Against Rent-Seeking

A confusing term for a common phenomenon

Definitions

Rent

The word rent, in common parlance, refers to paying someone to temporarily make use of something they own. If I rent an apartment, I’m paying the person/corporation who owns it for the right to live there. If I rent a car, I’m paying the person/corporation who owns it for the right to use said car. And so on.

Economic Rent

Economic rent, on the other hand, means something else entirely, which is honestly poor word choice and blatantly confusing, but it’s the vocabulary we have.

Here’s Merriam-Webster’s definition for economic rent:

the return for the use of a factor in excess of the minimum required to bring forth its service

Which is not super helpful.

Wikipedia is much more useful:

In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the moral economy of neoclassical economics, assuming the market is natural, and does not come about by state and social contrivance, economic rent includes income gained by labor or state beneficiaries or other "contrived" exclusivity, such as labor guilds and unofficial corruption.

In my own words, economic rent is the price you pay to access things that have been restricted/monopolized by other people.

Rent-Seeking

Wikipedia again:

Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.^[1] Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, stifled competition, reduced wealth creation, lost government revenue, heightened income inequality,^[2][3] risk of growing corruption and cronyism, decreased public trust in institutions, and potential national decline.

Successful capture of regulatory agencies (if any) to gain a coercive monopoly can result in advantages for rent-seekers in a market while imposing disadvantages on their uncorrupt competitors. This is one of many possible forms of rent-seeking behavior.

Put generally, rent-seeking behavior is when a person or organization tries to get rich, not by creating something that people value, but by using the law to deny people access to resources through any other source than them.

I like to use the metaphor of a troll that guards a bridge. The troll didn’t build the bridge, doesn’t maintain the bridge, and is otherwise utterly undeserving of any portion of the wealth flowing across the bridge. And yet, because the troll has claimed the bridge, it must be paid, lest it club you over the head. The troll is rent-seeking.

Real World Cases

Rent-seeking happens all the time in real life, and we’re all vaguely aware of it. Whenever someone talks about regulatory capture or monopolies, whenever you look at how expensive housing or healthcare is, whenever a company throws around its intellectual property (IP) - you’re looking at rent-seeking.

Land - The Big One

Land speculation is one of the most egregious cases of rent-seeking in existence. To speculate on land means to buy a plot of land, not to use it for anything productive like a business or housing, but simply to hold it until the price goes up, at which point you sell it for a profit.

Why does the price of a piece of land go up, when the land itself isn’t being used productively? Because the piece of land is located near other pieces of land that people want to be close to. A good example of this is how houses are more expensive in districts known for having good schools. More people want their kids going to these good schools, so demand for the land is high, and since there’s a limited number of houses, supply is limited. High demand and limited supply makes for high prices.

From Investopedia:

The position and location of the land can have a direct influence on its value. For example, a remote parcel of land may have limited value because it does not have access to amenities, utilities, transportation or other resources that could make the property useful. The value of the land might increase if the property is located near a popular destination such as a city, entertainment venue, or services that are in demand.

Land speculators don’t produce anything. They don’t contribute to the economy. In fact, their refusal to develop the land they own leads to urban blight and high housing costs for everyone else. It’s a purely extractive practice, monopolizing the value that other people have created by exploiting how land ownership and taxation works. It’s the quintessential form of rent-seeking.

Intellectual Property

Intellectual Property (IP) is the government’s way of incentivizing people to share their discoveries and inventions with the world. While there are different kinds of IP, including copyrights, trademarks, and patents, the general idea is that, in return for making the IP public knowledge, the government gives you exclusive rights to monetize that IP for a set amount of time. Without this right, IP could simply be copied or stolen by anyone, which means that it’d be incredibly difficult to profit off of making new IP, which means that few would make new IP, and we would all be impoverished. Or so the logic goes.

This can work okay under reasonable circumstances, but problems come when try to game the system. Instead of making new IP that will eventually wind up in the public domain, they lobby to extend the protections on their existing IP, which benefits no one but themselves. Disney is the poster company for this behavior:

For decades, whenever Mickey Mouse would have entered the public domain, Disney successfully lobbied for copyright extensions, enabling Disney to continue rent-seeking with its intellectual property.

Another practice that has become common is patent trolling, where a company buys patents and then threatens lawsuits against other companies, forcing them to pay licensing fees rather than fight a protracted legal battle. The patent troll didn’t invent anything, doesn’t sell anything - they make money by threatening others with the law, exactly like a troll on a bridge threatening travelers with its club.

Occupational Licensing/Guilds/Unions

Let’s start off with the obvious: not all occupational licensing is bad. As discussed below in The Good, doctors, lawyers, and engineers all practice professions that should be gate-kept to some degree.

Likewise, guilds and unions do serve some kind of function. Guilds can serve as guarantors for the quality of the products/services of their members, while unions can serve as a check against corporate power run amok.

That being said, all of these things tend to result in rent-seeking.

Take doctors, for instance. While it isn’t controversial that one should have to be rigorously trained to be a doctor and have a license to do so, that training and those licenses are controlled by a cartel of doctors called the American Medical Association (AMA). The AMA artificially restricts the supply of doctors via lobbying in order to maintain high salaries; they justify this by saying that a doctor’s salary must be high enough to pay back massive medical school debt, but medical school is only so expensive because, among other factors, how much doctors are paid.

Guilds, by restricting entry into an industry, restrict competition and can thus collaborate to set prices. This is shown in whimsical detail in the recent Wonka film, where the existing chocolatiers attempt to prevent Willy Wonka from selling chocolate. Notably, they don’t use marketing or advertising or making a better product to keep Wonka out of the business - instead they set the police on Wonka. They’re using the law to enforce their monopoly power. This allows them to get rich selling subpar, watered-down chocolate.

Unions are the mirror image of guilds. While guilds use the monopoly power of being the only businesses legally allowed to sell a product, unions use the monopoly power of being the only people legally allowed to sell their labor. If a union won’t sell their labor and the law protects them, they get to make demands that benefit them at the expense of everyone else. American dockworkers’ resistance to automation of the ports is a recent example of this. A good summary of how unions exercise monopoly power can be found here.

Counterarguments

Some of the above examples of rent-seeking can have some good results. IP is meant to encourage investment, and it does, to an extent. Drug discovery and testing is famously expensive, and the patents on those drugs that allow the pharmaceutical companies to make billions of dollars serve as incentive for that investment, which results in new drugs coming to market that make people healthier.

There are plenty of occupations that should have barriers to entry - doctors, lawyers, and engineers among them - because the consequences to mistakes in those fields can be so disastrous, and an average person’s ability to judge the work of a professional so poor, that keeping the occupational licensing justifies the downsides. And unions were, at one point in time, a counterbalance to corporate interests run amok.

In each of these cases, though, the rent-seeking behavior is justified, not because it isn’t bad or negative or a drain on the economy, but because the associated upside is worth the cost. And even then, our society has done little in the way of experimentation to determine if there’s a better way to get the upside without the downside.

For instance, could drug discovery be funded through prizes instead of patents? Or perhaps patents could be bought out by governments, after the safety and efficacy of the patented drug has been proven?

Could occupational licensing be better addressed through databases and review/ranking engines, rather than exams and state certifications?

And so on.

Conclusion

Rent-seeking is, in my opinion, the core of the true and righteous complaints that people have about capitalism. For all the good that capitalism does - and it does a hell of a lot - many people who complain about it are right that there are people who aren’t contributing, and yet are capturing value and getting rich nonetheless.

These people are the rent-seekers.