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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RIP James “The Amazing” Randi

James Randi was an inspiration to me. He was one of the many magicians (including Penn Jillette) who also turned their attention toward exposing many paranormal claims. He was a first-rate debunker of those who prey on fear, ignorance and superstition, as well as an entertaining communicator. I was fortunate to be able to see "The Amazing Randi" make a presentation in person at the CSICOP Conference in Buffalo, NY in 1983. It is awesome to see these charlatans fails so dramatically and so publicly

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Time to Revise the Math Curriculum?

I heard Steve Levitt (from Freakonomics fame) discuss this issue on an episode of his new podcast, "People I Mostly Admire." Here's the proposal for changing the high school math requirement for most of us. This is from an organization to which Levitt belongs, 21CMath.org:

We surveyed 900 “Freakonomics” podcast listeners — a pretty nerdy group, we must admit — and discovered that less than 12% used any algebra, trigonometry or calculus in their daily lives. Only 2% use integrals or derivatives, the foundational building blocks of calculus. In contrast, a whopping 66% work with basic analytical software like Microsoft Excel on a daily basis.

When was the last time you divided a polynomial? If you were asked to do so today, would you remember how? For the most part, students are no longer taught to write cursive, how to use a slide rule, or any number of things that were once useful in everyday life. Let’s put working out polynomial division using pencil and paper on the same ash heap as sock darning and shorthand.

What we propose is as obvious as it is radical: to put data and its analysis at the center of high school mathematics.

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NYT Rethinks the Factual Basis 1619 Project

Bret Stephens has given the 1619 Project a much-needed sober factual analysis revealing that the Project is laced with ideology. To its credit, the NYT has printed Stephens' critique. Serious historians are thus getting a well-deserved moment in the sun. Here's an excerpt from Stephens' article:

An early sign that the project was in trouble came in an interview last November with James McPherson, the Pulitzer Prize-winning author of “Battle Cry of Freedom” and a past president of the American Historical Association. He was withering: “Almost from the outset,” McPherson told the World Socialist Web Site, “I was disturbed by what seemed like a very unbalanced, one-sided account, which lacked context and perspective.”

In particular, McPherson objected to Hannah-Jones’s suggestion that the struggle against slavery and racism and for civil rights and democracy was, if not exclusively then mostly, a Black one. As she wrote in her essay: “The truth is that as much democracy as this nation has today, it has been borne on the backs of Black resistance.”

McPherson demurs: “From the Quakers in the 18th century, on through the abolitionists in the antebellum, to the Radical Republicans in the Civil War and Reconstruction, to the N.A.A.C.P., which was an interracial organization founded in 1909, down through the civil rights movements of the 1950s and 1960s, there have been a lot of whites who have fought against slavery and racial discrimination, and against racism,” he said. “And that’s what’s missing from this perspective.”

In a lengthier dissection, published in January in The Atlantic, the Princeton historian Sean Wilentz accused Hannah-Jones of making arguments “built on partial truths and misstatements of the facts.” The goal of educating Americans on slavery and its consequences, he added, was so important that it “cannot be forwarded through falsehoods, distortions and significant omissions.”

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We Love it That Two (Count’em) Two Cartoon Dimensions Pretend to Describe Complex Political, Racial and Economic Systems

When you last purchased a car or a phone, it was probably an important purchase for you, so you considered many aspects of the product, including cost, function, aesthetics, performance and many other things. When we deal with complex things, we are rightfully motivated to carefully consider many such dimensions. Most of us dig deep into these many factors before making such purchases. The same thing occurs when considering a long-term romantic partner. Most of us will consider dozens of factors before settling into such a relationship. In fact, if we failed to do such a careful analysis, our friends and family would consider us to be reckless. Complex issues demand complex and nuanced analyses.

We don’t use this same degree of care when it comes to evaluating the types of politics. Instead, we jam all the possibilities onto a one-dimension line containing endpoints of “left” and “right.” We do this despite the fact that people are complex and they fall into many dimensions of political attitudes. If you were to gather 100 random self-declared “Conservatives” into one room (or 100 “Liberals” or 100 “Libertarians”), you will have a rich diversity of thought, and you’d starkly see this, if only you take the time to get to know these people. For some reason, however, we are willing posit a simplistic binary single-line political analysis, despite the rich multi-dimensional complexity of political thought in the U.S. This lazy shortcut invites us to talk in cartoons. It invites us to talk about “those Conservatives” or “those Liberals” with hubris.

David Nolan is one of the many people who sensed a big problem with this left-right way of thinking. He offered a two-dimension chart that capture much more complexity: https://en.wikipedia.org/wiki/Nolan_Chart Many others have offered more nuanced (and I would argue, more accurate) ways to characterize political outlooks of our 300+ citizens, but the traditional and highly inaccurate one-dimensional (Left-Right) still dominates the political and journalistic landscape. We seem to prefer simplistic over accurate.

We’ve got the same problem with many other categorizations we blithely make. I resist categorizing people in terms of “race,” because long experience has proven to me that the way a person looks has very little to do with who they are. Using immutable physical traits as a proxy for one’s a stereotyped content of character often wildly inaccurate. When I evaluate a person for character, I consider many factors, dozens of dimensions, such as the “Big Five”:

• openness to experience (inventive/curious vs. consistent/cautious) • conscientiousness (efficient/organized vs. extravagant/careless) • extraversion (outgoing/energetic vs. solitary/reserved) • agreeableness (friendly/compassionate vs. challenging/callous) • neuroticism (sensitive/nervous vs. resilient/confident)

I consider manny other dimensions, including creativity, credibility, grit, acts of altruism, credibility and intelligence, and intelligence can be broken into many sub-categories. For instance, Psychologist Howard Gardner argues that there are multiple types of intelligence, such as:

  • Musical-rhythmic and harmonic
  • Visual-spatial
  • Verbal-linguistic
  • Logical-mathematical
  • Bodily-kinesthetic
  • Interpersonal
  • Intrapersonal
  • Naturalistic
  • Existential

Gardner’s declaration that these are separate intelligences is controversy in psychological circles. That said, these traits that he describes are some of the things I consider when evaluating another person, regardless of any “race.”

There are dozens of other dimensions I might use when evaluating any other person, but many people are willing to divide other people into “white” and “Black,” as though this is a meaningful way to evaluate another person. Making these “racial” distinctions is as absurd as embracing astrology--using a person’s birthdate as a proxy that persons personal character. To me, it seems bizarre and absurd to divide people into colors. That said, I live in a country where far too many people are enthusiastically willing to judge each other on this single simplistic dimension of “white” verses “Black,” despite the fact that this binary is an even cruder measure than the American political spectrum because it’s not a spectrum at all. It is a switch that is flipped from “white” to “Black,” with nothing in between, even though millions of “inter-racial” people exist. What a bizarre stilted binary, on so many levels! How is it possible that this racialized way of dividing people has any intellectual or political traction in modern times?

Here’s another popular binary: socialism versus capitalism. Many people are content to jam complex economies into one of these two boxes despite the overwhelming complexities and nuances of all existing economies. As though libraries are not filled to the brim discussions of the complexities of every economic system, where not a single real life system is declared to be purely socialist or purely capitalist.

I’ve been thinking about these false and limited ways of thinking for a long time. I was reminded of this issue when listening to The Portal, Eric Weinstein’s excellent podcast on Schrodinger’s Cat and the false-binary ways the many people find acceptable for discussing numerous social issues.

Why are we so willing to self-limit the way we think about obviously complex issues? Is it laziness? Gullibility? Social Pressure? We urgently need to reconsider our willingness of categorizing these complex issues, because our one-dimension cartoons are poisoning our ability to talk with one another.  This cartoon-talk is destroying our democracy.

Our willingness to think in terms of these cartoons would seem like an obvious problem for anyone willing to stop and think for even a few minutes, but many of us continue to embrace these cartoonish ways of thinking unabated, perhaps following the lead of our news media, social media and politicians. How can we convince people to stop and smell the nuance? How does one effectively declare that The Emperor has no Clothes in such an intransigent social environment?

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