Saturday, May 25, 2013


Today, I'm going to address one of the few explicitly moral principles of economics: rent-seeking. This term is used to damn those who use their assets to gain advantage in a way that doesn't create new wealth. The preferred axiomatic element of public choice theory, rent-seeking is, in essence, the closest thing to a genuine, normative moral concept the modern profession of economics has produced. It is the economist's answer to what should be, as opposed to what is.

Beginning and Ending

What this term basically means is that powerful people leverage their power to benefit themselves without productive action. This is usually related to monopoly and politics; the Soviet economy, particularly, was an economy based entirely on rent-seeking, not profit-seeking. Do you leverage your position for more power, by squeezing out competitors using a superior distribution network and cash reserves? Do you know of any market where people take advantage of something other than raw efficiency, or in any way support any attempt to cut back on competition? That's a rent-seeking attitude. Withholding something to gain competitive advantage is rent-seeking, and as such, the people truly engaged in rent-seeking are the ones who keep other products off the market or who cooperate with a situation in which this is the case. Preventing competition is bad... but how far can we take this?

Sometimes it's difficult to tell the difference between rent-seeking and profit-seeking. Where does one end and the other begin? Sometimes, rent-seeking just looks like normal, highly competitive economic activity, almost indistinguishable from market power, which is normal in markets without perfect competition.

You will find rent-seeking wherever there is genuine profit as opposed to accounting profit in line with opportunity costs, although this looks an awful lot like the maximizing attitude that drives the entire system. Should businesses with geographic monopolies, out in the sticks, charge only tiny margins for their goods? If there was no high level of profit opportunity, would new competitors come in? That's an idea fundamental to economics. If Coca-Cola uses its unique and mysterious formula to give it market power, is that a problem? The most popular examples of rent-seeking these days come from government, in reference to the idea of rent-seeking taxation; the government is a geographic monopoly. Of course, for other people, the legitimacy of the government to require taxes in order to "improve" society is perfectly acceptable because voting, and it's corporate power that they take issue with. Those corporations are coalitions of people that work for the sake of improving the company's performance, and therefore the company's wherewithal to pay them more, so working for a big corporation is tantamount to rent-seeking. The notion holds particularly negative opinions of structure for the sake of structure, instead of for the sake of maximizing individual welfare, to include the opportunity costs of corporate power. Hell, unions are openly talked about as organizations that exploit a business' economic rent to benefit their members who work in those industries. Then there are patents; plenty of people seem to think it's practically evil to want to benefit from innovation using government to prevent the "theft" of an idea. Actually, how about we not take the concept of rent-seeking and apply it to information here? It gets ugly, and it really requires its own post, because information asymmetry is a fact of life. The line between wanting to get what you deserve for your actions and rent-seeking can get very, very fuzzy.

We all seem to have an obsession with being valuable in the labor market. We know that the successful people are the most skilled, and the high pay they can command stems from the scarcity of what they have to offer. Isn't demanding a higher wage due to a scarce skill set a form of rent-seeking? Would more people put in the work to become engineers if they made the same income as Wal-Mart clerks? Of course not, but their power is a form of rent-seeking exploitation, just one that we intuitively like more than, say, the taxing power of government or the wealth-allocation power of big business. People can relate to it, and such behavior appeals to our cultural sense of justice; we put in time to get skills, and then they pay off. But it is rent-seeking: the skill is scarce, which is what gives it its value, and we exploit this scarcity to draw higher pay. If more people had the skill, we would be forced to accept less or not do the job. The only way to get around this is to say that skill is part of the individual and that treating skills as material assets is to treat people as assets, whereas we see it as different rules applying to labor and to material. But that's not the case, nor is there any reason to think that it is; people treat one another exactly as they treat material in the labor market. They do not buy labor, but due to the legal banishment of slavery, they rent it. The difference between a rent-seeker and a rightly valuable citizen is one of the perception of usefulness and has to do with how we feel about some particular action or actor; it has to do with values.

So where do you draw the line between rational payoff for investment and exploitative, rent-seeking behavior? Wherever it is, it's a subjective matter and I bet your opinion will be grounded in your experiences and the intuition you now have as to what's fair and what isn't. You won't agree with the person next to you. Now, if you want to be rationally consistent, then you will probably have to admit that every element that gives one person advantage in the labor market is a result of genetics, good background, parents who taught particularly good life lessons or who cultivated the right interests, or some other roll of the dice that's merely being in the right place at the right time. Exploiting such opportunities to your benefit is rent-seeking behavior; egalitarians have been saying this for years.

Indeed, if you're against rent-seeking and willing to take it to its furthest extent, a rational dream would be for every skill to be so commonplace that no one would be able to command a wage significantly higher than anyone else's, making every job a matter of preference and not incentives. This would, of course, put everyone at a similar wage but with different numbers of hours worked, in accordance with the individual's preference (see income effect versus substitution effect). That wage wouldn't be very high, given how many people there are and how intense the competition would be in the labor market.

That's a dream world, but being a celebrity means being a monopoly here in the real world. Some people would like to change that, but consumers really seem to like it. Given that so many valued skills work something like this on a smaller scale, we have a certain problem with the quest for wage equalization in employment.

And a word on investment and retirement accounts: money is an asset you can rent-seek with, too. If you invest your money anywhere except where the maximum possible ROI is, then you're acting irrationally, because your preferences are taking precedence over the preferences of the market, as shown by returns. Why would you do that? Because you prefer one kind of investment over another? That's just your personal taste, and meanwhile you're using your ownership of your retirement account to manipulate economic expansion, favoring one side over another despite superior possible returns. You're exercising your power, to the detriment of what others obviously prefer, you rent-seeking asshole!

And what were you doing with all that money, anyway, in a world where rent-seeking wage differentials and rent-seeking on assets is supposedly bad?

Really, anytime you want to be able to sit back and take some time in your life without constant cutthroat competition, you have to use some form of rent-seeking to get it. Most of what we call success is based on that idea. Going against rent-seeking requires perpetually increasing the intensity of competition.

Stability Through Market Power

Let's fuck with this a bit. If you buy into the narrative of two people getting into a relationship and expecting that relationship to be exclusive, is this not rent-seeking behavior? Is monogamy rent-seeking? Notice the similar prefix compared to monopoly... Marriage, actually, is the worst sinner; a spouse holds a monopoly over some dimension of the other spouse's affection in perpetuity. Free love advocates have known this for years.

Hell, are property rights themselves rent-seeking? Commies clearly think so. Wouldn't that be something: the fundamental legal element that makes capitalism possible is also a problem by the basic tenets of public choice theory...

Be honest: the term's intuitive origins are the same as the origins responsible for Marx' labor theory of value. The average person, for most of history, has done tangible work. You can look at them and see that what they're doing is work. It's hard. It sucks. It's fucking work. So we empathize with them and justify calling what they do morally right, while the activities of those we find less attractive we do not so endorse. What's the final stated goal, from the perspective of Nietzsche's slave morality? Greater equality, of course.

It's a moral idea. And the basis of this idea is some form of Judeo-Christian ethic. It hates empowerment, and by that standard, there is no difference between just desserts and exploitation. And if you assume different values than materialistic-but-rational self-interest, everything goes to hell.

So, try questioning it. Do empowered organizations provide anything of value by nature of simply having power? Most people would probably say no, but I'm not buying that. I think that the organizational elements of the privileges of ownership are the most important part of the entire equation. It's the basis of leadership, particularly the humane and predictable institutional leadership we know today. If there is a difference between what is commonly called rent-seeking and sharp business practices, one can simply call it a matter of honor: one avoids competition, and one embraces it. That's nice, very Nietzschean master morality at work, all about honorable struggle. But the competitor also rationally wants to win, and if there is no possibility for enough of a victory to enjoy it, how many would participate in the contest?

The government is the most obvious example; there are obvious benefits to having the government hold the monopoly on violence. And now, government redistributes wealth, regulates business, and squashes monopolies when a tasty opportunity comes up, too. Is this good? Well, we're certainly used to it.

And really, the answer is yes if you want maximum consumer welfare. By acknowledging that rent-seeking happens and that you believe the purpose of the system is maximum welfare, you admit it. The government is breaking up rent-seeking behavior. It's a clumsy but necessary process where merit and fuzzy notions of social justice interact and often oppose each other. It's also a form of institutional competition creating this situation - the government not wanting other institutions to mess with its turf while showing its legitimacy - but it works to do the most basic necessary thing, which is force opportunists to back off and play by the consumerist rules they establish. Those rules aren't perfect, but if you think rent-seeking would happen less without a pro-active government, then you've been drinking the Kool-Aid, and forgotten about things like, you know, the entire Gilded Age. Progressives have been saying this for years.

Theoretically, monopoly operating should be incredibly difficult, because people won't stand for it. Substitutes are created, consumers get put off by price manipulation, whatever. And that may be, to some extent, true, but monopolies have existed. They weren't always in cahoots with the government. Rockefeller's genius did not require that particular form of corruption.

From one perspective, the story of civilization is the story of rent-seeking: again, the state is known for having a monopoly on violence. Such was the development of superior force laying down its market power. This monopoly didn't entirely stop violence from happening, of course, and plenty of people think that it took violence and projected it outwards, against other states, which is certainly true. I hope we never become a one world government, but admit it: the stability that made civilized relations between people consistently reasonable to expect is the product of having empowered people creating consequences for uncivilized behavior. Stability results from inequality, and the tools - namely religion and family obligation - used to legitimize it. All those anarcho-whatevers praying for greater equality and the destruction of the state, wanting market utopias, they don't want maximum possible welfare. This species doesn't work that way; it's not possible. They're pursuing chaos, and that's just... wasteful.

The Need for Structure

Obviously, I think that government anti-monopoly action increases consumer welfare, but I still side with libertarians. The idea of rent-seeking, with how it falls into the Judeo-Christian line of moral thought, supports a certain continued loathing for corporations that hold market power. This promotes government intervention against businesses that hold that power.

But what if we made the perfectly rational decision that it's worth some reduction in consumer welfare for the stability provided by corporations with market power? Union men, who benefit from working for a successful corporation, should understand this line of thinking; the boss might not automatically give you a raise if he's making windfall profits, but he probably won't fire you, either.

I, for one, would be interested to see what would have happened if corporations became as empowered as feasible, as social institutions. I only want to see the state dis-empowered so that some new aristocracy can take its place. If that aristocracy was a true corporate aristocracy, would it be so bad? Forget the sad, ass-kissing modern corporation as an example of what that would be like; if corporations owned huge amounts of land, if they ran their own education, if those in charge saw themselves as true social leaders with responsibilities and not "service providers", and could try to establish truly stable power, how bad would it be? Western society, I will remind you, got very far with family-based aristocratic landowners working with the Catholic church. With institutional power being distributed by ownership of stock, and some minimal government power left just to assure a baseline freedom of movement and universal checks on violence, would a corporate society be so bad? As it stands, business ostensibly exists so consumers can make as many choices as possible, which works poorly when consumers are so lethargic about using this power constructively. Maybe a nation with a few dozen strong corporate institutions with arrangements among one another - similar to Japan's keiretsu system - would establish some more concrete set of privileges and responsibilities and work better, allowing for corporations to have enough power to be held legitimately accountable. Structure requires power to be stable, to draw commitments from people.

I don't side with libertarians because I want a more consumerist world. I don't. I side with libertarians because big business could theoretically gain enough power to become more than business, if it plays its cards right, and I want good businesses to have the opportunity to try. Same with families and religions, with any number of possible hybrids. I want the structural market to be allowed to evolve into something other than the hyper-individualism of the modern world, which requires government to stop subsidizing that hyper-individualism. People care about community and ideals when they need them.

Monopolistic behavior is impossible over the long run? That's only true if you define the long run as very, very long. All institutions fall in the long run. The house of Hapsburg fell over the long run. But in the more moderate long run, corporations could have become ridiculously powerful, and some may have matured into reasonably secure institutions for their employees that used their market power for social good, at least in a parochial sense. Certainly they would have tried to create stability and satisfaction, as opposed to modern democratic leanings that love finding something new to hate about its institutions and authorities now. Maybe corporations could have become "the nations of the world today", and that state of affairs might be preferable to the modern, geographically-divided one. Who knows? We don't, because we're evidently so afraid of pain that we don't even think about experimenting. Some freedom-loving people we are.

It seems nice with only minimal imagination, but the vision of a world without market power is one of a roiling cauldron of business, rising and falling constantly, spending just enough time outside of the state of perfect competition to create disparities that let investors know where the opportunities are. That's the vision of perfection offered by a world without rent-seeking. It would never be stable. All institutions would exist for the consumer's service only, and be perpetually bound by intense competition from having even the power to reward themselves with inspired folly and expansion; it would choke large-scale innovation badly to pursue this. And for employees, if you ban rent-seeking from employment, then you would be banning much of what makes the labor market function. Without the market power of scarcity behind their labor, the most difficult professions would have a very hard time finding new blood to invest themselves into the rigors of extreme dedication necessary to be truly good at tough jobs. Maybe the fantasy really is that of Marx' labor theory of value: cut down the exploitative power until everything is truly cheap.

So maybe we should take a more balanced view on our economic ideals. Maybe market power, or simply power, is the incentive behind everything. Maybe seeking enough inequality to be able to think you accomplished something gives us more of our motivation than we think it does. Maybe our attempts to be a unique person are attempts to hold market power and do some rent-seeking; we're interesting because it benefits us in the marketplace of personalities to be interesting. How much of our constructive behavior comes from wanting to be valued by others, and valued unequally? And while I take issue with much of Western moral sentiment, that we even have similar enough morals and expectations that we can get along and relate to each other can be traced back to religion and powerful people, using their power to encourage a shared morality, increasing cooperation among their subjects and empowering themselves through the efficiency gains. In the marketplace of ideas, Judeo-Christian ideas won; too bad those ideas so often hate their own power. I think this through, and after I dismiss the spoiled utopianism and trade it in for appreciation, the conclusion seems obvious:

Thank God for rent-seeking!

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