New York-based Strategas Asset Management believes that lobbying is so profitable for corporations that it launched an EFT (exchange-traded fund) based on the stocks of the most lobbying-intensive companies. “If it works,” notes a Financial Times journalist, “small investors will now at least be able to grab their share of the spoils” (Steve Johnson, “Corporate lobbying ETF seeks to profit from influencing politicians,” Financial Times, February 7, 2022).

Dan Clifton, lead portfolio manager of the new EFT (symbol: SAGP), defends the ethics of lobbying with a simple argument. Everybody (or at least every group) can be involved:

The beauty of the American system is that everybody is involved. NGOs, labour unions … I would argue there might be more power on that side than on the corporate side.

We believe in lobbying. It helps avoid mistakes. If you are not at the table, you are going to be on the menu.

At any rate, he adds, “we don’t make the rules, we just figured out there was alpha there.” (“Alpha” is a finance term meaning excess returns over and above the average return on financial markets.) This remark is interesting in itself: many people think that the system is so stable that they can try to game it as much as they want in their own interests and no systemic consequences will follow. In a free society, it is true… up to a point.

The existence of government lobbying is easy to explain. One doesn’t lobby a pauper, but only a person, group, or organization that has much to give away. The more government has to give in terms of money or privileges, the more profiteers will come to eat at the trough. The bigger the treasure, the more treasure hunters and the more resources they will spend in their quest. We expect government growth to be accompanied by an expansion of lobbying and, in turn, the latter to fuel the former.

This last point (the effect of lobbying on the size of Leviathan) only applies to “bad” lobbying. “Good” lobbying is the sort that companies and other participants in the economy do to protect themselves against the higher taxes or competitive handicaps imposed on them by the bad lobbying of their competitors. For example, objecting to a competitor’s subsidy or market protection (regulations that restricts entry into the industry) would be good lobbying. Bad lobbying, also called rent seeking, consists in trying to gain privileges for oneself to the detriment of others.

But why is rent seeking bad? As well studied by public choice economics, rent seeking has wasteful economic consequences. If producer A obtains a production privilege (say, a subsidy) that harms producer B, the latter may be tempted to ask for a compensating privilege (a subsidy or some other privilege for itself). In this special case, the net result would be that none of the two producers get any net benefit, but the taxpayer ends up paying the bill with some “deadweight loss” given the reduced incentives to work or other distortions. If all producers in an industry obtain a subsidy, the lower prices and increased quantity demanded that follow will divert resources away from other industries, which wastes scarce resources on producing a good that is, in reality, more costly (a deadweight loss again). Disadvantaged consumers or producers will try to get some compensating privileges.

As co-blogger David Henderson explains about rent-seeking expenditures by businesses,

Although such an expenditure is rational from the narrow viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole.

And as Mr. Clifton suggested above, if you don’t try to devour your competitors through lobbying, they will eat you up with the government’s teeth through their own lobbying. An unlimited democracy is a real political jungle.

As rent seeking spreads, each company or individual is harmed and harms others, in multiple and convoluted ways. In this churning, an individual will typically be unable to know whether the effect of all government actions translates into a net benefit or a net loss for him individually. Yet, deadweight losses reduce the total production and consumption in the economy.

What would be the ultimate end of the process of competitive rent seeking if nothing stops it? Anthony de Jasay developed an interesting model to answer this question. As the government becomes the focal point for all grievances and the source of all solutions, more and more demands for special privileges and assistance are addressed to it. Because of political competition, the government will try to respond to all the demands (or, at least, to all politically-imperative demands), however contradictory: to increase the minimum wage and reduce unemployment, to increase the money supply and fight inflation, to help businesses and regulate them, and so forth. Otherwise, a new political party or demagogue will win the next election by promising to cater to the frustrated demands. The government, argues de Jasay, becomes a drudge who has to use all its power merely to satisfy the clienteles necessary to stay in power—or to bring it to power, and the process continues. The only way out will be for the state (of which a particular government is a “tenant”) to restrict political competition more and more. At the end of the process, the state will control everything and will be to the “citizens” what the master was on a Southern plantation–sort of the dictatorship of the proletariat by another route.

There are other economic models of how politics works. Which one is the closest to reality represents a crucial question.