Desperately Seeking Rents

What, you may ask, is so awful about seeking rents? Paul Krugman‘s NYT column Friday on “Profits Without Production” looked at the problem of “monopoly rents” in the 21st-century American economy. He defines the term as “profits that don’t represent returns on investment, but instead reflect the value of market dominance,” and cites Apple as a prime example. He seems to be just warming up to his topic, promising future columns on what the “widening disconnect between profits and production” means for policy.

I was thinking about rent seeking in a distinct but related sense earlier this week as I read about the defeat of the farm bill in the House of Representatives as well as the market drop following the Fed plan to taper off its “QE3” bond-buying program.  What these two stories had in common was rent seeking and the pain of anticipated withdrawal therefrom. The phrase “rent seeking” was coined by economist Anne Krueger in a 1974 journal article focused largely on the heavily regulated economies of India and Turkey. She acknowledged that rent-seeking behaviors include bribery and corruption, but emphasized the “cleaner” types of rent seeking, such as competing for import licenses, which nevertheless result in deadweight losses to the economy as a whole. Gordon Tullock had the notion of rent seeking a few years earlier without the phrase itself, but he, James Buchanan and other economists, primarily on the libertarian side, have run with both the concept and the phrase for forty years now.

“Economic rent” has a different meaning than ordinary monthly rent on a home. It refers to any kind of unearned income, in the sense of excess returns above what would occur in a competitive market. Rent-seeking behavior, in short, is lobbying for a bigger slice of pie without doing anything to enlarge the pie. A modern economics term for an ancient set of practices. This sounds like something the right wing has accused liberals and bureaucrats of doing–and it is–but I would say the phenomenon of rent seeking crosses all ideological and economic class lines.

Last year’s election turned in large part, I think, on accusations involving rent seeking. Barack Obama’s “you didn’t build that” comment was doubtless distorted and edited somewhat by Republicans, but in full context it was still at best unwise and at worst offensive. Sensible business owners are not unaware that they count on government to maintain roads and highways, maintain public order, and so on–but it may well have seemed to people who knew they had worked hard over years or decades that Obama was gratuitously accusing them of rent-seeking behavior. Mitt Romney certainly suffered from the leak of his comment at a fundraiser that “there are 47 percent of the people who are with (President Obama), who are dependent upon government, who believe that they are victims…These are people who pay no income tax… (My) job is not to worry about those people.”

As citizens our job is no longer to worry about Mitt Romney, or assess his own rent-seeking offenses. But to worry or be indignant about rent seeking does appear to be our frequent occupation. Once you start to look for it, rent seeking is all over the place (often with its evil cousins regulatory capture and moral hazard). Vilfredo Pareto (as in “Pareto optimality“) wrote in 1905 that human efforts “are utilized in two different ways: they are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others.” And in the mid-19th century John Stuart Mill wrote that it “is lamentable to think how a great proportion of all efforts and talents in the world are employed in merely neutralizing one another” (hat tip to Samuel Bowles, Microeconomics: Behavior, Institutions, and Evolution, ch. 5). And speaking of surveillance, at least the second most offensive thing about the stream of news about it, to me, is the suspicion that the private contractors and the government agencies such as NSA are feathering their nests as much as or more than focusing on probable threats–that “privatization” of the security apparatus is a rentier’s dream and our troublesome task to disentangle.

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