About Rent-Seeking

Until a few years ago, I hadn't heard the term "rent seeking." In the past few months, I've heard the term repeatedly and I'm writing this post to anchor this important multifaceted concept in my understanding and to share it with interested others.

I knew concept of "rent seeking" long before I learned the phrase. I've repeatedly had this fantasy where every person who earns a wage needs to step up to onto a big stage in front of the other 300,000,000+ Americans and tell us these three things in simple language:

1) What is your job title?

2) How much do you make?

3) Justify your wage in terms of what you do for your job. In other words, how does your work make your community a better place?

I imagine that many essential workers would come out of this process as shining heroes. A person who works for $15/hour at a typical grocery store could succinctly state "I help keep my fellow citizens alive by making food available for them.

On the other end of the scale, a big shot at Goldman Sachs. A 2019 article at Investopedia indicates: "The average Goldman Sachs employee makes $367,564 on an annual basis, according to the firm’s most recent financial disclosures." Bonuses exceed $40,000. What does this company do to improve the community? Good question. I look forward to hearing how this sort of money is justified in terms of community betterment.

I have sketched out these two examples in order to introduce the concept of "rent seeking." The following is from Investopedia: 

    1. Rent seeking is an economic concept occurring when an entity seeks to gain wealth without reciprocal contribution of productivity.
    2. The term rent in rent seeking is based on an economic rent which was defined by economist Adam Smith to mean payments made in excess of resource costs.
    3. An example of rent seeking is when a company lobbies the government for grants, subsidies, or tariff protection.

Here's another definition, this one from The Library of Economics and Liberty:

People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher Social Securitypayments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.

Here's a third definition from CFI:

Rent-seeking is a concept in economics that states that an individual or an entity seeks to increase their own wealth without creating any benefits or wealth to the society.

Rent-seeking activities aim to obtain financial gains and benefits through the manipulation of the distribution of economic resources. Economists view such activities as detrimental to the economy and the society. The practice reduces economic efficiency through the inefficient allocation of resources. In addition, it commonly leads to other damaging consequences, including a rise in income inequality, lost government revenues, and a decrease in competition.

The concept of rent-seeking was developed by American economist Gordon Tullock in 1967. However, the term was offered by another economist, Anne Krueger. . . [T]he term “rent” is referred to as one of the sources of income generation that was conceptualized by Adam Smith. According to Smith, rent is an activity of lending one’s own resources in exchange for some benefits. Relative to other sources of income (profit, wages), rent is the least risky and the least labor-demanding source of income.

The corruption of politicians is related to rent-seeking activities. In order to gain certain benefits, the rent-seekers may bribe politicians. However, G. Tullock determined that there is a significant difference between the cost of the rent-seeking (bribery) and the gains from this practice. This paradox is called the Tullock Paradox.  The Tullock Paradox states that rent-seekers generally obtain large financial and economic gains at an enormously small cost.

With these definitions in place, I'd like to share an excerpt Episode 205 of the Making Sense Podcast, "The Failure of Meritocracy," in which Sam Harris interviews Yale Law Professor Daniel Markovits. It is a thoroughly engaging podcast, repeatedly touching on critically important economic issues we are facing. I'll end with this discussion of rent seeking (though that term is not used).  The speaker is Daniel Markovits:

[Re Silicon Valley and Finance] you see certain forms of seemingly rapid technological advancement. But these are not places that necessarily produce an enormous amount of increased social well-being or growth. And so what we need is a careful, deliberate eye to what kinds of skills our society needs. Let me give some examples of this idea to answer your question starting with ones that I think are easy for me and ending at ones that are hardest for me, just to be fair.

So the easy ones are fields like law and finance. We've had enormous innovation in law and finance, set asides, Silicon Valley, derivative securitization. But there is no--literally--no evidence that our super-skilled, super-elite financial sector produces any increase in economic productivity or well-being for the society. It's interesting, people don't realize that from 1950 to 1970, finance was neither better paid nor better educated than the rest of the economy. Whereas today, it sucks up the most educated people in the society and pays them vast amounts. Law is the same.

If you look at other countries’ legal systems, a system like Germany has much less elite or competitive legal education and loitering, but produces more effective justice at a lower cost. So there are some fields where what we're doing is we're creating intense training, genuine expertise, enormous innovation, but the innovation is just producing greater private wealth for the people who have the skills rather than a greater social product. I think that's true in management also, and we could talk about it.

But the hardest case for me is a case like medicine, because surely medical innovations produced by super trained, super creative people, cure diseases make us all better off. And of course they do. But even there, our system of meritocratic, hierarchical exclusive training leaves a lot of social good on the table. So take heart health as an example. Very well trained, very brilliant doctors and scientists have figured out how to transplant hearts, how to build an artificial heart. But here's some things we don't know about heart health. We don't know whether it's better for your heart over the long run, to exercise really intensively for one hour once a week, moderately for half an hour, three times a week, or just always to walk into take the stairs. We don't know the answer to that question. If we did know the answer that question and if we knew how to train people to do whatever is optimal, that would be a lot better for our population's heart health than the ability to transplant hearts for the very small number of people who get access to the heart and the surgeon.

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You Built Some of That

"You didn't build that" is a phrase Barack Obama uttered during the 2012 election campaign. It was then used by his political opponents during the 2012 presidential campaign as an attack by Obama upon entrepreneurs.

It's time to revisit Obama's idea. Did they actually build all of that business? Enter A.J. Jacobs, who decided to thank every person responsible for his morning cup of coffee. This project led to him reaching out to more than 1,000 people, far more than the woman who poured his cup of coffee and far more than the man who delivered the coffee beans to the coffee shop. Jacobs has created an upbeat reminder that the world is intricately inter-connected. We all depend upon each other to a mind-blowing degree. Yes, you built that business, but who "built" you and who are all the people you lean upon to keep your business going? Start counting.

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Axiomatic Civic Responsibility

I’m looking at the “protesters” in Michigan and ruminating on the nature of civil disobedience versus civic aphasia. By that latter term I mean a condition wherein a blank space exists within the psyché where one would expect an appropriate recognition of responsible behavior ought to live.  A condition which seems to allow certain people to feel empowered to simply ignore—or fail to recognize—the point at which a reflexive rejection of authority should yield to a recognition of community responsibility.  That moment when the impulse to challenge, dismiss, or simply ignore what one is being told enlarges to the point of defiance and what ordinarily would be a responsible acceptance of correct behavior in the face of a public duty. It could be about anything from recycling to voting regularly to paying taxes to obeying directives meant to protect entire populations.

Fairly basic exercises in logic should suffice to define the difference between legitimate civil disobedience and civic aphasia. Questions like: “Who does this serve?” And if the answer is anything other than the community at large, discussion should occur to determine the next step.  The protesters in Michigan probably asked, if they asked at all, a related question that falls short of useful answer:  “How does this serve me?”  Depending on how much information they have in the first place, the answer to that question will be of limited utility, especially in cases of public health.

Another way to look at the difference is this:  is the action taken to defend privilege or to extend it? And to whom?

One factor involved in the current expression of misplaced disobedience has to do with weighing consequences. The governor of the state issues a lockdown in order to stem the rate of infection, person to person. It will last a limited time. When the emergency is over (and it will be over), what rights have been lost except a presumed right to be free of any restraint on personal whim?

There is no right to be free of inconvenience.  At best, we have a right to try to avoid it, diminish it, work around it.  Certainly be angry at it.  But there is no law, no agency, no institution that can enforce a freedom from inconvenience.  For one, it could never be made universal.  For another, “inconvenience” is a rather vague definition which is dependent on context.

And then there is the fact that some inconveniences simply have to be accepted and managed.

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The Immorality of Fully Embracing Homo Economicus

Nick Hanauer gave a speech on the lies on which neoliberalism is built. He characterizes neoliberalism as "dependably orthogonal to the last 50,000 years of moral norms and traditions." Hanauer then turns the focus toward the foundation for neoliberalism, "homo economicus," the belief that human beings are "perfectly selfish, perfectly rational, and relentlessly self-maximizing." This unbecoming portrait of human animals dovetails with other unsubstantiated ideologies. For instance, you will often read that natural selection created a horrific dog-eat-dog world and that we are nothing more than these sorts of insatiable philistine dogs, which is nonsense, as discussed by primatologist Frans De Waal. De Waal’s main message is that we are NOT condemned by nature to treat each other badly. Though competition is part of the picture, we have evolved to be predominantly groupish and peace-loving beings who are well-tuned to look out for each other.

Now back to homo economicus. Here is an excerpt from Nick Hanauer's speech:

And how did we get to a so-called “ethics” of business that insists that the only affirmative responsibility of a corporate executive is to maximize value for shareholders?

I believe that these corrosive moral claims derive from a fundamentally flawed understanding of how market capitalism works, grounded in the dubious assumption that human beings are “homo economicus”: perfectly selfish, perfectly rational, and relentlessly self-maximizing. It is this behavioral model upon which all the other models of orthodox economics are built. And it is nonsense.

The last 40 years of research across multiple scientific disciplines has proven, with certainty, that homo economicus does not exist. Outside of economic models, this is simply not how real humans behave. Rather, Homo sapiens have evolved to be other-regarding, reciprocal, heuristic, and intuitive moral creatures. We can be selfish, yes—even cruel. But it is our highly evolved prosocial nature—our innate facility for cooperation, not competition—that has enabled our species to dominate the planet, and to build such an extraordinary—and extraordinarily complex—quality of life. Pro-sociality is our economic super power.

Hanauer sees homo economicus as a salve we invented to give ourselves permission to do terrible things;  "It is also a story we tell ourselves about ourselves that gives both permission and encouragement to some of the worst excesses of modern capitalism, and of contemporary moral and social life."

But what about capitalism? Isn't that would puts our food on our shelves. Isn't capitalism the explanation for why we strut around with our miraculous smart phones? Hanauer explains:

Capitalism is the greatest problem-solving social technology ever invented. But knowing that capitalism works is different than knowing why it works. And contrary to economic orthodoxy, it is reciprocity, not selfishness that guides it—indeed—as if by an invisible hand. It is social reciprocity that builds the high levels of trust necessary for large networks of people to cooperate at scale. And it is only through these networks of highly-cooperative specialists that the complexity that defines our modern economy can emerge.
Capitalism is good and useful, but only to an extent. More is needed for a just and prosperous society. Hanauer offers these four rules:

  • Capitalism is self-organizing, but not self-regulating. Government regulation is necessary.
  • True capitalism is not shareholder capitalism.
  • Capitalism is effective, but not efficient. Capitalism can raise our "aggregate standard of living, but it can also be extraordinarily wasteful, cruel, and unequal."
  • True capitalists are moral capitalists. "Being rapacious doesn’t make you a capitalist. It makes you an asshole and a sociopath."

For now, I'll close on this topic, but I've written often on the purported virtues of the unfettered free market, which is an ideology that I have sometimes termed the "Fourth Person in the Holy Quartet."  No doubt I'll return to this topic as homo economicus continues to destroy most of the institutions that had made the U.S. an exemplary place to live.

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Americans pretend there are free markets in many industries

I figured it out myself when I traveled. The airfares in Europe and the Middle East are surprisingly affordable. I bought asthma inhalers in Lebanon, Turkey and Spain for about $3 each. Equivalent medicine in the US costs $85 per inhaler, $120 if you don't have insurance.

I was primed to notice an excellent Article in The Atlantic, "The U.S. Only Pretends to Have Free Markets." Here's an excerpt:

Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales.

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