In which Dr Cameron Murray and Professor Paul Frijters examine how the connected class siphons off billions of dollars from the economy to line their own pockets in this excerpt of their latest book, Game of Mates.
It is no secret that increasingly, workers are no longer enjoying the fruits of their labour as a smaller and smaller group of people and companies come to share the returns of (slowing) economic growth across developed nations such as the US, the UK and Australia.
The ‘jobs for the boys’ model is having a tangible and outsized impact on inequality and it is killing the economy.
It is so tangible you can measure it. And measure we did.
In our book, Game of Mates, I and my colleague, Professor Paul Frijters explore insights from the science of human cooperation and raw metrics of economic costs and benefits, melding this information together to paint a picture of how a nation’s wealth can become siphoned off by a well-connected network of powerful individuals.
Drawing on our own research and that of others, we find that those outside the game are being bled dry, with hundreds of billions of dollars a year of hidden theft taking place.
The book helps to frame a discussion on ‘grey corruption’ – the type of unethical political favouritism that is economically costly to the unfavoured, but that is not necessarily illegal – that is brutally honest about human nature. We look at how the Game of grey corruption in played, how much it costs, and what to do about it.
What is a grey gift and when do I know I am getting one?
A grey gift is a way to pick a winner and loser without great, (or any) personal cost. Often the cost is instead passed on to another person or group. This phenomenon exists at many levels in almost all organisations, including government bureaucracies.
When a city council decides a plot of land can be now used for urban development instead of farming, it adds millions in value to the land which goes into the pockets of landowners.
In our study of just six rezoned areas in Queensland, Australia, we found that $410 million worth of property rights were given to a small group of well-connected landowners.
Or when the government insures bank deposits to secure the financial system, the free insurance is a gift to bank owners that should have instead been sold, costing the public billions in forgone revenue. In Australia, this gift of insurance is worth about $4 billion per year, which goes straight into the pockets of bank shareholders.
And when the transport department closes road lanes to funnel cars onto a private toll road it provides a gift to the toll road owner that costs motorists, but not themselves. If just 1,000 vehicles per day are forced onto a $4 toll road, that is an $18 million grey gift from a small routine bureaucratic decision.
It is important to make clear that a network of people trading favours is not inherently a bad thing and is an innately natural way to cooperate. The problem is when gifting occurs at an enormous cost of the financial, social, legal, or physical, security of other people.
When a clique becomes a cartel
Professional networks will always exist. This is as true of Parliament as it is of any other industry from journalism, to finance, law to retail. To make it to the top, (or even to the next level), there will always be cliques and circles of strong professional and personal relationships to be mitigated, co-opted, infiltrated or invited into.
Snippets of the clique in property development can been seen in the vast roll call of former politicians in Australia who have entered the property development industry immediately after retiring from politics. It is rare to have a senior politician not spend time in this industry after their political career is over.
Former Queensland Premier Campbell Newman and former Queensland Planning Minister Terry Mackenroth, both left Parliament to immediately work for major property developers. And it works in the other direction too. Current Federal Treasurer Scott Morrison worked for the Property Council of Australia, a property lobby group, prior to entering politics.
Without a group of people who also have grey gifts to offer, either now or in the future, no Game of Mates can form.
This differentiates the Game of Mates from outright illegal corruption. Theft of public resources by politicians is easy to spot and punish. Giving a grey gift to yourself is almost always corruption in advanced economies with basic political accountability. Bribery is similarly easy to track, and relatively easy to prevent, as it is a blatant trade of a grey gift for a direct payment.
But when grey gifts are given without direct payment, but instead are traded amongst a broad network of insiders, often indirectly, it becomes extremely hard to prevent or punish.
In the banking sector, cliques of insiders have emerged all the way from the bottom of the regulatory bureaucracy to the top of politics. Former Queensland Premier Anna Bligh now heads up Australia’s banking industry lobby group, ostensibly there to leverage personal and political relationships to ensure political decisions go the way of bank owners, rather than the public. Former New South Wales Premier Mike Baird was an investment banker prior to his stint in politics, and has since rotated back to the banking industry with the advantage of new political connections. The valuable decisions they will influence will be hidden deep in legislation and regulation be almost unseen by the public.
Because these groups of well-connected insiders can be large, with members in formal positions in public organisations, often many times rotating into private sector positions at favoured companies, it is usually hard to tell that the public wealth is being stolen at all.
The economic gains simply never get into your pocket! The group trades away all the economic gains to their Mates before anyone else gets a chance!
The Game of Mates is played via a suite of reliable ‘signals’ as a way for current and potential members of the group to prove their loyalty and willingness to reciprocate the trade of grey gifts. Signalling to others in subtle ways to show your cooperative intentions is no different in the Game of Mates to the standard ways in which humans cooperate in all social endeavours, and it is why even the most honest people succumb the Game given enough social exposure.
There are covert signals, whose public interpretation varies greatly from the intended meaning to those on the ‘inside’. When we conducted our research on property development we interviewed several industry insiders. When the option of a betterment tax was mentioned, we had the response from one insider along the lines of “You can’t say that. As soon as you mention that word you have signalled you are an outsider and won’t get access to politicians anymore.”
The second type of signal is called burning money. If a signal being given is costly – perhaps it skirts the edge of the law or involves significant financial or personal risk – the willingness to incur that cost show how serious the person is, making the signal credible.
The willingness to sacrifice personal security for loyalty is a trust-earning exercise.
For example, in our research we have come across cases where a company did home renovations for a politician’s family, but made a point of not wanting to be paid as way of burning money to build trust. Other examples we have seen involve giving selected politicians the first chance to buy off-the-plan apartments at a discounted price. These types of things may not be criminal, but certainly would not be seen as totally above board by either party.
Political donations are a metaphorical smoke signal. In Australia, we know that donations are not being used as bribes as a great deal of research shows that they are not good predictors of political favours. We also know that the largest political donors are outsiders looking to join a group of Mates, such as new Chinese property developers and miners in Australia, who are trying to establish their position in the local Game of Mates, but need to burn money to prove their willingness to play the Game.
Donations are also not about ideology or beliefs, nor getting “your man” into power. In local government in Queensland, most money goes to the politicians with the highest chance of election or re-election, which a complete waste if the purpose is to get a selected person into power. At a national level, over 60% of donations by value come from donors who donate to both sides of politics equally, again revealing that the purpose is to burn money rather than express a political belief.
The final ingredient in a Game of Mates is a set of myths that help shield the actions of the group from the scrutiny of outsiders. To allow what would be considered unethical economic theft to freely continue requires large sections of the general population to believe that what is in the interests of the Mates in the Game is what is in the interests of society.
Lobby groups and industry groups devote their time to promoting alternative economic stories to control the scope of debate occurring in the media and broader society. They know full well their role in the Game, and taking ever-greater control over the political discourse,
One stand out example come from agriculture. The slogan “Every family needs a farmer” was crafted by the lobby group AgForce to promote sympathy from city dwellers, and reinforce the notion that country living is a challenge. Yet the reality is that farmers are one of the wealthiest groups in Australia, with 70% of farming households being in the top 20% of wealthiest.
Another myth comes from the property lobby that zoning and regulatory costs constrain the supply of new housing and cause inflated prices. Yet favourable rezoning decisions come with no obligation to develop housing in a timely manner. An example is a site at Yarabilba, south of Brisbane, owned by development company Lend Lease. In public documents and in their application for rezoning they crowed about the urgent demand for the new 20,000 new dwellings they will build. Yet at the same time they told investors in company reports that they won’t be building most of the homes for at least two decades!
Our frank assessment is that Australia is handing ever-greater control over economic resources to the well-connected, costing the rest of us hundreds of billions of dollars a year. In the book the major free rezoning gifts, there are $11 billion of giveaways a year. In mining it is around $20 billion, with a similar amount each in banking and superannuation, and as much as $60 billion in lost tax revenues due to favourable treatment of insiders. And the list goes on.
Taking a rigorous scientific look at the problem shows that some commonly proposed solutions to corruption that are in fact non-solutions. If political donations are just one of many ways to burn money, banning them will simply donors towards other methods of signalling for cooperation. As long as the valuable grey gifts exist vested interests will naturally organise around them.
Another wrong-headed the idea that ‘bad’ corrupt politicians can simply be replaced with ‘good’, incorruptible ones. Yet our research shows that most of us succumb to the temptation of corruption given the right circumstances. Grey corruption is not the result of bad people, but normal people behaving naturally within poorly designed legal and institutional environments.
To get to the heart of what sort of policies worked we created a computer game that allowed for the formation of groups of insiders who traded in grey gifts at the expense of others. We conducted experiment with over 50 participants using this game, testing multiple policy changes. But the only policy change that worked was to reduce the value of the grey gift! With nothing of value to organise around, our experiment participants acted in a manner that was fair to all.
Strangest of all was that when we surveyed our experiment participants afterwards, those that had played their own Game of Mates did not feel guilty about it. Because they were being prosocial and giving favours they felt good and were able to block out any concern for those who suffered the loss.
Our research shows that the subtle ways in which we coordinate around things of value are difficult to change – they are human nature. The most powerful way to combat grey corruption is therefore take away the value of the grey gifts.
Political and administrative decisions always need to be made, but we can make sure they don’t always provide hugely valuable private gains by instead taxing or selling these gains.
Make developers pay for new development rights. Make miners pay market prices for the country’s minerals. Ensure banks pay for the right to create the nation’s money.
These are not radical ideas. Economists know that political gifts – known as economic rents – should be sold or taxed. So perhaps the fact that little attention is paid to this in the press or public debate can be attributed to the success of the myth-making of insiders.
What we can see is that trying to stop the ways humans naturally coordinate in groups is always going to be hard. Focussing on what makes this type of cooperation costly is the most effective thing to do.
Understanding the impact of nepotism on policy, the economy and workplaces everywhere, we can assess with more rigour the potentially effectiveness of policies designed to combat grey corruption and political favouritism.
Cameron also teaches at the University of Queensland, blogs at fresheconomicthinking.com, tweets at @DrCameronMurray and his Facebook page is Fresh Economic Thinking.
Paul Frijters is a Professor of Economics at the University of Queensland and an Adjunct Professor at the Australian National University’s Research School of Social Sciences. He is also a Research Director of the RUMiCI project. The project monitors rural to urban migration in China and Indonesia.
Paul holds a Ph.D. in welfare and well being in Russia from the University of Amsterdam. His Ph.D. thesis applies and extends psychological insights about the causes, definition and measurement of well being into economics.
Paul has a wide range of research interests, specialising in happiness, labour market, health economics and econometrics. He is particularly interested in how socio-economic variables affect the human life experience and the ‘unanswerable’ economic mysteries in life. His recent research into rural-urban migration in China produced new evidence and a prediction that China would be the largest economy in the world within the next 10 years.
In 2009, Paul was awarded the Economic Society of Australia’s Young Economist Award. Paul is also a contributor to the Club Troppo and Core Economics blogs.
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- Game Of Mates: Nepotism Is Costing The Economy Billions - July 7, 2017