Great Problems: The Rent-seeking Economy

In a healthy society, people acquire wealth by making stuff people want. Farmers till plots to provide for their nutritional wants. Workers assemble motorcycles for consumers who pay money because they find the motor bikes valuable. Perhaps the worker serves a philanthropic organization and earns a salary by serving the official goal of the organization. Or perhaps the worker earns money by creating crafts that others in the community value.

A society structured as the above has two great benefits. First, incentives are aligned to produce more output. A person can only acquire wealth by producing wealth. Thus the production of wealth is encouraged, as man’s natural greed is channeled towards productive ends. Second, humans are innately goal seeking creatures. It makes us fundamentally happy to strive towards a goal – whether that goal be winning a football game, learning a new song on the piano, leveling up in Warcraft, or producing a product that people want.

In a dysfunctional society, people acquire wealth via corruption, rent-seeking, and theft. Perhaps they steal it at the point of a sword. Perhaps they acquire wealth through outright corruption. Perhaps they acquire wealth through holding a position in a completely dysfunctional management structure that requires internal politicking and Kabuki make work rather than actual performance.

As Adam Smith wrote, “there is a great deal of ruin in a nation” Corruption has always existed in America. But in the past decades it seems as if the dominant paradigm has shifted, so now more and more income comes via dysfunctional rent-seeking rather the net creation of new wealth. 1

A most severe case of a rent-seeking economy was described by the historian Rostovtvzeff, who wrote of the late Roman empire:

The reforms of Diocletian and Constantine, by implementing a policy of systematic spoliation to the profit of the State, made all productive activity impossible. The reason is, not that there were no more large fortunes: on the contrary, their build-up was made easier. But the foundation of their build-up was now no longer creative energy, or the discovery and bring into use the new sources of wealth, or the improvement and development of husbandry, industry and commerce. It was, on the contrary, the cunning exploitation of a privileged position in the State, used to despoil people and State alike. The officials, great and small, got rich by way of fraud and corruption.

The problem in America is not quite this bad – yet. But it is bad, and getting worse.

The “rent-seeking” economy has several variations:

Rent-Seeking Variation #1: Groups and individuals exploit a dysfunctional political system to get insanely rich.

Exhibit A is Wall St’s strategy of developing “financial innovations” that produce immense profits in the short term by creating systematic risk in the longer term. When the long term arrives and the systemic threat blows up, the government bails out the banks and the firms survive to play again in the next cycle.

Wall St. abounds with other examples. If the political-economic structure was rebuilt according to Finbarrian guidelines, I suspect that the financial sector would be under 5% of GDP, rather than approaching 20% of GDP.

Wall Street hedge funds rarely make their fortunes by placing sound long term bets about the proper allocation of resources. In reality, they make money by skimming off the top as trillions of dollars slosh around due to the endemic instability in the financial system (instability that would be fixed with sensible reform). In a well ordered financial system, the stock market would be flat and predictable 2. Interest rates would never change, housing, equities and bonds would trade at unchanging ratios based on long term cash flow predictions. The only way to make money would be to actually predict the performance of particular companies. There would be no IPO “bounce”, no stock bubbles, no real estate bubbles. 401Ks would be invested in low expense ratio, future cash-flow weighted index funds, not in market cap weighted funds. The era of being forced to invest in a Fidelity plan with a 1% expense ratio that churns 150% of its stocks each year would be over.

High Frequency Traders make money not by adding liquidity or playing market maker (in fact they remove liquidity), but by gaming design flaws in the SEC regulated stock market (essentially they get to peek into the order book and front run the market, a sensible black box auction system would remove this source of gamesmanship). 3

Beyond Wall St. there are thousands of more run-of-the-mill cases of corruption. Washington D.C. is one of the wealthiest metropolitan areas in the country due to number the government contractors, lobbyists, and consultants finding ways to get a piece of the government pie.

A more petty example of corrupt riches is the wealth of professionals who are protected from competition by licensing laws. I am not opposed to some sort of occupational licensing. But standards should be set to reflect actual job requirements, not to create artificial barriers to entry. Professions such as podiatrists or orthodontists have hard caps on how many people can enter their profession each year. Only 280 orthodontists may graduate a year. The supply limitation allows them to earn 50% more than dentists ($350k for a 35 hour work week). The number of medical school seats in the U.S. remained flat from 1980 to 2006, despite a 37% increase in the population. The artificial supply constraints allow doctors to extort high wages from middle class Americans.

Variation #2: Bureaucracies and pseudo-bureaucracies (grant funded NGO’s, subsidized university system) that thrive not in proportion to meeting their stated goals of working for the public benefit, but due to politicking, unionized voting blocks, or – in the worst cases – actually creating problems and thus needing more funding in order to fix the crisis.

Typical government workers do not earn exorbitant wages, so it may seem unseemly to target them for criticism. But the income they do earn is rarely linked to producing stuff people want. For example, teachers do not earn money based on how well they inspire and educate children. Their aggregate salaries are determined based on the political clout of the unions, and individual salaries are based purely on seniority.

A professor at an architecture school or law school does not earn a six figure salary due to providing such superior mentoring and teaching. They earn their money because they are the legal gate keepers to entering licensed occupations.

Police officers who earn time and a half overtime for drinking coffee at construction sites, do not earn six figures salaries for providing such valuable traffic management skills. They earn their salaries because the police unions lobbied for laws mandating their employment.

Variation #3: Corporations with dysfunctional management structures that maintain their position only through economic rents, monopoly, or cozy relations with government, and thus have no discipline in working to create products that people want, but rather direct all effort towards internal politicking.

The rise of the mega-federal-state resulted in a dramatic increase in the size of corporations. It is always easier for a huge top down government in Washington D.C. to interact with and regulate a few corporations rather than hundreds of corporations. Economies of scale are generally greatly overrated, but one area where economies of scales really exist is in government lobbying – bigger corporations can afford lobbyists to write the laws that serve their interests.

If you look at the origin of most mega-corporations, you will see a link with government. IBM hit it big when it won the original contract for providing the counting machines that processed FDR’s new Social Security program. General Motors, Boeing, Honeywell, and Anheuser-Busch all leapt past competitors thanks to World War II contracts. Chase and Bank of America have grown massive due to too-big-to-fail policies. Citigroup has been bailed out multiple times over its 175 year history, and grows bigger each time. Fidelity and State St. grow huge managing government pensions and from exploiting 401k regulations. TV broadcast companies and telecoms gained a market oligopoly due to the methods of auctioning off spectrum rights.

The U.S. government appointed several ‘Nationally Recognized Credit Rating Organizations’. These three main agencies for many years dictated top-down control on the price of capital for American businesses. Naturally, big corporations are highly favored. If you are Starbucks, you get extremely cheap credit. Note also that thanks to government control of the interest rate, the interest rate has generally been lower than the rate of monetary inflation. Thus these favored, highly rated corporations essentially get free money. Starbucks uses that cheap credit to buy up the choice real estate. It’s coffee sucks, but that doesn’t matter, few local operators can out bid subsidized Starbucks for a hot corner location.

Not every inefficient-mega-corporation owes its dominance solely to federal assistance. There is such a thing as natural monopoly – cable TV is an example. Barriers to entry are so high that in most cities little market competition exists. I live in the Comcast Imperium. The prices keep rising, the customer service is notoriously awful, and broadband speeds remain behind other developed countries.

Credit cards are another natural oligopoly due to network effects – you need to use the credit card that stores accept, stores need to use the credit card that everyone has. As a result, Visa and Mastercard get to exact a 1-2% tax on transactions across the country.

Ever wonder why glasses at Lenscrafter costs $300? Luxotica owns every single major brand – and has purchased many of the chain lens stores. This gives it enormous power to set prices. If a local store sells discount frames, Luxotica will threaten to pull all of its products from the store, ruining the shop.

My region has among the highest medical costs in the world. One reason is because the major hospitals banded together for the purposes of price collusion. When insurers refused to give into the hospitals demands for increased reimbursements, the hospitals dropped the insurer. Enrollees rebelled, the bargaining power of the combined hospital network was too great, and the insurers had to give in.

These oligopolistic mega-corporations present an enormous problem. They make money not primarily from producing awesome products, but rather by manipulating regulatory procedures, long standing relationships, and rent-seeking. As a result, there is a lack of internal pressure focusing the organization on producing great products. Instead the main activity of people in the organization is towards personal enrichment and empire building. Furthermore, these organizations are fundamentally too large for effective management. The end game is a nation of Dilberts.

Variation #4: Productive enterprises are blocked and stymied by misguided regulation.

For centuries the price of energy dropped. Inventors developed ways to replace wood with coal, whale oil with crude oil. But since 1970 this progression has stopped. The natural successor energy source – nuclear – has been halted. Nuclear power has dangers, but the fear of these problems was so great that development in solving safety problems was basically halted 4.

Much debate has spewed forth about the fact that rises in the costs of living have nearly outstripped the rise in median income. One reason for this great stagnation, is that cheap products have been outlawed forcing people to buy expensive products. The Chevrolet Spark costs around $7,000 U.S. dollars new in Chile, but it’s not street legal at that price and specifications in the U.S.

Want to open a cheap walk in health clinic? You can’t fight city hall. Want to open up a doctor owned specialty clinics where you can perform cheaper surgery in a safe environment? The big hospitals will gang up to shut you down. Want to start a doctor run health network? The insurance companies will lobby to ban you. Want to start an insurance company that offers lower premiums because it takes advantage of scientific evidence to only cover treatments that look promising? Tough cookies – regulations explicitly state what you have to cover.

Want to start an architectural grad school that costs $5k a year instead of $40k? You’ll never get accredited. Look at the accreditation standards, notice how many of the standards are subjective matters of having enough resources and qualified faculty (aka Ph-D’s). Then notice that the people doing the accreditation are backed by the power of the existing architectural schools. A true low cost competitor has zero chance of gaining accreditation.

The growing problem of trivial patents and patent trolls further stymies productive enterprises. Innumerable Patents are granted for trivial technology, thus resulting in any other firm discovering the same technique having to either stop its innovations or lawyer up.

Variation #5: Seville Disease has wiped out the manufacturing base

The American manufacturing base was once the envy of the world. Cities from San Jose to Detroit, from St. Louis to New Haven, hummed with the work of clock makers, furniture crafters, car makers, and chip fabricators. Now hundreds of thousands of factories have folded. The blight first hit makers of toys and trinkets. But now production of high tech goods such as circuit boards, memory chips, and LCD displays have packed up and gone over seas. My dad worked at Bell Labs for three decades designing telecommunications equipment. As he winded down his last few years, he trained a Chinese team to take his place, rather than training Americans.

A recent Forbes article states:

The U.S. has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the U.S., even if Amazon wanted to:

* The flex circuit connectors are made in China because the US supplier base migrated to Asia.
* The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.
* The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.
* The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.
* The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia.
* The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.

America’s problem is the same problem that afflicted the 16th century Spain. When America established its hegemony and set up the world currency system, her leaders installed the U.S. dollar as the reserve currency for the world. America took advantage of this position to export dollars and import goods, rather than to manufacture goods herself. With demand for the dollar as reserve currency pushing up the price of the dollar, local manufacturers lost their ability to compete. Furthermore, China in the past decades has enacted an overt policy of keeping its currency undervalued to encourage exports. This is a violation of trade agreements and should enable the U.S. to take counter measures. But the political leadership has been asleep at the wheel.

Thus instead of Americans earning money via creating manufactured goods that people want, the American government prints money, gives the money to politically favored corporations, bureaucrats, and workers, who then export the dollars in return for cheap HDTV’s. 5

Variation #6: The Internet Monopoly Gold Rush

Every day, tens of millions of people log into Facebook and derive pleasure from stalking crushes, commenting on photos, organizing events, and posting funny status messages. The enablement of this pleasure requires the work of hundreds of thousands of people. There are the engineers that designed the chips in the home computer, the technicians maintaining network switches that route the internet, the open source hackers that wrote the operating system that Facebook runs on, the assemblers in China who put together the server boxes and laptops needed to run Facebook, the laborers who laid the fiber wire for the internet backbone.

The labor of all of these was required to make the pleasure of Facebook happen. The vast majority of the people involved make a normal, decent working wage. Some – particularly the factory assemblers – make a less than decent wage. One person – Mark Zuckerberg – has made a sum equivalent to the yearly wages of 400,000 Americans.

Why did Mark Zuckerberg make so much compared to everyone else? He does not personally write the code of 400,000 others, or personally design operating systems and build servers. If he retired tomorrow, Facebook would still function normally. He he never existed, some other social network would surely reign supreme instead.

Mark Zuckerberg is rich because he was able to capture ownership a natural monopoly opportunity.

Linus and the other contributors to Linux created an enormous amount of utility by creating Linux. But they did not capture this value because they open sourced it – all the value ended up as consumer surplus.

My dad was an ordinary electrical engineer at Bell Labs who helped design the routers and multiplexers which made the early internet possible. He never got rich because a) he had little bargaining power so he only got an employees salary and not a share of profits b) by the time he did get stock options there was fierce competition in the space and profits went to zero.

The assemblers in China makes so little because they must compete with hundreds of millions of other potential workers who can easily replace them. They have no monopoly, no bargaining power.

In the early 2000’s, the advancement of technology and the internet created an opportunity for a large scale, online, social network. This opportunity was a natural monopoly due to both the network effects involved and due to the natural returns to scale of software 6. The market opportunity existed outside the brain of any one person. The opportunity existed like the precence of a river and the invention of turbines creates a market opportunity for an electic dam, or the existence of a mountain and the invention of TNT creates an opportunity for a railway tunnel. Even more fortuitously for Zuckerberg, this market opportunity could be captured with very little up front capital outlay. All it took was to be among the fastest and the best. Thus Zuckerberg wrote the first version himself, and was able to capture a critical mass of users without giving up significant ownership.

When Zuckerberg captured the social network, he became the toll taker over a large swath of the internet. Many things are required to get the pleasure of sharing photos with friends, but Zuckerberg owns the one point which is a natural monopoly, and thus can earn enormous rents.

Now credit must be given where credit is due – Zuckerberg captured this natural monopoly because he outplayed the other competitors. While MySpace and Friendster crashed under load, Facebook scaled remarkably well. The product was solid with good enough design and well managed.

So what is the problem?

Problem number one is that thanks to mechanization, the bargaining power of ordinary labor has fallen. More and more income is being captured by those who hold rent-seeking positions – such as possessing a scarce skill, joining a guild, or capturing a natural monopoly. From a utilitarian standpoint this is undesirable as the median person faces more financial stress and a stagnant income. (See also my essay on economic classes )

Problem number two is that the economic system does not create incentives to produce the products or technology that generate the most utility. The economic system produces the incentive to create products where the entrepreneur can capture as much of the consumer surplus/utility created as possible. Even better is if the entrepreneur can create a monopoly platform where the entrepreneur can take a toll on the value created by others (see for example Google and Facebook). The best and brightest are pulled into creating social networks, games, and socially enabled fantasy football. Much less incentive exists to develop risky, ground breaking technologies, because in those situations there is a low probability that the initial ground breakers will capture the value of any ultimate success.

As a startup entrepreneur I include myself in this category, I create software sold to marketing folk, if my software did not exist, little meaningful utility to the world would be lost. Yet I make three or four times as much money as my roommates who work in research labs trying to cure breast cancer and stop aging. 7

Variation #7: The Marketing and Sales Treadmill

In the modern world, natural resources are the limiting factor of production. It takes only a tiny percentage of the population to farm the arable land, mine iron ore, cut down and process the timber, and extract the oil. A somewhat larger percent converts those resources into the necessities of life – bread, vehicles, homes, roads, bridges, clothing, furniture, stocked grocery aisles, appliances, etc. The worker entering the economy has a problem. They must find a source of income so they can access resources and manufactured goods. But there are no unexploited resources and no surplus jobs to be had processing those resources. They need a job, but their labor is surplus and unnecessary.

What is this worker to do? One possibility is that he starts creating luxuries. He might design iphones, code for Facebook, open a yuppie coffeeshop, start a hand carved furniture business, or brew craft beer.

A second possibility is that he manages to finagle his way into one of the rent-seeking cartels or guilds, as mentioned above.

But perhaps the most common path is that our prospective worker enters the sales and marketing business. It is quite astounding the portion of the economy dedicated to sales and marketing. Even engineering focused companies like Facebook have more sales people than engineers. The basic problem is that there is a surplus of basic goods in the world, but each person still needs some money to get access to those goods. So everyone’s energy is focused on imagining some gimmick – a six bladed razor, a beer can that turns blue when its cold, a funny talking gecko – that gives someone a reason to give you money when there is no real differentiation based on product value.

The sales and marketing economy is zero sum. Each business must work harder and harder at new tag lines, gizmos, tricks, and jingles. And when sales guys at the other company work harder, you must work harder too.

Past writers who imagined the future thought that as machines saved our time, we would have more time for leisure. That has not happened. Instead, since no one is self-sufficient, we must work in sales and marketing to convince someone with money to trade cash for our trinket, so that we can have purchasing power to access the natural bounty of the land. Average work hours declined for a century – and then started curving back upwards as the everyone switched the zero sum battle of sales and marketing. The future is here, and it is the sales desk at Dunder Mifflin.


  1. Hat tip to the blogger formerly known as Half Sigma, now known as LotB for his theories of value transference. While his ideas are similiar to well known concepts in economics such as “rent-seeking” and “capturing of the consumer surplus”, Half Sigma extended value transference to more situations. For instance, he includes startup entrepreneurs capturing winner take all markets, executives capturing control of corporate bureaucracies, and marketers who succeed by creating goods that compete along startus hierarchies. I was initially skeptical that those examples constituted value transference, but I now think that they are at least partial value transference. For this essay, I have eschewed the word “value” because the word means different things to different people. Some people use it to mean “utility”, others use it to mean “price”, and others use it to mean some sort of ideal “fair price”. You then get in all sorts of fights between people using different definitions. Instead I’ll use the word utility for value. If you see the word “value” in the essay, take it to mean “utility”. 

  2. Individual stocks would still be very highly variable. But the variability would average out over 5,000 companies. The great swings in the stock market are caused by changes in monetary inflation and interest rates – a few percentage points change can dramatically affect the relative desirability of equities versus other investments. 

  3. See for instance this interview with a former high frequency trader. While some HFT’s can make money through the legitimate case of market making, most of their “risk free” money is made by variations of gaining an information advantage over the retail trader. Strategies include analyzing the ordering patterns of certain platforms and exploiting time differences between markets. But the most egregious tactic is blatant front running – making fake orders to gain information only to cancel them, for the sole purpose of discovering the reservation price of slower participants. A sane stock market would use black box acutions to create a fair playing field for all traders. At the very least the stock market should impose penalities for canceling orders. Instead the rules allowed the little guy to get fleeced. 

  4. In the wake of Fukushima, advocating for nuclear power is not the most popular of positions. But one must really think of the long term cost and benefits. Little is more important to quality of life than energy. Our food system is based on converting oil into food. Better cheaper energy can be used to desalinize sea water and irrigate the dessert. It can be used to run factories and water systems to raise standards of livings around the world. We are so paranoid about mistakes from nuclear power that we cut off all development. Over time, many of the dangers could have been greatly mitigated. For instance, could a Fukushima happen with the small Hyperion reactors that are buried deep in the ground? Unfortunately these reactors have been stymied for decades because of regulations preventing their development.  

  5. Technically the government prints treasury bills, but as I have pointed out before, this is really no different than printing money. 

  6. Software has very natural returns to scale, because all engineering costs and up front. The marginal cost of serving one more customer is very low. Thus the best software gets more customers, and more money for investment in engineering, making it even better, making it more popular, etc. The cycle ends up in monopoly or near-monopoly.  

  7. In defense, I am very good at creating marketing software and our company has been quite successful. As far as I can glean, my roommates have not made much progress in their noble pursuits. 

28 thoughts on “Great Problems: The Rent-seeking Economy

  1. The Network Effect is often praised because value increases for each user the more users are connected to a platform, but the problem is that it shifts rewards from being good to being merely big. This is the origin of the MS-DOS/Microsoft tragedy. It is also the origin of the Facebook tragedy. There are many other examples, probably the biggest tragedy of all being the Federal Reserve currency being the international reserve currency. It’s bad enough when you have something like the QWERTY (rather than the Dvorak) keyboard creating lock-in to a standard but at least when you have an open standard into which people are locked by the network effect, no one is becoming a Bill Gates or Carlos Slim. It’s when the network effect is turned into a business model that the really nasty effects on the society start working their dark magic.

    The solution is to stop taxing economic activity (capital gains, income, sales, value added, etc) and instead tax market-assessed liquid value of assets.

  2. The Curse of the Network Effect is obvious enough in real estate that there is an entire school of political economy geared toward a single tax on land value — a school most identified with the 19th century political economics author, Henry George.

    If you want economic evolution to select for the right characteristics, you don’t tax economic activities, you tax the market-assessed liquidation value of assets.

    The liquid value of an company can be considered the cash value invested in it since, as the liquid value, it can be exchanged for cash. The decision not to exchange it for cash is an act of investment or re-investment depending on one’s perspective. The liquid value of a company is calculated by taking its projected future profit stream, adjusting it for risk (which gets larger as you go into the future so the risk-adjusted profit stream trends toward zero with time) and then asking how bit of a loan you could pay off with that risk-adjusted profit stream at what modern portfolio theory calls the “risk free interest rate” which is basically the long term average of the return on short term government treasuries, like 3-month T-Notes.

    So now we have a basis from which to talk about “return on investment” because we have defined exactly what we mean by “investment”.

    With this mathematically correct definition of investment, it’s clear you should tax only the risk free return on “investment” aka “liquid value” — as that is what keeps network effect monopolies from getting huge profit streams that get bigger just because they are the biggest. For example Bill Gates had a network effect monopoly bootstrapped when IBM distributed MS-DOS on its PCs and made everyone dependent on paying Gates money or else they wouldn’t be able to run most of the software on the market — and software developers had to write software for MS-DOS because that was where the market was.

    • There are only two source of profit: risk-taking (entrepreneurial and financial) and rent-seeking. Only entrepreneurial risk-taking creates wealth. Even going to college to get education is a rent-seeking attempt (although it can fail due to mis-information).

      • Or to put it as Oppenheimer (Franz, not Robert) put it: there are two means – the economic means (satisfying demand through voluntary exchange) and the political (reliance on coercion – almost always abetted by the State).

  3. So, a rent seeks economy? This statement doesn’t make sense. A rent seeking economy… is that like a lost animal seeking shelter?

    • Would you have preferred “An economy dominated by rent-seeking actors” … although that does not scan quite so well, does it?

  4. “Chase and Bank of America have grown massive due to too big to fail policies”

    Dude, the hyphen: USE IT. They’ve grown massive because of too-big-to-fail policies.

    And I’m pretty sure the rent is not seeking economy; it’s a rent-seeking economy.

  5. I agree with you on most things, but I disagree that rent seeking by itself is bad as you state, in fact I believe it is part of the solution.

    Also denouncing the problems is just part of the work, you need to make something about it. Just saying :”The world should be perfect, everyone should hug and love each other” has no value in itself. YOU need to do something about it.

    You are the first to say that you want to work less on sales and marketing. The solution is rent seeking: write books, give conferences, and create apps that work. I personally know lots of people in marketing and sales that live a great life, not working too much, and earning money. Yes there is a reason for that: Some are pretty, some are handsome, and people love them and want to buy from them before they open their mouth.

    As you work for others, you are on their terms. There is nobody that forces you to do it. Really.

    I believed that(And when X[sales, engineering, managers...] guys at the other company work harder, you must work harder too) myself, some of my customers came to me shouting and telling me that I had to do things for them that were abusive, like working too much without resting. I used to believe that I could not say “no” to a customer as the good ones will hear from this person and I will lose them, I did not want this. One day a beautiful woman tell me the secret: “Go tell this person to b*ck herself, politely.” And what do I do if things go wrong and I lose my customers?, I said. “You change your job”, she said.

    So simple, but it worked flawlessly, not only I did not lose my good customers, but my bad ones refused to go away, they started respecting me!!! for having the guts to tell them to go f*ch their selves(politely).

    What this tells me is that you want to do something that you could do but you don’t have the guts to do it yourself, you want others to do it for you, so you are able to write such a long article about what “should be made”, “how world should be”, dreaming that your readers, society(or just someone else) will do it for you, instead of taking action and taking action on your live today(as you are so terrified on taking action).

    • Oh dear, I hope this essay did not come off as whining. I was intending to strike a tone of cutting yet detached analysis. I am quite happy with my situation as is. I do not expect anything to magically happen as a result of my writings. My goal is to help people understand the nature of the world, with the hope that having a better understanding of what is, will someday help with figuring out how to make improvements.

  6. Like the previous commenter I do believe that rent-seeking is in and of itself not always bad. The groups who seek to take advantage of their privileged positions (politicians, bankers, big corporates, unions, licensed professionals etc) were originally granted these privileges because they did in fact contribute to society. Politicians were meant to represent the people, bankers were meant to provide the financial lubricant to enable business and support the economy (as you point out the should be taking 5%, not 20%), corporates generate wealth, unions protected workers rights/conditions, licensing professionals was to ensure competence, tenuring professors was to ensure academic freedom and quality teaching etc. In reality, as long as the toll paid (not extorted) is low the benefits were worth it.

  7. You’ve left off the classical explanation of the role of finance: to equalise marginal returns to capital. That’s not “making” anything anybody wants but it does in theory increase wealth.

    • Yeah, that is the good part of finance that would exist should I be appointed czar. Maybe I should have made that more clear. Since this essay was about rent-seeking I did not mention the good parts of finance. But I think most of finance is not about routing capital to the most efficient ends, but rather it is about gaming the system.

  8. Asylum hostels in Europe are perfect rent seeking exercises…. literally!
    Money paid to private entrepreneurs who open hostel type buildings to deal with the overspill of asylum seekers!

    Goverment made the problem by legislation passed at EU level, or above….. then the asylum seekers arrive and Gov’t must adhere to their own policies to hosue these people.

    With a housing boom! You have few spare places to put the people….

    Cue private people to come in and rent-seek the heck out of the situation!

  9. When talking politics, such as tax laws, the only thing that matters are the rentiers: Those who can afford to invest their lives in political action because they live off the milk and honey of civilization’s protections of property rights (private) and against natural duel to the death as the appeal of last resort in dispute processing (public).

    Tax policy is in service of private sector rentiers: taxing economic activity (income, value added, sales, capital gains, etc.) rather than economic inactivity (net assets). Public sector rentiers don’t care who they get the money from just so long as they remain in control of its distribution. The deadly embrace of the public and private rentiers is accomplished by the private sector rentiers agreeing never to push a citizen’s dividend as the means of delivering social goods and the public sector rentiers agreeing never to push a net asset tax as replacement for productivity (activity) taxes.

  10. Coincidentally, I just jotted this thought down to myself yesterday…. The American people do not begrudge an entrepreneur the opportunity to reap large rewards, very large rewards, as profitable return on the investment of their own money, and for employing their vision, innovation and effort – provided that those efforts are directed at useful and productive industry, and earned fairly in competition, and without exploitation of labor or destruction of the environment.

    However, the situation we have now, is that the rewards have become very, very large.

    The larger issues though, is that the rest of the bargain has been avoided. There is precious little innovation or productive industry going on. What we have now is fortunes being made through:

    • Extreme exploitation of labor and destruction of the environment
    • Developing cronies in government to stifle competition, create captive markets, protect them from liability, and pass along subsidies and supports
    • Placing themselves as middle man in transactions and exchanges solely to extract rents from the flow
    • Raiding public assets and common wealth through privatization and government contracting
    • Earning of profits by the destruction of productive enterprises (a strategy only viable due to tax preferences, monetary subsidies, and lax regulation)
    • The production of obscenely inferior products supported largely by marketing tactics, arcane pricing schemes, and the like
    • Collusion with peers to restrict competition and inflate prices
    • The perpetration of scams and frauds on services and financial products
    • The breaking of promises, be they contractual with workers or in terms of services promised to customers

    There has always been a balance across this spectrum of ways to make money between rent-seeking and productivity. Our economy has tipped too far out of balance now, so that the parasitic behavior dominates economic activity, and the productive and innovative activity is very nearly extinct.

    On your point about “misguided regulation,” I would also there’s a lot of anti-competitive, anti-innovation regulation out there that was put in place quite deliberately to protect incumbent players from competition. There’s also of course our ridiculous patent and copyright system. When they start handing out retroactive extensions, you know the point of the thing has been lost.

  11. Rent-seeking is a quite legitimate activity when its purpose is the provision of real, unencumbered, money-good, unlevered capital. But when government corrupts and debauches the currency, when regulatory and tax impediments make real business risk-taking inadvisable, and when government favouritism and monopoly-granting destroy the pricing of risk, then it becomes little more than state-supported theft.

    Why don’t you attack the institution of government – which has a monopoly on the use of force abd could end this in a heartbeat, instead of merely its effects?

    • Re Kredit. There seems to be some confusion in your analysis – and those of others in that vein – as to who is the puppeteer.

      Take the situation of the mob and crooked cops. The cops are supposed to serve the public, but they have been twisted by the graft of the mob into doing the opposite of their job. To reform that system, you must certainly deal with the bad cops, but you do not eliminate the institution of the police force entirely – because at the end of the day, you still need cops.

      What you need to do above all is root out and restrain the mob.

      In your analysis, the bad cop is the source of the problem, rather than a symptom. In your analysis, the bad cop somehow forces the mob to go on crime sprees. The reality is of course that the mob pays cops to look the other way, and to harass the mob’s competitors.

      Our government has been captured by the mob. There is no doubt who is pulling the puppet strings.

      • All I need say is that the responsibility to take action lies with the party with the guns, courts, jails and police. Not with the gangsters.

        Government is a monopoly, accountable to no one since all in it are corrupted by power. Privatize and localize policing, courts, “law-making” and get the government out of the money-creating business. That way we could fire the miscreants…

          • A bunch of unregulated regional warlords supported by mercenary armies, and providing security to the highest bidder… what could go wrong with that?

            I am reminded of every mafia movie I have ever seen, to the scene where the gangs kill each other and everyone else, while business grinds to a halt, until they eventually decide to unite and just kill everyone else instead of each other.

  12. If we privatize, what is to stop the bankers from directly taking over the act of policing? Privatization of government services has been shown time and again to be conduits for fraud, sweetheart deals, lousy services, and higher prices. It is happening already anyway; and frankly I would rather deal with the local police force than with Blackwater mercenaries granted a license to use deadly force and tasers on citizens.

    Localization is great in principle, and desirable in the current environment, but it is useful to remember also that the transition to strong federal government happened in part because the corporate gangsters had taken over state and local governments; which become hopelessly corrupt and unresponsive, so people turned to the Feds to act on entrenched corruption at those levels, and to break the logjams on issues like civil rights, organized crime, contracting fraud, and toxic pollution .

  13. Damn I got late to the party.

    Rent-seeking is just another name for power. It’s a fact of life. Why take risks and work when you can, duh, not take them?

    In fact the only argument for absolutism is that you have less people doing rent-seeking so there are less rents taken out of the economy in total. Democracy naturally always tends to 51% seeking rents from the rest.

    In fact given that having power today doesn’t give you automatic nobility status, and you can’t fuck peasant girls or disregard the law (not as much as in the Ancien Regime), what else are the powerful supposed to but rent-seeking?

    Agreed that Marketing is fucked up. It’s just coming up with tricks to manipulate peoples minds into doing what they don’t really want to. I just don’t see how it’s different from a substance addiction. It’s fraud squared. Cubed.

  14. “Rent-seeking” is an inherently private matter solely between lender and borrower. That’s all.

    No one – and no one’s government – should interfere, any more than they should other personal decisions…

    And theres no justification to do so/

  15. “In the wake of Fukushima, advocating for nuclear power is not the most popular of positions. But one must really think of the long term cost and benefits”

    What’s your projection for what ‘long term’ means when you talk about irradiating the largest single body of water on the planet with a constant stream of radioactive particles? One geologic era more or less doesn’t matter.

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