How many of you have heard of the term “Rent Seeking”? And no, I’m not talking about the awkward conversation you have at your front door on the 1st of every month. I’m talking about the very common practice of obtaining wealth by interfering with or manipulating a market rather than through the creation of new wealth.
In market economics, we accept the premise that trade or exchange can create more wealth than previously existed. To simplify, let’s create some imaginary characters: Jesus, a carpenter, and Deng Xiaoping, City Wok owner and chef.
Let’s say Jesus makes some awesome tables out of oak. Deng perfects his General Gau’s Chicken recipe, creating a product both tastier and less prone to Montezuma’s Revenge (Unrelated to Montezuma’s Food Truck, which will be featured in part 36 of this series) .
A table is nice, but you probably want something to put on top or else’s it’s useless. And Gau is tasty, but cumbersome and dangerous when eaten on an uneven surface. Let’s say after some honest competition on the free market, Jesus and Deng agree to trade 30 bushels of Gau for every single table Jesus makes from the supply of oak tree being grown on the community commons of his town.
Next thing you know, Deng has tables for his growing chain of restaurants and Jesus can now pay his 12 lumberjack employees in General Gau’s Chicken. Sometimes the market will fluctuate and perhaps the trade off for each item will change over time, but either way, we have now generated new wealth and capital. And perhaps Deng may need chairs instead of tables, and Jesus wants money instead of Gau due to the rising costs of healthcare of his employees (they unionized). In addition to greater wealth, we now have innovation, diversification and experimentation in our economy.
Simple? Maybe. Racist? Of course! But now, we have two individuals engaged in a voluntary association in which they’ve created more wealth, both for themselves and for the whole of the common good.
Now, let’s say there’s another imaginary character. We’ll call him, oh I don’t know, Grand Moff Tarkin.
Tarkin, in addition to being the man who gave the order to obliterate Alderaan, also happens to own a number of large factories and businesses that produce tables. They break, they’re made from synthetic, faux-wood materials and currently the only competitor in the market.
Jesus’s tables are longer lasting, sturdy and made from pure oak. Tarkin’s market share decreases, and so do his profits. The job market maybe hiccups during the transition, but ultimately the jobs created by Jesus offset the jobs lost by Tarkin as there has been no change in demand as a result of the competition. Some people will always opt for cheap and easy, but many people will prefer sturdy and more expensive. The market has voted.
Grand Moff Tarkin has two choices: He can attempt to change his product, restructure the business, accept profit loss or leave the business and sell. In short, competition or failure.
More likely, Tarkin will opt for a second option: Rent seeking. Altering the rules or manipulating the market to acquire greater wealth without actually creating new wealth as per the theory behind market economics.
Depending on how vile he is, he can do all sorts of things. He can lobby congress to lower corporate tax rates while small businesses continue on the same tax rate. He can lobby to have the oak forest privatized entirely and proceed to raise the price, effectively raising market prices and pushing Jesus out of business.
Or, if he’s really crafty, he can release a chemical to degrade the health of the oak trees, causing rot and death. This would also increase the price of oak on the market.
My ridiculous example is just a single scenario to demonstrate a practice that has always gone on since the dawn of trade. However, we live in a time where the social contract in which we tolerate a certain amount of corruption in exchange for a stable economy has been broken. In fact, it’s been breaking down for decades with the current financial crisis as the biggest warning sign yet. The market is supposed to be stable and efficient. Rent seeking de-stablizes and destroys capital.
I don’t need to go into every single example of rent seeking, because it happens everyday. When corporations send 28 lobbyists per congressman to Washington, government policy becomes rent seeking.
When banks illegally foreclose on thousands of homes and under the assumption that poor people can’t afford a long legal battle, we have rent seeking.
When most major corporations fund the election campaigns of hundreds of politicians from both major paries, that is most certainly rent seeking.
So I’m just going to cut to the chase here: Electoral politics won’t stop the practice of rent seeking. Elected officials can make mild concessions to keep people from tearing shit up, but they won’t take action until we take action.