformer wants “to do something,” then Wagner’s “analysis suggests that reformist activity should be directed toward the prevention of future deformities and not toward the eradication of past ones,” (Tollison and Wagner 1991, p. 68). The great lesson from Professor Wagner is that “The Fifth Element,” in this case productive entrepreneurship, will triumph over the great evil of rent-seeking, if we allow it not to be thwarted by political discretion, however much the intent of such discretion might seem benevolent.

 

 

References

Tollison, Robert D., and Richard E. Wagner. (1991). “Romance, Realism, and Economic Reform.” Kyklos 44(1), 57–70.

 

[1] Hereafter, for the sake of expediency, reference to Wagner alone will be made to the article.

 


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Program Director of Academic and Student Programs at the Mercatus Center at George Mason University