Public Choice 62: 191-200, 1989. © 1989 Kluwer Academic Publishers. Printed in the Netherlands.

Reviews

Robert Klitgaard, Controlling corruption. Berkeley: University of California Press, 1988. xiii + 220 pages. $ 19.95.

Controlling Corruption is a practical guide for policymakers in the developing world who are seriously concerned with reducing corruption. The book does not represent a theoretical advance over previous work, but it draws in a useful and enlightening way on economic analyses of principal-agent problems and of corruption. Rejecting the polemical literature which claims that corruption might actually be good for development, Klitgaard argues that corruption is generally harmful especially when it becomes a way of life for public officials who not only accept bribes but actively extort payments. Klitgaard begins with the economist's conventional wisdom that the optimal amount of corruption is not zero given the costs in time, money, and effort of control strategies. The fact that this is meant to be a shocking statement (p. 24) is one measure of the lack of economic sophistication that he expects from his readers. On this foundation, Klitgaard proposes a checklist of control strategies that emphasizes the selection of agents, the incentives they face, the information available to principals, and the possibility of redesigning programs to reduce corrupt incentives. Moving beyond strictly economic arguments, he also discusses the possibility of changing the attitudes of officials, increasing their professional pride, and working with citizens to enlist their aid in anticorruption efforts (pp. 94-95). Having analyzed many of the economically-oriented policy proposals that he recommends in an earlier more theoretically-oriented book,1 I was pleased to see an effort to apply them to real situations in the underdeveloped world. My own thinking was influenced by several years of newspaper clippings and the reading of numerous case histories. Klitgaard's book supplements that material with a series of first-hand accounts of attempts to control corruption. The advantage of his studies over most previous descriptions is their emphasis on the techniques of control. Instead of simply detailing the societal conditions in which corruption flourishes, these case studies present examples of policies that worked, as well as others that failed. His cases cover the tax collection agency in the Philippines, Hong Kong's Independent Commission Against Corruption, Singapore's Customs and Excise Department, U.S. Army procurement in Korea, and the food distribution agency in the real but misnamed province of 'Ruritania.' All but the last are at least qualified success stories, and Klitgaard is careful to explain what worked and what didn't and to try to explain why. While generalizations are obviously difficult, he does demonstrate the value of the economically-based strategies outlined in his checklist so long as one also takes account of the political and social constraints within which any policy operates. I was especially struck by the discussion of U.S. Army procurement in Korea. Sealed-bid competitive processes are usually viewed as a means to pre-

192 vent corruption and favoritism and encourage competitive pricing. In Korea they did not have this effect because the bidders colluded ahead of time to fix bids and divide the business. The public nature of the process made it possible for cartel members to check on others' behavior, and the rule that the contract must go to the low bidder prevented Army personnel from seeking concessions. The proposed solution was to permit sole source contracts with bargaining. Interesting parallels exist between this case and both the public construction contracting process in New York City and defense contracting at the federal level. In those cases, as well, some officials have argued that sealed bid procedures foster corruption and that negotiated contracts would be superior. Finally, a note of caution is in order. Strong anticorruption agencies, such as the Hong Kong commission, which report only to the highest governmental authority, can be abused to discipline political opponents and maintain centralized power. The risk of such behavior seems evident in some developing countries that have adopted the Hong Kong model, and corruption prosecutions in the Soviet Union have sometimes been used to harm politically suspect individuals. This is not to say that vigorous anticorruption policies are not consistent with popular government, but merely to suggest caution and to recommend an emphasis on changes in bureaucratic incentives and in the nature of the government service as control techniques. Klitgaard recognizes these dangers, but to my mind he underplays these risks in his enthusiasm for Hong Kong's efforts. Susan Rose-Ackerman Ely Professor of Law and Political Economy Yale University Box 401A Yale Station New Haven, CT 06520 Note

1. Susan Rose-Ackerman,Corruption:A study in pofitical economy. New York: AcademicPress, 1978.

Kenneth J. Meier, Regulation: Politics, bureaucracy, and economics. New York: St. Martin's Press, 1985. 334 pages. $18.00 (softcover). Kenneth J. Meier, The political economy o f regulation: The case o f insurance. Albany, NY: State University of New York Press, 1988. 230 pages. $44.50 (hardcover). It is said there are two groups of people in the world, those who divide others into groups, and those who don't. As a denizen of the former, and one who has studied regulation at the boundary between economics and political science, I have found those around me divided into two rather different groups, those who know what theories are and those who don't. That division is not as clear as one might like, however, as these two books by Kenneth Meier demonstrate. The third class knows what theories are, but

193 looks at existing theory and asks, 'Isn't it more complicated than that?' Since the answer is always yes, the IIMCTT? school serves a potentially useful function (witness Moe, 1980, 1985; McCubbins, 1985; and particularly Weingast and Marshall, 1988) in refining the Chicago (Stigler, 1971; Posner, 1974; Peltzman, 1976; Becker, 1983) model of regulation and challenging scholars to examine the inside of the regulatory black box. In Regulation, Meier develops his theory of the regulatory process, and then applies it to all the usual suspects, including banking, consumer protection, agriculture, the environment, occupations, workplace safety, and antitrust. In Insurance, Meier briefly develops his theory again, and then provides an extensive, lucidly written, and extremely well-researched analysis of the insurance industry, touching on both federal and state regulatory efforts, dating from the 1785 profits tax law passed by (of course) Massachusetts. I see these two books as sequential volumes in a single work, and will evaluate the entire work on three criteria: (1) Does the 'theory' advance our understanding of regulation? (short answer: absolutely not, and its pretense of doing so is its greatest failing). (2) Do the case studies work as a means of illuminating the regulatory process? (absolutely yes; the insurance study in particular is excellent, but the other cases are each useful in their own right). (3) Does Meier accomplish his apparent goal of writing two useful textbooks? (marginally yes, though anyone using them will be forced to disabuse students of the notion that 'theory' means 'tautology.')

Theory Most IIMCTT? theorists accept the Chicago model and its essential prediction that economics drives regulation. The quarrel is usually that Chicago ignores the institutions of legislative, presidential, or bureaucratic decision-making, which shape these economic forces. Given the political motivations of elected and appointed agents to serve their economically motivated principals, surely it is not controversial or even ideological (Karl Marx and Milton Friedman appear to agree here) that regulatory politics is economics with a complicated set of institutions. Meier claims he rejects neo-institutional IIMCTT? theory to form a radical fringe group (call it IIEMCTT?, for 'Isn't It EVEN More Complic/ated Than That?'). In fact, there is no theoretical insight in either book that can't be found in Olson (1965), Stigler (1971), and Moe (1985). The supposed advantage is the works' interdisciplinary view: [g]uiding this multidisciplinary approach, however is a belief that regulation is a political process. I have emphasized political rather than economic or legal explanations for regulatory policy Regulation, p. xiv. What does this even mean? After all the work that has been done, in the journal you now hold and elsewhere, are we to believe that it even makes sense (much less be a theoretical advance) to Claim political actors act for political reasons, and economic actors for economic? Continuing on through the work, the reader's worst and darkest fears are realized. Meier's theory of regulation is developed in both books, but most fully in Regulation. In Insurance, the new theory for which so much is claimed

194 is carefully laid out in all of two pages of one chapter, but with references back to Regulation. It is the presentation in Regulation, then, on which Meier's theory must more fairly be judged (though if the theory is really worth only two pages in Insurance, perhaps the reference alone would have sufficed). There are four groups of political actors in Meier's world: (1) Industry, (2) Consumer Advocates, (3) Regulatory Agencies, and (4) Political Elites (defined as the elected chief executives, legislators, and judges). Consumer groups want more regulation that restricts industry; consumer groups are more likely to form when size of the affected group is small and the benefits to collective action large (this is apparently a novel observation, since there is no citation to Olson anywhere in Regulation). Industry will be more effective when it possesses more political resources (size, wealth). But what does industry want, more or less regulation? Meier cuts through the murk surrounding all previous work and solves the problem: '[I]ndustry will seek regulation that benefits it and try to avoid regulation that restricts it' (Insurance, p. 30). Now, why didn't we think of that? Regulatory agencies favor policies consistent with their policy goals; political elites have policy goals of their own (how these are induced is not quite clear, though of course we know these goals are mostly political rather than economic). The basic proposition is that every group that is organized is able to influence the regulatory process precisely to the extent it is able to influence the regulatory process. (I'm not making this up.) The utter mind-numbing tautological triviality of this theory would be more forgiveable if Meier made less of it. But he trumpets his discoveries from the roof tops, even to the extent of including an appendix full of things his model implies (it is shorter than it might be; what his model doesn't imply is hard to imagine). These are 'Hypotheses Concerning Regulatory Policy;' the first two are illustrative, and worth quoting here in full: Hi: The greater the ease of entry into the industry, the more likely that regulation will favor the nonregulated. H2: The more firms in an industry, the more likely that regulation will benefit the nonregulated. The reader will immediately recognize Stigler (1971) and Olson (1965) respectively, though both stated their theories far more clearly (and considerably earlier) than H 1 and H 2. Cases The news here is (nearly) as good as the theory was bad. The cases are all well researched, and Meier's perspective in outlining each case is reasonable. After all, agents behave self-interestedly, collective action is subject to the free rider problem and mostly, it's very complicated. Meier's understanding of the regulatory process and his ability to exposit industry-agency interactions that are in fact very complex makes both books quite useful. The better one is Insurance with its much longer treatment, historically and using extensive current data, of the insurance regulation of the various states and of the federal government.

195 Textbooks

Regulation has been used quite successfully here at the University of Texas for several semesters. Students like the writing, the case studies are meaty but accessible, and the coverage is broad. Insurance is more highly specialized, and likely to be useful only to professionals or small focused classes. Further, Insurance is much more technical: all but the best undergraduates would find it too difficult even if its subject lent itself to a broader discussion. The failure of these books, and they do fail, is not their lack of utility as textbooks. Rather it is the author's completely nonsensical insistence that he has made a contribution to the theory of regulation. The books do an adequate job of reviewing existing theory and even offer some cogent (if unoriginal) criticisms of the Chicago model. But almost literally nothing is offered to replace such a model save a set of tautological, primitive and wholly vacuous 'hypotheses'. Because Insurance devotes only two pages to this theory, and is elsewhere excellent in its extended analysis of the industry that gives it its name, it is the better book. Given the continuing difficulties faced by the insurance industry, and the November 1988 decision by California voters to reduce auto insurance rates by referendum, Insurance should become a part of many personal libraries. Michael Munger Department of Government University of Texas Austin, TX 78712

A. Allan Schmid, Property, power, and public choice: An inquiry into law and economics. Second edition. New York: Praeger Publishers, 1987. xv + 332 pages. $49.95 hb.; $23.95 pb. A. Allan Schmid is an institutional economist, and his book examines the impact of alternative institutions (property rights structures) on observed economic performance. Although I disagree with some of Schmid's conclusions, I recommend this book for two reasons: it deepens our understanding of the role of properly rights in shaping efficiency assessments and distributional outcomes, and it suggests significant potential for fruitful intellectual exchange between public-choice scholars and institutional economists. Schmid's overarching concern is to understand what determines whose interests count - that is, what engenders power - in the economy and in politics. In his view property rights create the underlying opportunity sets that, coupled with the owner's abilities, the choices of others, and such relevant market characteristics as transaction and exclusion costs, determine economic and political power. Thus for Schmid property rights are central to institutional economics: Rather than asking what causes the market to fail to reach the optimum, institutional economics asks how rights interact with these characteristics to determine whose preferences will count when the components of the optimum are selected out of many possible optima. It is public resolution of

196 power conflicts that determine[s] what is efficient. Welfare economics explores possible gains from trade, but the institutional economics of this book explores who has what to trade (p. 4). The substance of the book provides analysis of how alternative property rights structures, formalized in institutions, shape a society's economic performance, given actual characteristics of human interdependence with respect to various categories of goods. In Schmid's view the nature of human interdependence shapes the actual outcome of any particular property rights structure. Human interdependencies in turn are determined by identifiable characteristics of economic goods, such as incompatible use, exclusion costs, economies of scale, joint impact, and transaction costs. Detailed chapters explore the nature and consequences of these interdependencies, in light of which Schmid concludes that 'The ability to participate in an economy depends on much more than competitive markets, ownership of factors of production, and money income as conventionally defined' (p. 4). While this analytical territory is familiar ground to economists, Schmid's treatment is unique in focusing consistently on the underlying property rights issues involved. Consider, for example, his treatment of incompatible-use goods. Schmid sees most externality issues as issues of incompatible use, stating for example 'if we look at the resource air, it is simply not possible to use air for disposal of particulate matter and for healthful breathing at the same time. The same kind of problem occurs when two people cannot eat the same bushel of corn' (p. 44). For Schmid the issue in both cases becomes a straightforward property rights question of use rights regarding an incompatible-use good. Regarding joint-impact goods (public goods), he states that 'the point here is not that unavoidable and preemptive goods prevent global optimal resource combinations but that unless the relevant property rights are previously determined, optimality has no meaning. The conflict over who chooses when utilization is inherently interdependent is a fundamental distributive question, as is factor ownership of incompatible-use goods' (p. 81). Regarding all specific situational interdependencies examined, Schmid argues that the underlying public choice of property rights largely determines the distributional outcome. The final section of the book provides examples of institutional impact analyses in the areas of natural resources, business performance, public services, public-choice rules (e.g., legislative rules, court jurisdiction, ballot design), and economic development. Although some cases are treated superficially, the discussion is nonetheless valuable in suggesting analytical techniques for impact analysis and in emphasizing comparison of real-world institutional alternatives. Despite the book's useful examination of the property rights issues described above, readers holding a public-choice perspective will find much that is objectionable in this book. For example, Schmid views property rights as inherently coercive: he states that 'One person's right is another's cost. One person's property right is the ability to coerce another by withholding what the other wants . . . To own is to have the right to coerce' (p. 9). Thus bargained transactions arrived at by mutual exchange are described as 'mutual coercion' (p. 11). While it is of course true that property rights ultimately are backed by the coercive power of government, to label property rights and voluntary

197 exchange as coercive is to blur essential distinctions. At the very least one must distinguish meta- or constitutional-level choice of institutional structure from operational-level choice within an existing property rights regime, as Schmid is careful to do in other contexts. Schmid would do well to ponder Paul Heyne's useful reminder that 'To coerce means to induce cooperation by reducing people's o p t i o n s . . . To persuade means to induce cooperation by offering people additional options' (The economic way of thinking, 5th ed., 1987, p. 323). Another limitation of the book is one consciously chosen by Schmid. As mentioned above, he conceives of this book as institutional impact analysis as opposed to analysis of institutional development and change. As a result many theoretical questions of vital concern to public-choice scholars, particularly those concerned with constitutional-level choice, are not on Schmid's agenda. In his words, the 'political rules for making economic rules,' the 'constitutional level,' the ways in which people 'interact with each other for the purpose of setting rights governing control of goods and services' are given 'only passing reference' (p. 34). While this will disappoint scholars interested in those issues, it highlights fruitful avenues for future research. In my view Schmid's book expands the intellectual audience for publicchoice scholarship by broadening people's perceptions of what public choice is all about. Insisting that the key issues of political economy are property rights issues, he explicitly and repeatedly labels these as issues of public choice. He states that 'It is the public choice of property rights (institutions) that control[s] and direct[s] this interdependence and shape[s] the opportunity sets of interacting parties' (p. 5). Noting alternative definitions of public-choice theory, he uses the term 'to refer to the impact of rules for making rules as well as the resulting rules directing private transactions' (p. 283). While much is omitted from Schmid's definition, he usefully reminds readers outside the subdiscipline that there is much more to public-choice theory than the study of bureaucracies and voting rules. Public-choice scholars, of course, are well aware of the crucial role of property rights in shaping institutional outcomes. Nonetheless, Schmid articulates in a fresh and thought-provoking way what property rights mean and how they shape allocative efficiency and observed distributive results. You will find much to applaud and much to quarrel with in Schmid's analysis, but you will come away from his book with a richer understanding of the institutional underpinnings of economic and political power. Charlotte Twight Department of Economics Boise State University 1910 University Drive Boise, ID 83725 Martin Anderson, Revolution. San Diego: Harcourt Brace Jovanovich, 1988. 486 pages. $19.95. Martin Anderson has written a book that will be enjoyed immensely by those interested in politics and economics. With an engaging narrative Anderson takes the reader from the early years of Reagan's national presence as a polit-

198 ical spokesman and candidate through the Iran-Contra scandal in his second term as president. Although Anderson is a professional economist his knowledge of issues is impressively broad and his book covers the policy waterfront from domestic to foreign. Indeed, Anderson's most in depth discussion of policy deals with the justification for the Strategic Defense Initiative (more popularly, if misleading, known as Star Wars). The longest discussion of an issue in the book concerns the miscalculations that led to the Iran-Contra affair. One reason Revolution reads so comfortably, however, is that it is not a book that is concerned with meaningful analysis of policy, economic or otherwise. There is no difficulty determining where Anderson comes down on such issues as taxes, government spending, balancing the federal budget, deregulation, and monetary policy. But Anderson makes no serious attempt to apply economic logic to justify the policies he so clearly favors, or to analyze in any depth the consequences and interdependencies of those policies. The book is primarily about the problems, procedures, and personalities involved in developing and implementing policy under Reagan, rather than about the policies themselves. As evidence of Anderson's lack of interest in a serious discussion of economics, he includes, in its entirety, a memo on economic policy he prepared for Reagan in August 1979. In that memo Martin informed Reagan, and now informs the reader, that 'the main cause of inflation is the massive, continuing budget deficit of the federal government.' At no time does Anderson attempt to qualify this statement, or acknowledge the difficulty of reconciling it with the Reagan Administration's success in reducing inflation as the federal budget deficit escalated. In the same memo (which makes up the bulk of Chapter 11) Anderson makes what this reviewer considers an excellent recommendation. The memo states: 'To re-establish control over the federal spending machine we should require a two-thirds majority vote in the Congress to approve every major appropriations bill.' But nowhere does Anderson follow this recommendation up with the obvious suggestion, a suggestion that Gordon Tullock has been making for many years; i.e., the president should automatically veto all bills. This is the one most effective thing a president could do to moderate the special interest influence that dominates Congressional decision-making. But rather that recommend an automatic veto, Anderson cautions in Chapter 15 that 'the veto power can be used only sparingly' because Congress sends up 'huge catch-all spending b i l l s . . , which [would] force him to veto the good programs along with the bad.' True enough, unless you are willing to make the plausible argument that, given the special interest influence over Congressional decisions, any spending package that cannot muster two-thirds support in Congress is, on balance, a bad package from the perspective of the general interest. One could also quibble with Anderson's view that, if only exposed to public scrutiny, good ideas triumph and bad ideas whither. For example, when discussing the Iran-Contra affair in Chapter 32, Anderson states, 'bad ideas are feeble and powerless . . . As soon as the bad ideas were exposed to a little public scrutiny, as soon as people, . . . , began to discuss and debate those ideas, they withered and died almost instantly. And the good ideas, the ones that have survived centuries of debate and discussion, once again triumphed.' One does not have to deny that ideas are important to recognize that even

199 Pollyanna herself would have difficulty making this statement without blushing. What about the bad ideas that are used to justify farm programs, minimum wages, rent controls, and the list goes on? They certainly do not seem to be feeble and powerless, or showing much sign of withering away. And what about the good ideas that lie behind policies such as educational vouchers, eliminating trade barriers, a monetary rule for the Federal Reserve, and the list goes on? They certainly do not seem to be triumphing. True, victories can be cited (instances of deregulation come to mind) and good ideas were important in these victories. But it would be naive, indeed dangerous, to assume that these good ideas had triumphed. There can be no doubt that the bad ideas that were overcome by the policy victories that can be cited are alive and well, and ready to dominate policy discussions and practices once again. And these ideas certainly will achieve dominance again if those who know how bad they are dismiss them as feeble and powerless. But enough of my quibbling. My criticisms of particular points that I have teased out the larger fabric of Anderson's book can be considered somewhat beside the point, given the objective he had in writing it. As Anderson states in his prologue, 'This book is primarily a story about Ronald Reagan's rise to power in the United States, on what kind of man he is, the public policies he thought were important, and the main consequences of those policies.' This is exactly the kind of book Anderson has written, and he has written it well. Readers of Public Choice are not likely to learn any economics from reading this book, but they will get a interesting insight into the policy process in the Reagan Administration. And, maybe more important, they will find the book enjoyable. Dwight R. Lee John M. Olin, Visiting Professor Center for the Study of American Business Washington University Campus Box 1208 St. Louis, MO 63130

James L. Regens and Robert W. Rycroft, The acid rain controversy. Pittsburgh: University of Pittsburgh Press, 1988. $24.95 cloth; $12.95 paper. Acid rain is an issue which attracts attention and resists solution. The reason it attracts attention is that, as Regens and Rycroft note, its presence and prominence on the political agenda promises something for all the major protagonists in environmental policy making. Polluting industry and its political apologists are happy because, in comparison with other environmental issues, cost benefit calculations are likely to conclude that the high costs of emission control do not justify the uncertain benefits such control would yield in this case. Scientists and technologists welcome the funding for research, development, and demonstration that the same uncertainty legitimates. And environmentalists find it hard to resist a crisis of any sort, though the Regens and Rycroft account of industry motivations on the acid rain issue might suggest environmentalists' energies are best expended elsewhere. There are three reasons why resolution of the acid rain problematique is un-

200 likely. The first is simply that the externalities involved are long-distance and transboundary. The second is that it is hard to trace any specific acid rain damage to any particular emissions source, such that redress through the courts is improbable. The third is that, as the authors note, effective control of acid rain would involve concentrated costs and diffuse benefits. The costs would probably fall in the first instance upon smokestack industry, coal-burning utilities, mine operators, and mine workers. The benefits would be spread throughout the ecosystems affected by acid rain. Thus effective action is unlikely in a political system which affords as much veto power to well-organized and well-heeled private interests as does the American polity. The Acid Rain Controversy is a rarity among studies of environmental issues in that it combines a sound grasp of the relevant science and technology with reasonably sophisticated economic and political analysis. Its balanced coverage of a complex subject is comprehensive and comprehensible, and as such the book constitutes a good primer on acid rain. Despite these evident strengths and subtleties, the political analysis perhaps fails to reach quite far enough, especially when it comes to the authors' own suggestions for tackling the acid rain problem. In the final chapter, they pin their hopes on some kind of scientifically well-informed consensus developing around the idea that acid rain is a truly national problem, which in turn would lead to a pragmatic compromise among all the interested parties. Thus the pandering to polluters which is the essence of the 'client politics' of environmental policy established in the Reagan era would give way to an 'entrepreneurial politics' in which a coalition for action is somehow mobilized (the categories, used by the authors, come from James Q. Wilson's policy typology). Regens and Rycroft hope that the resulting compromise would enshrine the 'polluter pays' principle, respect market values, and allocate emission reductions efficiently. A close reading of their earlier analysis of the incidence of the costs and benefits of acid pollution control should be sufficient to demonstrate that their proposed solution, while not inconceivable, may well be thwarted by those who would bear the costs. Margaret L. Clark c/o Department of Political Science University of Oregon Eugene, OR 97403