The economics of corruption and the corruption of economics

The true meaning of corruption has been distorted, leaving research, policy and the public to allow it to continue unchecked. Geoffrey M. Hodgson explains.

Some authors – particularly economists – have adopted a narrow and inadequate definition of corruption that has led to skewed measures of its influence and biased policy recommendations. These definitions of corruption confine the phenomenon to the public sector.

Prominent international organisations adopt an inclusive definition of corruption that applies to the public and private sectors. Transparency International, the World Bank, and the United Nations Office for Drugs Control and Crime Prevention all address private and public sector corruption.

In contrast, economists frequently define corruption more narrowly as the misuse of public office for personal gain. Electronic searches reveal that the term “corporate corruption” appears much less often than terms like “government corruption” in leading journals of economics.

Corruption in private organisations does make headlines: Enron, WorldCom and the International Olympic Committee… But ultimately we should be interested in the reality of corruption, irrespective of whether an institution is defined as public or private.

In the 1990s, the Soviet bloc countries transformed into market economies. Corruption did not decrease as industries were privatised. In several post-Soviet countries, including Russia, it seems to have increased.

Corruption is contagious and does not respect sectoral boundaries. Corruption involves duplicity and reduces levels of morality and trust. It tempts others to take part and reduces incentives to conform to the rules.

If we adopt a definition that is blind to private sector corruption, then the tempting remedy is to reduce the size of the public sector. Indeed, Chicago economist and Nobel Laureate, Gary Becker, declared in Business Week: “If we abolish the state, we abolish corruption”.

This bias has fuelled privatisation programmes that address public sector corruption but achieve little to undermine rule-breaking in private organisations. Reducing the role of the state and privatising as much as possible provides no guarantee that corporate corruption will then disappear. In some cases, these policy interventions have themselves been corrupt, and levels of malpractice have increased.

With widespread corruption there are few incentives to behave morally and avoid corrupt deals.

Economists frequently see corruption as a problem where a utility-maximising agent is bribed to disobey the instructions of a principal. This approach has led to policies to monitor behaviour, penalise bribery and offer incentives to obey instructions. But is corruption a principal-agent problem? Individual agents may see corruption as immoral and would prefer it to be reduced, but with widespread corruption there are few incentives to behave morally and avoid corrupt deals. Somehow, the whole system must be shifted to a low-corruption equilibrium, where moral norms are more robust, and it is normal to avoid and decry corruption.

This underlines the importance of changes in the prevailing morality. The dominance of utilitarian and incentive-based approaches has detracted from both the treatment of corruption as an ethical issue, and the perception of a need to strengthen moral forces to deal with it.

To counter corruption our policies should appeal to moral values as well as costs and benefits.

Mainstream economics reduces ethical concerns to the maximisation of utility by individuals. Keeping to social rules demands moral commitments from people in the same way medical professionals work to ethical standards. These moral commitments transcend tallying costs, punishments, benefits and rewards; humans are not calculating machines. To some degree we are all moral agents, concerned with our dignity, identity and self-regard. To counter corruption our policies should appeal to moral values as well as costs and benefits.

The concept of corruption has itself been corrupted by the utilitarian underpinnings of mainstream economics and by ideological prejudices against state activity. The commonplace definition of corruption as the abuse of public office for private gain, itself reflects this conceptual corruption. There is no good reason why organisational corruption should be confined by definition to the public sector. Policies to counter corruption should embrace ethical issues and emphasise matters of moral motivation.

The ideas in this article are discussed further in:
Aldred, Jonathan (2019) Licence to be Bad: How Economics Corrupted Us (London: Allen Lane).
Hodgson, Geoffrey M. (2013) From Pleasure Machines to Moral Communities: An Evolutionary Economics without Homo Economicus (Chicago: University of Chicago Press).
Hodgson, Geoffrey M. (2021) Liberal Solidarity: The Political Economy of Social Democratic Liberalism (Cheltenham UK and Northampton MA: Edward Elgar), forthcoming.
Hodgson, Geoffrey M. and Jiang, Shuxia (2007) ‘The Economics of Corruption and the Corruption of Economics: An Institutionalist Perspective’, Journal of Economic Issues, 41(4), December, pp. 1043-61.