Monday, April 06, 2009

Regulation as anger management? 

We show that capitalism is not common around the world. Outside the US and a small group of rich countries, regulations, leftist rhetoric and interventionist beliefs flourish. We argue that the lack of capitalism is connected to the presence of corruption. For example, we find that within a country, people who perceive more corruption are more likely to favour regulations, government ownership of business and to self-place on the left of the ideological spectrum. As the level of regulation is held constant within a country, this finding is inconsistent with a theory that assumes the only channel connecting these two variables is one where regulation causes corruption. We present a model where corruption reduces the demand for capitalism. This occurs because corrupt capitalists are disliked and voting for left wing policies is a form of punishment that is available to voters (even when the judicial system is weak). Evidence on emotions supports this explanation: the frequency with which people report experiencing anger is positively correlated with the perceived amount of corruption, but this correlation is significantly weakened when business is heavily regulated.
From a new paper being presented at the spring Brookings Papers on Economic Activity conference. It's a challenging read. Many successor countries in the former Soviet Union went through an early period of 'market romanticism' in which Russia, for one, ran fast towards freer markets and paid little attention to the graft going on behind it. The result was a lost election and a stop to reforms in the country, from which it seems never to recover. (See Michael McFaul, for instance.) To imagine that there is a "demand for capitalism" and think about what shifts the demand curve (and to wonder what's on the vertical axis?) is intriguing. This paper goes in the summer reading pile for further thought.

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