-Charlie Munger
Corruption steals money from the populace and leads to worse goods and services. No one says they want corruption, but somehow, societies end up with it.
When you understand incentives, the world makes sense. Every country has some level of corruption, but countries with the least freedom have the highest levels of corruption. Culture and the system of government cause corruption.
“Good” Corruption
Initially, rules and regulations are added to protect the consumer. In socialist systems, these rules become particularly restricting. Excess rules make corruption necessary to get anything done, leading to an odd form of “good corruption” where businesspeople bribe government officials to continue operating their businesses.
It’s “good” because, without this corruption, no buildings would get built, and no business could start or operate. Without corruption, the economy would be at a standstill, and people would suffer. The theory goes that bribery in these circumstances is better for the economy and people.
Corruption can be beneficial in the short term if it circumvents senseless bureaucratic structures. Good corruption is massively negative in the long run. As soon as bribes are expected, the process becomes institutionalized, and then unions and lobbies form.
Pulling Up the Ladder
In Japan, legacy barbershops had competitors that didn’t wash clients’ hair after a haircut. The legacy barbershops lobbied and successfully outlawed giving haircuts without having sinks on the premises because “it wasn’t sanitary.” The ban slowed their competition, which was built for cheap, efficient haircuts without wash stations.
The US is equally bad. We can’t automate our ports for “safety reasons,” even though the Port of Rotterdam has been fully automated since 1993. The massive waste leads to extra costs for every good that passes through our union-run ports.
Industry incumbents use rules and regulations to keep out competition. In the US, this is being discussed in the AI world, where the most prominent AI companies work with the government, proposing restrictions on building technology that no startup could bear.
Slippery Corruption Slope
My late Zayde (grandfather) often told a story about how when he started a tennis club, a local government official came by to enforce a draconian regulation. Zayde needed to increase the size of the septic tank by an order of magnitude. It made no sense as the septic tank was already large enough for its purpose. The government official offered to accept a consultant fee to overlook the matter.
Zayde proudly built the massive septic tank instead of paying the bribe. It would have made business sense and not harmed anyone if he had, but it’s a slippery slope. When corruption works to circumvent rules, it can also circumvent rules that should exist.
The Twin Towers fell during 9/11 even though the structural beams were covered in fire retardant. A friend working on the investigation told me that the developer who built the Twin Towers was mafia-affiliated and skimped on fire retardant to save on cost. It’s TBD if the beams would still have melted, causing the towers to fall. Assuming my friend was correct, corruption violated necessary safety protocols.
Institutionalized Corruption
In my Zayde’s case, maybe the government official wasn’t being paid enough, and he needed to supplement his income with bribes. Or it could have been the culture of his division had a corruption norm. Or he could have been one bad apple. Outright corruption is less common now in the US. We have moved on to institutionalized corruption.
Entire industries exist because of lobbies. Pharmacy benefit managers and car dealerships are examples of massive industries that impose enormous costs on consumers solely because of regulations. US agricultural subsidies are another commonly referred to case.
We’re seeing US government agencies weaponized to target political opponents. Once you understand the actual powers behind regulations and the incentives behind rules, you see why they lead to evil acts.
Regulations are occasionally necessary, but they trust the largest, most incompetent bureaucracy to be the ultimate gatekeeper. Corruption exists to get around rules. The more rules there are, the more corruption there will be. Limiting the number of rules and government power is the only proven way to lower corruption.