Gordon Tullock and the Transitional Gains Trap
Gordon Tullock, who died on Monday at the age of 92, was along with his longtime colleague James Buchanan, the founder of the modern field of public choice, which during the past fifty years has become a well-established subfield of economics and of political science and has also had an influence on other disciplines. Tullock himself is most closely associated with the idea of rent seeking, which would have caused less confusion and been more precise if it had been called privilege seeking.
One of his most important contributions, which he expounded in a 1975 article in the Bell Journal of Economics, pertained to what he called the transitional gains trap. This idea helps us to understand, among other things, why government privileges have such durability long after the original rationale for their creation has become irrelevant.
Consider, for example, an agricultural subsidy such as the production controls authorized for lemon producers during the 1930s. This privilege allows the lemon producers to operate, without fear of the antitrust laws, a marketing cartel for their product. This cartel, called a marketing board, restrains the quantity of lemons placed on the market each year and thereby ensures that the product’s price will be higher than it otherwise would be. When this privilege was created, it had the effect of making the land operated by existing lemon producers (i.e., members of the cartel) more valuable. This increase in land value reflects what economists call the capitalization of rents: because the future stream of income expected from growing lemons on the land has been raised, farmers are willing to pay more to acquire the land. Indeed, they will pay so much more that anyone who acquires the land after the cartel has been created will gain no special benefit — no extraordinary rate of profit — from its ownership. Future owners must, so to speak, pay fully for the cartel profits associated with ownership of the land and its employment in growing lemons. All of the true profit from cartel’s creation is captured by those who owned the land at the time the cartel was created.
Now, the Great Depression, which had an especially harmful effect on most farmers, ended long ago, yet many such agricultural subsidies remain in legal effect. Why? Because elimination of the privileges at this point would be harmful to all the existing land owners by causing them substantial capital losses on the value of their land. Any farmer who acquired possession of the land after the privilege had gone into effect gained no profit from lemon production, yet all such farmers would sustain large losses from its elimination. Hence, existing producers are willing to carry out whatever political actions are necessary to bribe legislators to keep the program going (thereby illustrating another of Tullock’s ideas, the deadweight loss associated with rent seeking).
The transitional gains trap is a powerful and (by the general public) little understood idea. For its formal introduction and development in the economics profession, we are indebted to Gordon Tullock.
I got to know Gordon about thirty years ago. I spent time with him on many occasions over the years and worked with him in various editorial and professional capacities. He was an extraordinary person in many ways, and he made contributions of great and lasting value to our understanding of economic and political life. May he rest in peace.