Some industries have far more political influence than others, and some political systems are more susceptible to the influence of industries than others. In Australia, the Independent Commission Against Corruption (ICAC) is currently investigating evidence of the links between the previous NSW Labor Government and the mining industry. In the words of Geoffrey Watson, QC, the counsel assisting the commission: “If it is corruption, then it is corruption on a scale probably unexceeded since the days of the Rum Corps.”
Despite the seriousness of the charge, the murky relationships between corporate interests and public policy remain poorly understood. Such indifference to this process, a process that can shift billions of dollars from one group in society to another can be explained in a number of ways including:
1) The volume of legislation that passes through our parliaments makes it difficult for anyone without large financial interests to monitor and evaluate all legislation with the potential to impact on an individual or organisation’s interests.
2) The complexity of the legislation, particularly the way that pieces of legislation may interact with existing legislation or new legislation or regulations that are pending but not yet public makes it even more difficult for ‘unvested interests’ to understand the significance of particular policy change.
3) While community groups and NGOs typically herald the passage of legislation they consider favourable, business groups are typically more constrained when legislation that is favourable to their interests is passed.
These three explanations are buttressed by the economics of ‘externalities’. Economists define an externality as the costs or benefits to accrue to an individual who was ‘external’ to a transaction. For example, if your neighbour buys a leaf blower for $100 it suggests that the neighbour values the leaf blower at more than $100 and that the shop values it at less than $100 so both are happy with the transaction. However, neither the neighbour nor the shop has considered how an ‘external’ party, such as you, feels about the leaf blower. Any noise pollution generated by the leaf blower is, therefore, considered to be an ‘externality’. Economists typically assume that there are no externalities when they analyse economic behaviour . When ‘small’ externalities (such as noise from leaf blowers) exist they are typically ignored by policy makers but when ‘larger’ externalities such as radioactive waste are identified they are described as a form of ‘market failure’ that warrants government regulation. Whether or not the ‘distinctive sound’ of a Harley Davidson is a small externality that should be ignored or a larger externality that should be prevented through regulation is, of course, a matter of judgement.
Economists typically suggest that if the benefits of an activity to those who enjoy it exceed the costs of that activity to people who don’t enjoy it then society is better off with the activity. While it is hard to value the external costs and the benefits of activities such as leaf blowers and nuclear reactors, it is the job of politicians to value the political pain associated with supporting or opposing a particular policy. Politicians who are poor at making such choices are often replaced by those who are better at it.
Externalities help explain why governments are susceptible to lobbying and the influence of large corporations. Small changes in policy can deliver huge windfalls to a small group while imposing small costs on a large group. A policy change that costs each of Australia’s 22.9 million residents a dollar per week would collectively cost us around $1.2 billion per year. A private company that thought it might gain 10 per cent of that cost ($120 million per year) would be highly motivated to engage lawyers, economists and lobbyists to help ensure the policy went ahead while few if any ‘rational’ individuals would spend much time or money to protect their $1 per week. A successful politician likely possesses the ability to predict that a low profile policy change that would cost people $1 per week will deliver them little if any political pain from the citizenry. Furthermore, the successful politician will likely anticipate that political benefit will flow from a business community who, while relatively silent on the specifics of policy change, are more vocal in providing general support for a government that ‘listens’ and ‘understands what business needs if it is to create jobs and opportunities for workers’.
While the tendency amongst successful politicians to grant policy changes that harm a diffuse majority and help a concentrated minority is consistent with the economic analysis of externalities, it is likely enhanced even further by the willingness of such concentrated minorities to donate substantial amounts of money to politicians who are willing to ‘listen’. Of course not all industries benefit from the same policy changes and, in turn, not all businesses can be heard. For example: •Policies that advantage the big banks may come at the expense of the small businesses who borrow from them and use their transaction services. • Subsidies to speed up the rate of mining expansion come at the expense of the manufacturing industry who have to bid for the same pool of skilled labour. •Policies that allow supermarkets to increase their market power come at the expense of the firms that supply food to those supermarkets. Given that not all firms can get what they want from governments it follows that some firms must be more successful in encouraging governments to ‘listen’ to them than are others. Of course, if governments made decisions solely on the basis of the costs and benefits of their decisions to their constituents then policy choices would be made with reference to the broad interests of the community rather than the narrow interests of the industry lobbyists. However, as discussed above, when the costs of the policy change are diffused across the community and the benefits concentrated in the hands of a few there is likely to be a ‘market failure’ when it comes to the ear of government.