David Schmidtz on Corruption

Welcome to the policy of McCollum’s podcast, a data driven conversation on the economic
issues of today in this series. We invite guests into our studio to provide a highlight
of their work presented during a visit to the University of Texas at Austin Policy.
Emma Combs is produced by the Center for Enterprise and Policy Analytics at the McCombs School of Business.
I am your co-host, Carlos Carvalho, with my colleague Mario Villarreal.
Our guest today is Professor David Schmidt from University, Arizona. David, is it true that in the philosophy
department it is also the director of the Center for the Philosophy of Freedom while with the Policy McCombs?
Great to be here, Carlos. Thanks for having me. So today they’ve joining us, talking about his work on on
corruption. So I guess let’s start with the basic question of what is corruption?
Well, like any word in the English language, it can get complicated and tracking
the different ways its use can get complicated. But but going back several
centuries, it emerged in the English language as
a way of talking about things going rotten. And now what we mean is,
is a particular kind of rotten CI’s is when a person has
what we call a fiduciary responsibility, meaning a responsibility to act
as someone else’s agent. And and the person doesn’t handle
that responsibility to act as someone else’s agent in a in a responsible
way, then that’s when we today start talking about corruption.
So that sounds like a little bit more and more involved and more complex than just the idea of taking a bribe.
I think a lot of a lot of folks these days we might think about corruption as the quid pro quo. They can a bribe
to do something illegal. But but it seems like the definition is a little broader than that.
Yeah, thanks for the thought. I I agree with that. I would say that say taking
a bribe might be the classic example of corruption, but
it’s not the definition of corruption. The definition of corruption is being
in trust entrusted with discretionary power for one purpose
and then using it for a different purpose. So to say my job is to issue this permit
and you say I need it today. And I said, oh, that’s interesting. You need it today. Well, that’ll cost you a
hundred bucks. Otherwise I’ll get it to you in six weeks. And then there’s no
process for expediting it, it’s just you’ve decided yourself that you’re not going
to expedite it unless you get paid under the table. So that then we would start talking about corruption
because we would say your employer or the agency that employs you never intended for
you to be collecting 100 hundred dollars to give out the license. You were paid a salary to
do that. You’re not supposed to be collecting fees for yourself. So we call that corrupt.
They’ve a common thought is that the center of these exchanges
is greed. That’s what is driving the behavior. What do you think
about A. Well, again, I guess
I would say that you might say greed is the first example that we think
of, but it’s not the definition and greed is the it’s the classic
classically corrupt mode. But it’s not the only corrupt motive. So
you could have people who are just mean. Right. And they say,
well, I’m supposed to help you. You’re here to fill out a form to get registered to
vote. And I don’t like you. I’m going to make it hard for you to get registered for a vote.
And then you say, okay, I’ll pay you 100 bucks and say, not, not got nothing to do with it. I’m not I’m not greedy.
I’m just mean. So that’s a different kind of motivation. That can be a kind of corruption where you say
your job is to make it easy for people to get these licenses or permits or something like that.
And you’ve just decided to make it hard for certain people so that that kind
of laziness might be another kind of corruption where you say,
I don’t like your accent, I don’t like your long explanations of why you’ve got a problem. I’m just going
to shut my window now and stop listening to you because you’re boring me. Now, that would be another
instance where you could start talking about about corruption
and just general ways of general reasons to misrepresent your
role or the agency’s purpose or your job within the agency,
I guess. But but yeah, just just generally
having a fiduciary responsibility, a responsibility to provide a service
and then just deciding for reasons of your own to not be good
at providing that service. So there’s a lot of attempts
in economics, too, to work on problems that we call typically principal agent problems.
Right. Where where we know that the agent might not act in the best interests, interest of the principal.
And and we try to think about structures or institutions or incentives in place in order to
to stop that from happening and lining up their incentives. We
try sometimes. Is that by fiat, by just saying trying to say, for example, now, you know, was a big, big thing in the country
of trying to make sure that every FNET financial adviser has a fiduciary duty with their with their
with their clients. And and and, you know, that creates that expectation of
of a fiduciary responsibility, but might be very hard to to enforce and have the proper incentive. So
in your in your view, when you’re thinking about this, is it a matter of really trying hard
to think about institutions to correct or goes beyond that is not enough or we don’t
know it. It’s too hard to try to solve the problem from the institutional framework.
Yeah. Thanks, Carlos. I would say yes and yes. It’s it’s important
to think about this as centrally a an institutional issue
and it’s important to understand that it isn’t only an institutional issue. So
many theories people have worked on how to align incentives, how to how to create
a structure of rewards. So if you say, well, I’ll tell you what, I will give you
a commission for selling this product, and then you say, but it’s important
for you not to lie about the product, but that’s not going to work out well for us. So.
So you’ve got to you’ve got to play within the rules. But at some
point, you say, no, this is what we rewarded people for doing. And sure enough,
this is what people are actually doing. So you might say, well, I’m paying
you to maximize the graduation rate in your unit. And so you say, well,
that’s why we canceled the exams and just gave everybody A’s. And so you say,
you know, actually, you’re doing exactly what we gave you an incentive to
do. But you’re misunderstanding what the point was. I mean, that’s that’s
a that’s a corrupt that’s a very literal but corrupt reading
of the incentives, the reward structure that we gave you. So. So
if you’re serious about if you’re serious, say just generally, if you’re serious
about morality, you don’t set up people’s
incentives and motivations in ways that are contrary to morality as best you can. But that’s
not easy. That’s a huge achievement to set up the rules of an institution
so that what it leads people to do is genuinely the right thing.
So when I said that it isn’t only an institutional issue,
there is a matter of what kind of culture you are building, not just
an incentive structure. Will, what’s your culture? What is your ethos? What are your principles?
What do you stand for? What is your mission and what can you do to get your agents to buy
into your. And so. So at some point, those agents, those
people have to say, I’m going to do what’s
good for me and my family. I’m going to collect my
commissions, my rewards and salary and so on. But there’s also a
matter of pride beyond the incentive structure. And so that’s something
that people have to teach each other and have to teach themselves. They have to say,
I at the end of the day, I don’t want to I don’t want to wake up and find out that
really I’ve become a pawn of an incentive structure. Yes. Maybe I own a
Ferrari now or something like that. But I’m a cheap hood, like.
And there’s no car in the world that can make up for the kind of person that I let myself
become. Now, a thought here is it seems
that some societies have more corruption than others.
Sure. So that is speaks a little bit, too, to your narrative about institutions. But it also speaks
to it seems that we can have a sense of the magnitude of the problem. So it’s a dual issue
here. One is a Kennedy measure. Can it be assessed?
And if and if so, how would you try to explain why some societies have
more of it than others? Well, one thing I would say as a preliminary
is you have to be careful what you measure, because measurements can be
very misleading. The measures that you create are never going to perfectly
track the goals that you have in creating those measures,
the kind of performance you’re trying to incentivize will. That’s just
something you kind of aim at with your with your incentive structure. Now,
as to what would make the difference between one
society and another, gee, that’s a big, hard question
which surely doesn’t have only one answer. It’s this is a complicated thing.
But I guess I would say a couple of things. One is
you have to you have to look at the what it is that makes
information available. What kind of information is available in
your culture, in your society, in your organization? And so, you know, corruption
like rottenness happens in the dark. It doesn’t happen in the bright light. So
so where where people can operate with
a sense of knowing what’s going on, knowing who’s doing what. Knowing why they’re
doing it. And knowing that whatever you do is going to come
to light some day, not only what you did, but probably even why you did it. To
some extent, it’s going to come to light someday. So
you can have feedback mechanisms and the feedback
where you get information from other people and where other people can see what you’re doing
and maybe you have a chance to explain what you’re doing. But that
has that has a lot to do in general with how much corruption
you’re going to see, the amount of oversight and the information that the overseers
have is is going to make a difference. So there was a case
once where the National Science Foundation GIV gave some people
a very large grant to run conferences and they went and bought a yacht
with the money and I’ll attend that. And will they? And they got caught and
they said and there was a there was a story in The New York Times was writing it up. They said
there’s this yacht. Like it’s got like rose and cherry paneling and it’s got
gold plated doorknobs and that kind of thing and gold plated toilets, whatever it was,
something like that. And and these and the people who got the grant said.
Wow, this looks really bad, but if you just give us a second to explain.
That’s where we hold our conferences and our conferences like per person,
like they’re cheaper than having it at a downtown San Francisco convention center.
And then we’ve got the asset, which is which is appreciating in value. So
they said, we’re sorry this we we see how bad this looks. And we.
And we probably shouldn’t have done it, but we were trying to do what we got the grant for. We were trying to
hold conferences. And that’s that’s what we did. We have the best conference location, like out on the water,
out in the bay that you could imagine. And and we thought that was a good thing. But we
realized the optics are bad. So you and the National Science Foundation,
they said. OK, we hear you, we understand we’re
still going to come down on you pretty hard. We’re going to you’re going to have to return that
money. Your institution is going to have to return that money to us. But
but we’re not saying you’re going to burn in hell or anything like that. We we understand why you
did it. Yeah, it was a mistake. It and yeah, the optics are horrible. And yet
we can’t afford optics like that. And yeah, you should have thought of that. So it’s
complicated, but information just makes a huge difference. And the and the ability
to have a certain equality so that. Right. If you accuse someone
of corruption and they say, oh, we’ll see. What you don’t understand is I’m upper class and
your lower class. That’s the end of the conversation. You don’t criticize me. And if you have a situation
like that where people have autocratic power based on class or
or gender or whatever it is, that also is going to be something that is going to create space
within which corruption can happen. Interesting thought that
I never. There’s a lot of information, there’s a lot more information in the world. And
right now there’s more ways for us to access information than then than we used to. So from that perspective, then,
as is potentially a very good thing, that by us being less in the dark about lots and lots
of different, different institutions and behaviors, you might be a path forward to two
to live in a potentially less corrupt ways because people
are going to be more aware of how bad they can look eventually. Right. But perhaps we need to learn
how to deal with that more effectively still. Yeah. You have a you have a point. I mean, corruption
is something that we read about on the front page every week anyway.
And maybe the encouraging thing is to say, well, it’s news. It’s not business as usual. And it’s.
So it may be that there are more stories than ever, but that doesn’t mean it’s more common than ever. It may
be that it’s bigger news now because it’s less common than ever.
Another thing you can think about institutions is, is to say, well, if you’ve
got a salaried employee who’s supposed to be issuing licenses and
the salaried employer starts collecting fees, taking bribes under the table,
that’s corrupt. But you might say, well, what about before the time
when there were no computers? There was barely even paper.
There were no pay rolls per say. If you worked for the king, you worked for the king
as a as a volunteer, basically saying, hey, if you give me a give me a, give
me knighthood and I’ll just take care of this service for you. I will. And this is a real case. I will
I will take care. I’ll just take sacks of gold coins from you. And I will take care of handling
the Navy’s payroll. And I’ll
be doing that, of course, as a as a volunteer. Like they’re no, they’re not going to be any pay stubs, they’re
not going to be any W-2s or anything like that. It’s just a sack of coins and me and the sailors.
Okay. And then these people say, okay, there’s no such thing as salaries. Salaries won’t be invented for a
couple of centuries. But I’m working for you now, dear sailor. And so
I’ve got your your pay. And
if you want me to put you at the head of the line, then we’re gonna have to. You’re
going to have to pay me a fee because I’ve got gotta make a living, too. Now,
you might say, well, in a couple of centuries when the person’s on a salary and there’s not supposed to be any
commission that will be known as corruption. What about now? What about now when like nobody’s
on nobody’s getting a salary and everybody’s working on a hundred percent commission.
Now, are commissions corrupt? And you say, well, it’s what every. It’s what
everybody is expecting. Everybody knows that that’s how the system works.
And everybody knows that that’s the only way they have of making this system work. At this
point, and if you talk to the sailors and you said should that person be collecting fees in order to
give you your pay, they would say, well, yeah, because otherwise they don’t get paid. Otherwise
the guy just doesn’t show up. So, yeah, of course, I want the person to get paid.
So you might say there are things that we do in effect
to set the table for corruption as well. We have more information now, but maybe
now we we expect people to ignore opportunities
to collect extra fees or something like that, whereas there was a time when there were no
extra fees because everything was the fee. So it’s just
it’s just food for thought. Anyway, I don’t know whether to forgive those people centuries ago who who
made their living that way. And I don’t forgive the people now who who agree to take a
certain salary for providing this service and then just decide they’re gonna give themselves a raise.
I’m not sure if this is a follow up, but certainly in my in my mind, there’s someone to go for it.
If you’re you’re citing some sort of like convention, it’s the way things where
at the moment and it seemed that he was a service was being provided. Maybe we’re gonna
be suspect of it nowadays. But in the context of then he
probably was expected like what if an exchange that he’s kind
of suspect on on those grounds or order grounds? Dave, what if it is
legal? Like, think about something like lobbying is perfectly legal.
There is a framework to do it. There is rules about any information needed in order to engage
in that activity, that their information is public is out there. Yet some
of us may think that there is something problematic with a lot of
activities where firms or industry seek privilege and regulators grant those privileges.
You may not be legal. I don’t know if it’s corruption, but certainly there is something
to say there. What would you say? Well, obviously,
that’s a really hard question, Mario. And it’s it’s one of the hard questions of our time.
Practically speaking. So what I said before when Carlos
and I were talking about it is, is I said you can’t expect
your institutional incentive structures to be perfect. You can’t expect your legal
structures to be perfect. Another way to put it is to say you can’t be a good neighbor
just by obeying the law. Good neighbors have a kind of alertness
and considerate ness that goes beyond obeying the law.
And all kinds of things are going to be legal that are irritating to your neighbors. And you wouldn’t want
to pass laws against every form of irritation. But what you need
is neighbors to say, I just need to check like up. I know I was playing music pretty loud.
Did that disturb you? Was that. Was that a problem? If so, just tell me. Because I don’t I don’t need to play
after 10 o’clock. I don’t need to have parties on Tuesday night. Just just tell me if it’s a problem. And if you want
to come over, just come over. So that’s how neighbors work things out. You do
things beyond the rules. You do things beyond the legal requirements
and incentive structures. You have to go the extra mile. So
what I would say in addition about that,
I suppose, is, is that there are there are cases
that really make you have to think. About.
About how you’re going to handle it. So in the in the in the lobby case, you mean it?
Well, yeah. Thanks. So in the lobbying case, I mean, there
was a there was a person a few years ago who who got put in jail
for various kinds of bribery and things that
that we’re involved in in this person’s lobbying effort. And the person went to jail
and then was on television and said, I I was guilty. I absolutely I was convicted
of a crime. I committed it. What I want to say is and he says, I don’t mean
to be making excuses for myself, but I want to. What I want to say is for some
somehow it’s incredible to me now. I didn’t see it at the time. I didn’t get it. He said
I I swear I honestly thought I was one of the good guys. So I was collecting 80
million dollars in fees for brokering deals between politicians
and and and and firms and CEOs, that sort of thing.
And and I gave 80 percent of of that to charity.
And I thought that that made me one of the good guys. I. And then later on when I realized,
no, I actually personally all by myself did serious
damage to the political culture of this country. He said, I can’t believe it in
retrospect. But I at the time, it was invisible to me. I honestly didn’t see it.
And he said, I do see it now, though. So that’s something to think
about. It’s so this person was doing things. Many
of the things that this person was doing were legal then some of them were
rich. Right. Retroactively made illegal. And he didn’t complain about that. He said,
nah, it was it was criminal. Even if the law hadn’t exactly been interpreted
that way yet, even if it was conventional to do what I was doing. You said I
don’t want to say everybody did it. I was the biggest I was the biggest criminal of the bunch at
in my heyday, I was the worst. But yeah, a lot of people were doing that and that.
And it was legal and they they were and people knew that they were doing it.
And so that’s a that’s a that’s another issue where you
where there’s a personal responsibility for saying, what’s the law? I need
to stay within the law. But wait a minute. That’s that’s not the key to being a good person.
The key to being a good person is to say, what should people what what would good
people expect from each other? What would good people do here? What should the law
be? And and we’re you know, we’re a long way.
We’ve always been a long way and maybe always will be a long way from being in a position
to just create all the laws, pass all the laws that we imagine would be good things.
The problem’s always changing. And so the thing that it’s going to take to solve it is going
to be something that we don’t see coming right now. So there’s all kinds of,
you know, costs to freedom of thought and freedom of expression, freedom of speech,
where you say, yeah, at some point we’ll be paying a cost that we didn’t imagine paying
and we will be tempted to curtail and censor. And you say it’s it’s
always pretty much been a mistake. Maybe it always will be a mistake. But we don’t
we don’t know what’s around the corner. So you write about self-awareness, be a very important
aspect of this person being aware of trying to be a good person and be able to engage and try
to find out or do the things that they are supposed to do, as opposed to just follow literally the letter of
the law, of the rule, of the incentive and so on. I think one of the most
disturbing examples when I read it here is, is that there’s that the idea that what happens
when one loses the self-awareness. And can you tell us a little bit about that, what you have in mind when you talk about that?
Yeah, well, it in fact, the birth of Western
philosophy basically goes back. I mean,
the first huge text in the history of philosophy, Western philosophy
was Plato’s Republic. And that’s what Plato’s Republic was about. Plato’s Republic
was about many things, but among them was the the
idea of tyranny and the idea of of
of justice and political power not coming apart.
And so when he talked about injustice, really, he
was talking about corruption. But it was about not about a city going
rotten, but an individual soul going rotten. And he talked about the city as well,
because, in his words, the the city was just a magnified case of the
soul. And so by magnifying the soul in the form of the city,
then you get a closer look at what’s going on. But but he thought the fundamental corruption
was letting the parts of yourself fall apart so that the
so that you’re your character and your intellect and your set of physical
skills and capacities say these are different aspects of your soul.
And if if you lose touch with yourself,
that’s a form of going rotten. That’s a form of of having your soul
fall apart. And that’s what rotten is, is falling apart. So when your soul falls
apart, you’re corrupt. And when your city falls apart and doesn’t know what it’s doing,
it has no purpose. Then your city is becoming corrupt. And
now I think there are ways in which we should quarrel with that analogy and
say cities and cities are not just big souls. There there’s
a sense in which the parts of a of the soul of a city,
they they really don’t need to be on the same page. And you don’t want
them to be on the same page. You don’t want everybody to have a common mission. What you what you
want is for people to be like drivers in a organized
traffic system where you say, excuse me, sir, you have a red light and then the person
stops. But what never happens is you you roll up
to the intersection and say, which of you have lower class destinations in which
of you have upper class destinations because the people with the better destinations get to go first.
The people with the low class stuff destinations have to wait that you never
see a traffic management system managed that way. And in fact, that would be if you tried
to be that organized and that integrated and that self knowing as a city
that would be really corrupt. I mean, that would be something where you would be sorting
the world into, you know, winners and losers and upper-class and lower class. And so
it’s it’s the genius of a of a city to become
that integrated. But no more integrated than that. Like so everybody knows whose
turn it is. But everybody knows also that your destination
is your business. You just have to take your turn and wait when it’s somebody
else’s turn. But your destination that’s up to you know, that that’s the essence
of liberalism is it’s not needing to dictate other people’s destinations.
David, but I sympathize with the notion that there is something about corruption
that. To the soul. So there’s something about the character of
those that who come or give up to the temptation of
doing what is not correct. What is not right. But you also talked about institutions and rules and
incentive structures. So I can imagine a perfectly
decent human being that is not drowning too, that a spiral of rottenness
of the soul facing a choice where is just too costly
to do the right thing for various reasons. There life is at risk.
There are many, many order order possibilities. So
sometimes good people act badly. And they act badly because the incentive
structure induce them to do so. Is there a contradiction there? Or actually those two
things work together. Yeah. Well, realistically, practically, that
also is a really interesting question, Mario. So I guess I
would put it this way is in times of desperation,
people grasp at straws. That’s you know, people will do whatever they
need to do to survive when they think survival is the issue.
So you can only expect so much of people when you you don’t
give them a dignified way forward. So I would say that
the other thing I would try to do. Say,
you know, when when just explaining to people, explaining to young people the road ahead
of them and what what it is they have to look out for, as I would say,
be careful about exaggerating the stakes when you’re being bullied. You will say,
I have to do whatever it takes to get through this. I have to go along to get along.
And it’s we live in a pretty affluent society. You can be in the bottom 10
percent of the income I have been. And it’s not that bad. It’s not. It’s
it’s got your attention. And there are things that you have to do. There
are there are plans that you have to make and budgets that you have to observe.
And it’s and it’s tricky and sometimes dangerous. But when you exaggerate
the stakes, then you’re on the road to making excuses for
behavior that you yourself don’t condone. And so I would I think it’s
very important to to teach
people, to teach oneself to be realistic about what the risks actually are
here and what the costs actually are here, because we we are emotionally geared
to view ourselves as in any in an emergency, like we have to do what’s
we have to keep this job, because if we don’t keep this job, then we become outsiders
who are not part of the tribe anymore. And that means we’re going to be food for somebody
else. We’re not going to be protected by the tribe. And that that feeling makes
us capitulate to corrupt bosses and become part of corrupt schemes. And and
so very often I would want to say to people, it’s just a job.
And I admire people who say, I’m done here. It’s just a job. It’s not worth
my soul. It’s not worth my pride. It’s not worth not being able to look
my kids in the eye. It’s not worth having to explain to them why I’m on parole. And by
the way, my boss never got he arranged for me to be the one who is taking the risk.
So don’t exaggerate the stakes. I think that’s an important life lesson. Our guest today has
been Dave Dave Schmidts from the inverse of Arizona. Dave, thanks for joining us. Apolicy McCombs.
I have really enjoyed my time here. Thanks so much for having me.
Before we wrap up, you can get more information in our medium page. Thanks for listening to Policy
Imogen’s. See you next time.