Corruption

Google “define” states corruption as, “Dishonest or fraudulent conduct by those in power, typically involving bribery.” This standard definition sticks it to those in power, which is how the term is used by most people. But, a more expanded idea can take it beyond politicians and bribes.

Imagine someone wants to do something that has a law or sanction against it. Let's say, a married man wants to have an affair. So he sneaks around at night; maybe, creates fake ID for hotel rooms. He obfuscates the trail of clues that leads back to him. This obfuscation of the truth is a metaphor for corruption. It's the “system” he builds to help him live his normal life, with wife, kids and job unaffected by his sanctioned behavior.

Now, in those few moments when this guy is tired of the stress of lying and hiding things, we could imagine he wishes he could live in a different kind of world. One, where he could just do what he wants, truthfully. Straight forwardly, even. Without the lies, wouldn't things be so much easier? This kind of questioning of barriers, parallels the libertarian point of view. The honest, straight forward approach, it's assumed, would lead to things being so much better. A person is going to go after what they want, anyways, so let's just get rid of the lies, obfuscation ..the complexity; and, just let people do what they want.

I'll leave it as an open question whether the libertarian point of view should be adopted in the case of affairs; but, you get the point.

To restate the basic principle: You have a social value or law; and, a system develops to try and circumnavigate the “barrier” to the thing desired. This circumnavigation may be completely legal; but, there will be consequences. Namely, a less transparent, usually more complicated set of systems used for the circumnavigation. (Not to mention, the risk of a frying pan to the head.)

Black Markets

When a drug is banned people find a way to buy it anyways. For the right price, someone will scheme to get the product in another country (or make it in a lab). They smuggle it into the country and take the risk of confrontation with the state's law enforcers. For this to happen, the smuggler/lab producer is paid a premium. The amount must be high enough to cover the cost of the product, as well as, the risk they take to fight the legal system.

According to our framework, corruption is the subsystem that arises to get around society's laws or social value. In this case, drug dealers build an organization, including lab workers, smugglers, sales staff and other risk takers, to get around society's barriers. The system of corruption can become violent as they inevitably clash with law enforcement.

Investment tools created to circumnavigate US Real Estate Laws

The following is a more complicated example of our corruption principle. It would be impossible, given the scope this blog to cover every detail; but, here is the summary: A major company, Freddie Mac, was created, with a lot of input by the US government. Its purpose was to help facilitate the secondary mortgage market. One of the ways it did this was create investment tools related to real estate.

At the same time, the US has laws which put barriers on real estate investments across state lines. Freddie Mac's investment tools were designed to circumnavigate these barriers; or, at least not be in conflict with them. To achieve this, there was a combination of lobbying for some legal changes; and, the tools themselves contained enough complexity that US real estate laws wouldn't be broken. These investment tools, in other words, reached a level of complexity that went beyond the scope of the US and state laws to contain them.

Their role in the financial crisis

Real estate tools were created by other institutions, emulating Freddie Mac's; and, additional, secondary tools, were created that worked along side ones of this first type. This second type, in effect, added a layer of complexity to the contracts/legal relationships investors and banks would see at the end of the process.

When the financial crisis came these investment tools “gummed up the works” because the different banks couldn't understand (quickly enough) whether certain investments based on resultant contracts could be used as collateral. (The attempt to describe all of this exponential complexity, in a general way, is itself, near impossible to contain the messiness!)

The time it was taking to understand these investments played a major role in the credit freeze which took place between banks. Complexity and obfuscation was a major barrier to investigations by the banks and authorities.

In this case, nothing illegal happened. Even if we assume politicians didn't take bribes during the initial lobbying process the “corruption” is still there, however. There was indeed a legal sanction in place; and, a regime built up over time to create a LEGAL subsystem to get around it. The “getting around” was legal; but, the resulting regimen was necessarily complex. This very complexity, was one of many factors that lead to the catastrophic consequences of 08. It was one the key factors that combined to create the perfect storm for that year's “black swan”.

Circumnavigating the law

In both the case of drugs and avoiding trade/investment barriers, a set of systems can develop to facilitate this circumnavigation. It's possible this type of system gaming was facilitated by unnecessary law; but, whether you agree with the law or not, they corruption problem and resulting transparency problem, happened because there was some kind of market demand to get around the law.

Politicians Taking Bribes

Is there a complicated construction zoning law, a local politician, knows how to get around? Is there some other kind of permit he knows how to get his “customers” under the table? Again, the corruption, is the system that develops as the politician and his “team” are interested in circumnavigating.

It follows, a system with a lot of laws blocking things people want to do will develop a set of “black market professionals”. Whether these are politicians, civil servants or drug dealers, who sell their expertise at a premium on getting around these sanctions, it has the same underlying principle.

Approaches to corruption - Simplicity or Sanction?

The approach to corruption is at least two pronged. There is deterrence or punishment of the politician, civil servant, drug dealer, or adulterer. Another way of doing things would be the removal of the law, sanction or social barrier. The legalization of alcohol in USA lead to a drop in the organized crime surrounding it. Although there have been negative consequences, like drunk driving accidents, many of those problems existed when alcohol was illegal. An objection to this argument, might be, those drunk driving accidents happened far less frequently when drinking was illegal.

Whether there is a law or not there will always be behaviors and practices society frowns on. Some wanna be adulterers might find a partner who is willing to have an open marriage; but, then my question is, what sanctions will they impose on their partner?