3 Dec 2014

Rent seeking really just means legalized theft

JW Writes:

"For the past eight weeks I taught a “Life-Long Learners” class on economic topics. The class name was, “Rent Seeking and other Economic Concepts”. The motivation for teaching the class occurred when I was in another class. One of the class members mentioned Joseph Stiglitz’ book, The Price of Inequality. He asked if anyone in the class knew what Stilitz meant by “rent seeking”. No one else in the class of about 40 knew. So the person who read the book; had enjoyed it; and thought the book was important; even though he did not understand a key concept presented. I set out to change that.

The working title I used in developing ideas for the class was, “Economic Principles you Won’t Learn on the Evening News”. (I don’t have high regard for the way mainstream media covers economic topics.) During the class we covered a variety of topics, both fundamental, and more complex, subtle, or counter intuitive. I also introduced the ideas of several historical economists. During introductions I learned class members could name only Paul Krugman and Thomas Piketty as economists, and that several class members thought that Thomas Friedman and David Brooks were economists.

I based the curriculum on topics that I think are interesting. The first class topic was rent seeking. Wikipedia does a good job defining the term. Rent seeking is the spending of resources on social or political lobbying to increase one’s share of existing wealth without creating any new wealth. The concept was developed by Gordon Tullock in 1967 in a paper titled, “The Welfare Costs of Monopolies, Tariffs, and Theft”. (Note: Tullock died November 3, 2014.) Anne Krueger coined the term, “rent seeking” in her 1974 article “The Political Economy of the Rent-Seeking Society”.

"Rent" is a bit of an archaic term and dates back to Adam Smith who divided incomes into profit, wages, and rent. Rent is generally associated with income from land, but rent can be collected on any property controlled by an individual or organization.

Many economists, including Stiglitz and Piketty, believe that rent seeking increases economic inequality and decreases economic efficiency, and I agree with them. What's strange is that so many people think that these problems can be exposed and addressed by mainstream media and government, respectively, when it's clear that these channels are controlled by the rich and powerful. Their faith in those tools turns out to be misplaced as well as self-destructive, since they are often used to influence policies, laws, and regulations that favor the rich. This is a excellent (but sad) example of the law of unintended consequences at work.

Rent seeking has been practiced for thousands of years, and rent seeking behavior can be observed more easily when one looks from a particular angle. As an example, consider The Copyright Term Extension Act of 1998, also known as the Mickey Mouse Protection Act. Copyrights are granted to encourage authors to produce original material by granting them a limited time monopoly on their intellectual property. Under this act, the works of Walt Disney (the man) written after 1923 were granted an extended term of protection (until 2019 for works created in 1923). Walt Disney died in 1966 so I have struggled to understand how the retroactive extension of the copyright protections incentivized him further or benefitted society. Another explanation -- that the Act was designed to protect Disney's profits -- seems to make more sense.

Bottom Line: Just because someone makes a claim or assertion does not make it true, and does not obligate society to grant unearned compensation.

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