The power that the ruling class has over institutions of authority gives them the ability to use that power to transfer income and wealth from some to others. It enables them to transfer control over resources from the masses to themselves and to transfer resources among the masses to preserve their positions in the political hierarchy by buying support. The ability of the political class to redistribute is the direct result of their control over institutions of authority. Despite the coercive institutions that enforce redistribution, citizens generally view it as a legitimate function of government, and those citizen views are supported by academic arguments that it enhances social welfare. The chapter analyzes this interaction between citizen opinion and academic support for government redistribution.

There is a political marketplace in which individuals transact with each other to produce public policy, but access to the political marketplace is limited because high transaction costs prevent the masses from participating. This divides the population into two groups: the political elite and the masses. Many people have observed this division, but often have gone on to advocate giving more power, and eliciting more participation, from the masses. That is wishful thinking. This volume explains not only why that division exists, but why it must exist. Because political power necessarily rests with an elite few, the only way it can be constrained from being abused is within an institutional structure that requires elites to compete among themselves for power, so some within the elite check and balance the power of others.

One way that citizens can become involved in public policy issues is to join interest groups that share their interests. By accumulating a large membership of voters, and by amassing resources in the form of dues, interest group leaders influence public policy. Individual members face the same incentive problems with interest groups as they do as voters. Each individual member will have negligible influence over the interest group’s activities. They can either choose to join and contribute, or not, but members are still excluded from the political marketplace. Their collective contributions convey power to the leaders of those interest groups, who are able to transact with the political elite in the political marketplace. As individuals, members of interest groups remain powerless. The leaders of those groups gain the bargaining power to enter the political elite.

Whereas goods and services can be exchanged through bilateral transactions, political outcomes typically require collective agreement. For example, legislation typically requires the approval of a majority of the legislature. Rent-seeking models often depict rent-seeking as a contest in which the rent goes to the highest bidder. In the actual political marketplace, there are not rents that are available to bidders, and rarely is there a single contact point through which rent-seekers can bid for and be awarded rents. Government activity is initiated by some demand for access to government power. This chapter explains the interactions between suppliers and demanders for access to government power and analyzes the institutions within which the negotiating process produces public policies.

Public policy is designed in a marketplace in which policymakers and well-connected interest groups negotiate with each other. This is more than an analogy. There is an actual marketplace in which legislators exchange votes and other favors, and lobbyists and interest groups offer legislators benefits in exchange for supporting programs and policies they favor. The good that is supplied in the political marketplace is access to government power. An important characteristic of the political marketplace is that only a small subset of the population is able to participate in it. Most people face high transaction costs that exclude them from being able to participate in the political marketplace. The political elite engage in politics as exchange, while most people are unable to transact in the political bargaining process.

One check on the abuse of power by the political elite is the ability of people to move away from those who abuse their power. In agricultural societies, this is difficult to do because individuals who move must leave their land behind. Land is not mobile. One result of the Industrial Revolution was that capital displaced land as the most significant factor of production, and capital is more mobile than land. The mobility of physical and human capital has constrained the abuse of authority and has contributed to the shift from feudal political institutions toward democracy.

Institutions of organization are designed to lower transaction costs. Transaction costs tend to be prohibitively high when large numbers of people would be required to engage in a transaction, so those transactions will not occur. Classic cases of externalities, such as when large numbers of people in an area suffer from air pollution from nearby industries, are good examples. Large numbers prevent those suffering from pollution from negotiating with those who are causing it. One way that market institutions deal with the problem of large numbers is to reduce those large number cases down to bilateral exchanges. With two parties engaged in transactions, transaction costs are lower, which facilitates mutually advantageous exchange. That works well for institutions of organization, but is difficult to apply to institutions of governance because one set of rules is designed for the entire population. Transaction costs are necessarily high, which means that only an elite few will be able to negotiate in the design of those institutions of authority and governance.

The scope of authority of the political elite tends to expand because those in authority seek more power, and the masses often perceive problems and demand that those in power do something to address those problems. The demands of the masses are supported by the academic concept of market failure, which legitimizes the expansion of the elite’s scope of authority. Despite theories of market failure that are used to justify government action, most government programs do not correspond with the problems identified by economic theory. Interventions in response to the demands for government action often create additional unforeseen problems, which leads to more demands for government action. The result is that the scope of authority of the ruling class tends to continually expand as the political elite identify problems and the masses demand that the elite address those problems.

Prior to the Enlightenment, citizens viewed themselves as subjects of their governments, obligated to obey the mandates of the ruling class. Enlightenment thinkers argued that governments should serve their citizens, rather than citizens being servants of their governments. This had a constraining effect on the abuse of authority, but also led to a romantic notion of democratic governments being accountable to their citizens and acting in their interests, legitimizing the exercise of authority by the ruling class. This chapter discusses the historical evolution of democratic institutions to show how they emerged as a result of negotiations in a political marketplace. One advantage of democratic institutions is that the exercise of authority tends to rest with the positions people hold rather than with those people themselves. This mechanism for peacefully replacing those in authority constrains their ability to abuse their power.

While elites cooperate with each other, transacting in the political marketplace for their mutual benefit, they also compete with each other in other ways. They often have different policy agendas, but more significantly, they compete with each other for power. Those lower on the hierarchy of power work to displace those above them, and a division of power within government leads them to try to increase their scope of power, often by infringing on the power of other members of the elite. A system of checks and balances helps control the abuse of power by those who have it. The masses have little power, and the powerless cannot constrain the powerful even if the powerless far outnumber the powerful. The most effective way to constrain the abuse of power by the ruling class is to maintain institutions that facilitate competition among elites.