Lately, there has been a heated discussion about interventionist states and influential firms who extract private benefits and as a result harm social welfare. Economists have dubbed these phenomena as the ‘grabbing hand model’ and the “state capture model” respectively. The distinction between the grabbing hand and state capture models is still considered as a recognizable achievement to the economic and public policy communities. Before proceeding any further I would first like to introduce a control model (the invisible hand) to understand better the other two models (grabbing hand and capture the state)
- Invisible hand model– up until the breakdown of socialism the most widely accepted policy to the capitalist world was the invisible hand model. Invented by late 18th century economist, Adam Smith, the invisible hand model refers to an economic system where market forces are unhindered by the government; the role of the government is hence to provide the necessary public goods and not to interfere into non-political matters. Advocates of this view insist that inefficiencies are cleared by the market forces.
- Grabbing hand model– upon a century worth of ideological antagonism, as soon as the war between the two distinct models of economic organization received its winner, the West were too quick to claim their superiority- the implementation of Lassez faire liberalization and institutional reforms onto post-socialist economies was at best limited and at worst disastrous. A new type of politico-economic behavior was detected- the so called grabbing hand model, referring to a state that pursues its own personal interests at the expense of the nation’s social and economic welfare. Grabbing hand governments shape the entire destiny of companies and for that matter industries, which in turn remain helpless considering the absence of a functioning legal framework.
- State capture model- is the inverse of the grabbing hand model. Here firms or so called oligarchs (disproportionately powerful business men) capture and control the ‘vital organs’ of the state. They shape the nation-wide economic and legal policies and compensate politicians in return. It is important to acknowledge this two-way relationship between politicians and oligarch- the two groups of individuals pursue their personal interests at the expense of the wider public. Now, I can imagine some of you wondering how it could be possible- why doesn’t the public rebel against such a system like they did during the Bolshevik revolution?- the answer has to do with organization, and for that matter (dis) organization.
Let me expand on the concept of (dis) organization further as it is of key importance! Economists so far have kept the grabbing hand model and the state capture model separate for theoretical reasons but in reality the elements inducing both systems are the same. The group of people that form the government and the group of people that control the largest, most significant companies are both from the very same social entourage. Economists so far were conscientious in forming their econometric models to measure the extent of corruption but have largely ignored the social connections of both parties- who are densely organized ‘lobby groups’ and possess the incentives to construct and follow group protocol so as to extract and divide benefits among the group. On the other hand, the mass (comprising of the general public, smaller de novo companies and other social and business entities) are large in size but detached from one another, or disorganized. The mass is therefore reasonably weaker in bargaining power than the politico-oligarchic groups as the former lack a common vision and hence incentives to act against the latter, densely organized group, which in contrast possess strong incentives to pursue their personal objectives.
As it appears this reality is very visible in transition economies due to tight government agent- manager relationships existing years before transition. I am sure most of you are aware that during socialism economic activities were coordinated by the state, fueling state-company bonds even more. Although, the inherent socialist behavior only makes these relationships more visible to the analytical observer, it is important to keep in mind that state-company relationships and for that matter collusions exist everywhere and especially in the developed democracies, though in a more ‘sophisticated’ less visible way. It is in the nature of the human to find ways, even if this means bending rules, to pursue private interests (whether it be wealth, power or recognition). The only difference between countries is the extent of qui custodiet ipsos custodies (who watches the watchmen)- or institutional checks and balances, which in turn depend on the overall competitive landscape where lobby groups operate (and sometimes dominate). The more the densely organized groups and the more divergent their interests the better the competitive environment and the lower the risk of grabbing hand or capture the state.