By Larry Marsh, Kansas City Star Midwest Voices columnist 2009

Many years ago Henry Hazlitt wrote the book Economics in One Lesson. He told the story of the hooligan who threw a rock through a window that resulted in a chain of good events. The broken window required paying a glazier who spent the money generating more jobs. In what an economist would call a multiplier effect, the hooligan generated a number of jobs that generated even more jobs. As a stone tossed into a pool of water generates outward rings, the rings of jobs spread continually in a series of good outcomes. Isn't President Karzai using corruption in his government to just the same effect?

The Dean of the Columbia School of Business, Glenn Hubbard, and his co-author William Duggan wrote about the economic effects of corruption in their book The Aid Trap. In it they explained how border guards collected money for safe passage that supported their families and their tribes in a seemingly endless series of good outcomes. Bribes collected at the border stations provided income for a large number of people who would otherwise be destitute. The problem is that although President Karzai is allowing bribes to feed the tribal system, he is preventing his country from developing economically.

In the first round, Hazlitt is right that breaking a window, like taking a bribe, does not create a product or provide a service. However, in the second round, they may well do so. The speed at which jobs are created in the outwardly expanding rings in our pool of job creation is affected by what economists call the velocity of money. In most cases forcing poor people to pay bribes does not increase the velocity of money. Most likely, the money would have been spent just as quickly on something else anyway.

Economics is more than about generating jobs. After all, both Marxism and capitalism generate jobs. In fact Marxism, in the form of communism, did so more completely with everyone guaranteed a job.

The difficulty overlooked by Karl Marx and Hamid Karzai is the little problem of incentives. Dambisa Moyo in Dead Aid, like Hubbard and Duggan in The Aid Trap, points out that corruption, especially governmental corruption, kills incentives. When taking a bribe is an easier way to get the same money than taking a job, productivity suffers. Demanding a bribe creates barriers to commerce and business creation. The International Bank for Reconstruction and Development (aka "The World Bank") recognizes corruption as a significantly negative factor inhibiting business throughout the world. (See World Bank publication: Doing Business.) Moreover, the people paying the bribes are deprived of the money they would have spent elsewhere in the economy to bring about those same economic benefits in a more productive manner.

We are often faced with alternative ways of making money. From growing poppies in Afghanistan to dealing drugs on the streets of Chicago, people face the choice of working to improve their lives or make them worse. Incentives matter. Economists have been trying to make this point with regard to every governmental policy and procedure.

In economics wage and price incentives are not determined by the average person's behavior, but by what happens on the margin. We don't have to change how every person behaves. Instead we need to work on changing incentives for the marginal person who faces life-altering choices in Afghanistan or elsewhere. No, Hamid Karzai should not ignore corruption. Stopping corruption is an essential step to improving the lives of Afghanistan's citizens.

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