Rent-seeking is not capitalism

Rent-seeking is the bad profit seeking activity that people often mistake and confuse for capitalism.

I think rent-seeking is one of the most unintuitive terms in economics.  Few people know what it means and the words don’t lend themselves to easy interpretation.  Rent-seeking brings to mind images of landlords, which is incorrect.  Maybe someone can coin a more intuitive term to replace it.

We would be better off if more of us could properly recognize rent-seeking activity and distinguish it from capitalism.  Then many things that are claimed to be “failures of capitalism” could be blamed on the real culprit, rent-seeking.

So, what is it?

Rent-seeking a genteel way to say attempted robbery.   Here’s the wikipedia description of rent:

Rent… is obtained when a third party deprives one party of access to otherwise accessible transaction opportunities, making nominally “consensual” transactions a rent-collection opportunity for the third party.

That doesn’t help much, does it?  An example might.

We pay more for sugar (a nominally “consensual” transaction) because the U.S. Federal government (third party) imposes a tariff (deprives access to otherwise accessible transaction opportunities) on sugar imports  to protect domestic sugar growers.   U.S. sugar growers cannot produce sugar as cheaply as foreign producers.  The tariff raises the price we pay for foreign sugar so U.S. sugar can compete.

That’s like government forcing Walmart to raise prices to make Target more competitive.  Sounds good to Target, but Walmart customers would not like it.

Based on some quick Googling, sugar tariffs cost my household $20 – $30 per year.  Not a lot, but enough.  If I didn’t spend that money on sugar I might spend it on an extra restaurant meal or even higher speed internet.

Rent-seeking comes in many forms.  A common form is special interest groups lobbying to use government power that forces others to do something — like pay tariffs or use only union workers — to benefit the members of the special interest group.  Often such things are sold to the public as ways to “protect” consumers.  Little do consumers know how much that protection truly costs them.

Just about every lobbying effort in DC or at your local state house is an effort by some special interest group to harness a bit of that government power to their own advantage.  Even the politicians who auction off the power vested in them by the voters are rent-seekers.

Even your local pro sports franchise rent-seeks.   How do you think stadiums are built?

Rent-seeking is not capitalism.  Capitalism is nothing more than the private ownership of capital.  In capitalism people seek profits by trading voluntarily and for mutual benefit.

Rent seekers profit from coercion and transactions that may not result in mutual benefits to all involved.   That makes people angry, so it should.  But it also gives capitalism a bad name, which it shouldn’t because that’s not capitalism.

It’s important to recognize that rent-seeking is not unique to capitalism.  It happens in every form of economy.

Update: @Anonymous: You may be interested in reading my post, What is capitalism?

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49 thoughts on “Rent-seeking is not capitalism

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  6. Your def of ‘capitalism’ is contrived and excessively stringent. The conditions of “voluntarily and for mutual benefit” are not accepted necessary conditions of capitalism. Many goods are fundamentally non-voluntary (if we want to continue to exist) and many transactions are not mutually beneficial. Drugs or fat-food come to mind.

    • Someone once warned me that there are some folks who are both stupid and recalcitrant such that there is no point in trying to carry out a civil discourse. Two solutions exist for these idiots – ignore them or deliver a sharp blow to the cranium. Which would you prefer?

      • I named the blog, OUR Dinner Table, for a reason. Plus, so far, Anonymous’ disagreement seems rather civil. If I ever have the problem of uncivil comments, I will lay some ground rules for etiquette. Have at it, if you feel so inclined. I think Anon gives us some good food for thought and represents a common position/resistance to capitalism where a well-articulated response might give folks who hold that position some food for thought.

    • Anonymous:

      There is no such thing as a “fundamentally non-voluntary” good. For starters, goods themselves aren’t voluntary or non-voluntary at all. The description makes no sense. Our PURCHASE of a good is voluntary, however, to the extent it is not forced. And buying a certain good only because we want to “continue to exist” is definitely a voluntary transaction, as by so doing, we merely indicate our subjective preference in favor of continuing to exist, a desire which not every person has.

      I also disagree that any transaction freely entered into is not “mutually beneficial.” You may think that the purchaser of drugs or fast food is not benefited by his purchase, but the purchaser, by his actions, disagrees. Value and preference are subjective to the person, and by trading for drugs or fast food, the purchaser indicates his subjective belief that drugs or fast food will make him better off than he is without them. The transaction is thus a “mutually beneficial” transaction.

      I did not have major disagreements with the offered definition of “capitalism,” but if you believe it to be “contrived and excessively stringent,” perhaps you could offer one in its place?

      • Felix – I completely agree, both with your description of how free markets work and with your statement regarding voluntary being inapplicable to goods. As we both understand, it is actions that are voluntary (as in a free market) or involuntary (as in a slave state). That Mr. Anonymous cannot comprehend that even deals involving illicit drugs or fast food are indeed both voluntary and mutually beneficial (even if they aren’t really good for the health of the buyer) leaves me shaking my head in disbelief. That is exactly the kind of economic ignorance that permits and fosters a “nanny-state” government where transactions are made on our behalf by those in power who know what’s best for us. Thank you for being the gentleman I was too lazy to be in explaining this to Mr. Anonymous. Sometimes, explaining simple concepts such as this to the low information voters is exhausting.

      • Well-stated, Felix. Thx for the comment.

        I think Anon may not buy that a choice between ‘existing’ or ‘buying something’ is voluntary. I once agreed with that.

        What got me over the hump was coming to understand that most choices people think fall into that ‘exist or buy’ category really don’t. There are usually many other alternatives before we cease to exist, so we’re really making a value-added choice between ‘buying something’ and all of those alternatives.

        Consider food. Our hunter-gatherer ancestors proved they could exist without places to buy food by doing so for hundreds of thousands of years. They also didn’t have many of the other things that Anon might think we need to exist. Yet, here we are because they did just that.

        So,we could try foraging for food (like our distant ancestors) or raising it ourselves (like our not so distance ancestors) and we’d quickly come to appreciate the value food producers add to our lives over merely existing. So, instead of spending 80% of your time to produce enough calories to subsist, you can earn your subsistence calories in mere minutes each day. Anything else you trade away for more than subsistence calories like buying the brand of soda you prefer, or the cut of meat you like, or the fresh out-of-season apples from half way around the world, is pure luxury.

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  11. Just curious to know the background/qualifications of the author and/or respondents of this blog. Econ PHD? Masters? Published Econ Papers? Undergrad degree from where?

    • Z A – I’m the blog’s author. Since you’re asking about econ creds, my guess is you’ll find my econ area of concentration from Local State U less than satisfying. But, I am always interested in learning. If you disagree with something I’ve written, I’d love to hear why.

    • I have always found it more important to weigh the value and the validity of what is presented than to make assumptions about it because of a bias towards “credentials” issued by some institution or publisher’s opinion.

      But perhaps that’s because the majority of whatever I have learned in my life was gathered informally by reading and weighing the information myself. I have no sheepskin. In part, that may explain why I am not a sheep.

      I’m not denigrating credentials per-se, but rather advising people to avoid dismissing information and opinions out of hand for spurious reasons. I have found that route to be evidence of intellectual laziness in some cases.

      • But can’t you see the utter chaos that would rein if people were allowed to think for themselves without the benefit of first being told how and what to think. If society cannot set and enforce standards for acceptable thoughts and ideas how can society ever hope to reach utopian perfection? We need a license to drive for pete’s sake. Then why not a license to think? If you don’t have a PhD from a party sanctioned university, your thoughts are unacceptable and must be punished. Thought crimes must not be tolerated.

        • Thanks Shannon. The only criticism I have of your answer is your html skills need some honing. You forgot to close your tags. Here, I’ll do it for you. There, that’s better.

        • Oddly, the tag I made for you didn’t show up. I must be better at html than I thought. It was a “end sarcasm” tag. Apparently, it works because it went invisible.

        • Oh how I love your condescension and sarcasm. Economics being the dismal science that it is, I still do not ascribe to the notion that all points are valid and that any moron on the street that tries to form a thought or opinion about the macro-economy has a valid or sound point. Knowing what someones credentials are in most any case does help in knowing how much they have actually studied that subject. Why do you want to know your doctor has a degree instead of just going into the first guy that says he can perform open heart surgery on you without any complications?

          It has nothing to do with “being told how to think”. It has everything to do with knowing that the individuals offering the glaringly uninformed opinions that are found in some comments on this post have never had any real exposure to the field of economics. Watching the Fox News Business Report then reading a few chapters of Friedman or Beck mixed with a business degree constitutes real exposure. Having an advanced degree from a legitimate research institution or being published by a peer reviewed journal DOES mean something whether you like it or not. Nobody on here seems to be even citing those types of sources. The Adam Smith reference was very good I must say but what is funny is one can find SO many other things Smith said that run contrary to the far right wing politics that dominate the conversation these days. In fact if he were here today he would probably be on the left side of the aisle advocating things that conservatives today would not even dream of.

          I could write for hours about the incorrect assumptions and arguments on here but what good would it do if the people I am writing to do not have clue one about real economic theory and thought or the history of those things? Honestly how often do really profound arguments that rock the establishment come from people that have little to no training in the field? It happens but not often enough for me to listen to everyone that posts on this blog.

          The conversation is interesting and the argument made by the author of the blog is pretty damn good. Id still love to see it posted in a journal of some sort and see what comes out of it being reviewed by people trained in the field. People ranging from Nobel Prize Winners to PHD candidates looking for a dissertation topic.

          Oh and yes utter chaos would ensue if we validated every ones opinion just because we don’t want to hurt feelings. Listening to them rant is fine of course but saying that they have any idea what they are talking about is another thing all together.

          Again, JUST CURIOUS, does anyone on here have an advanced degree in econ? I am always eager to pick brains about this stuff.

        • V A – Thanks for the comment. You’re inspiring a forthcoming blog post on the appeal to authority fallacy. I think that’s an important topic because so often it dovetails conversations away from productivity.

          I, too, once use to get hung up on credentials. But I tired of that because you can find experts that represent all sides of an issue and even the peer-review process is subject to groupthink, status quo biases and politics.

          I found it to be more productive and engaging to discuss the merits and demerits of an issue rather have a battle of sheepskins.

          You wrote six paragraphs and complained about not having the time to address all the incorrect assumptions on here. It would have been much more productive for all us to learn something from you if you would have picked just one of those incorrect assumptions and laid out a case as to why it’s incorrect.

          Also, in the two times that a doctor was to perform a procedure on me or a loved one, I wasn’t interested in whether they had their degree. I asked them how many times they had performed that procedure and what was their success rate.

    • Based on the actual content of your last post on this subject, rather than some credentials that seem rather lacking in your resume on this thread, I would opine that it is so full of malarkey, (not a scientific term) that perhaps someone of your credentials might consider asking for a refund on whatever was spent acquiring them.

      I would point out that Paul Krugman has a PHD in economics and Barack Obama once taught constitutional studies. (Largely to an almost empty classroom) I’ll leave it to readers to judge the competence of either of them in their chosen fields.

      Here’s a piece of unsolicited advice; rather than claiming you don’t have the time to rebut people you seem to consider to be your inferiors, try gaining some credibility by actually countering their arguments with your own based on what is actually said. In that way you could actually add to the thoughtful discourse on this subject.

      In the interest of full disclosure, I do not have the credentials you seem to covet before you will lower yourself to debate with the riffraff who dare to add their thinking on subjects such as this. Therefore, feel free to ignore the advice above.

      Perhaps my response to your post was a bit too pointed, so I apologize in advance to the owner of this site.

  12. Comparing a sugar tariff to price fixing between Walmart and Target is an incorrect analogy. The sugar tariff would be more similar to the government requiring both Walmart and Target to only carry goods made in America (or to charge more for those goods that are produced overseas).

    All successful capitalist societies engage in this kind of protectionism (including our own during it’s most prosperous era).

    Here’s some commentary on the subject:

    http://www.commonwealthclub.org/events/2013-01-17/why-free-trade-doesnt-work

    • Erik – Thanks for the comment. The sugar tariff is equivalent to the government forcing Walmart to raise its prices. Both are a government actions that artificially raise prices paid by consumers for the benefit of a special interest, aka rent-seeking.

      “All successful capitalist societies engage in this kind of protectionism (including our own during it’s most prosperous era).” This is a fallacy of questionable cause. Just because protectionism is practiced in times of prosperity does not mean that it contributes to prosperity. It could just mean that other factors offset it. The $30 extra I spend on sugar each year due to the tariff doesn’t make us more prosperous, it just doesn’t hurt all that much.

      Thanks for the post to Ian Fletcher’s work. I encourage you to also consider some criticism of his position. Don Boudreaux has offered plenty of thoughtful criticism on his blog Cafe Hayek: (http://cafehayek.com/?s=Ian+Fletcher).

      • Seth – I agree. Price fixing between Walmart and Target would involve WalMart and Target agreeing between themselves on a certain price. They would both be happy and the government would be mad. Rent seeking would be as you described, with the government and Target happy and WalMart mad.

        The term “rent seeking” is indeed confusing and I think it is best understood if we use instead the term “privilege seeking” with the understanding that the party doing the seeking is seeking the privilege (subsidy for their product or tariff/tax on the other guy’s product) thru the political arena.

        Just because “all successful capitalist” societies engage in this type of behavior does not mean that this type of behavior is inherent in capitalism or even capitalistic in nature. I’m sure that in all successful capitalist societies we can find instances of sex slavery, yet this does not mean that slavery is capitalism. It simply means that someone in that society felt that they themselves – as opposed to the society as a whole – would benefit from that arrangement.

        The fundamental flaw in the thinking that because “bad” things still exist in a capitalist society, capitalism per se must be bad is that it fails to recognize that “bad” things will exist in any and all societies. However, in a capitalist society, we all recognize and acknowledge that each of us will try to do that which is in our own best interest. As such, we will both ensure that deals we make serve our own best interest, i.e. they are mutually beneficial.

        • Thanks Mike. Nice comment, as always. I really like ‘privilege seeking’. That’s more intuitive. Is there a term for seeking privileges at someone else’s expense?

        • No Daniel I am pretty sure that is just the nature of the Human condition as one could make the argument for the transaction between owners of capital getting profit from the labor of others. IT HAPPENS IN BOTH SYSTEMS.

        • ZA, I see your point. I will only point out where socialism bothers me the most. In a socialist society, profiting off the labor of other is an inherent element of the political system. Since the only entity who truly has power over you is “the State” and the State also makes and defines the rules….I can not accept a socialist society as inherently fair or free. We do see this privilege buying taking place in our bastardized version of a capitalistic society, but what we have is exactly that: bastardized.
          (on meds, hope it was coherent, if not, you got what you paid for it.)

        • After all, my postgraduate degrees are in math, so as previous poster have noted, I am highly unqualified to speak on such topics as economics or governmental systems. Again I apologize.

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  14. I agree that there are flaws in every system. Based on where your feet are planted and the direction you are facing changes your perspective on the number of flaws. Also the severity of the flaws.

    The import tariff is to protect the local sugar farmer. It helps him compete against a farm in a third world country using near slave labor. If you are the local sugar farmer (even employing illegal labor for cash) you see the system as flawed as you aren’t just competeing with other farmers on a level playing field. Because the other sugar farmers aren’t subject to any of the other taxes

    • Hi Jef — Thanks for the comment. I think a better term for flaws is trade-offs. Everything has trade-offs and those trade-offs differ based on which party you are.

      I agree that the import tariff is meant to protect the local sugar farmer.

      But, you are passing your own, perhaps flawed, judgment when you classify the third world farmer as using ‘near slave labor’. Have you asked those ‘near slave’ laborers why they choose to work on sugar farms over other options?

      Certainly, it is in the best interest of the local sugar farmer to view competing with low-priced competitors as unfair to get the government to help him. And one reason he’s successful in getting government’s help is because it doesn’t cost the rest of us that much, so it’s not worth our time to oppose the tariff in hopes of saving $40/year, and folks like you believe you are somehow protecting ‘near slave laborers’ by reducing opportunities for them.

    • Jef

      As a consumer, my concern is not for the arrangement between the foreign cane grower and his workers. It’s for the price I pay for my sugar. The cost of the tariff placed on the foreign sugar supplier is not born by the foreign sugar spiller, but by me, the consumer.

      But since you’re so interested in the foreign worker, who has voluntarily entered into a mutually beneficial arrangement with the foreign cane grower, please explain how the tariff makes his life better. Of course, it doesn’t. The foreign grower will have even less money. His two choices will be to provide even less tolerable conditions for his workers or to hire fewer workers, leaving the previously employed worker without a job.

      The benefactor of the tariff is the domestic sugar grower (and not his employees) and his political lackey who he rewards with a campaign donation (and possibly some under the table perks).

      The left typically sells these tariffs as protecting foreign worker’s rights in order to pass laws that reward their special interest groups or cronies, but the job of our government is NOT to protect citizens of other nations. It’s to protect US citizens. Furthermore, as explained above, it does not even protect those foreign workers it claims to protect.

  15. Discussing economics is like fighting quicksand. Life experience, and view of the world economy changes everyone’s perspective slightly. So for every valid point made there are many equally valid points made to contradict that point. In that, always try to look at the situation from as many angles as possible. Whether you agree with that perspective is not the issue. Understanding it is.

    • I disagree that every valid point has equally valid points to contradict in economics. Too often, we let personal preference bias (like your’s on the labor used by foreign sugar farmers), anecdote and fallacy pass as valid points and then get on about our day.

      • I hate to nitpick, but I think you’ve both used “valid” incorrectly. We are not so much concerned over whether or not our arguments are valid, but that they are sound, i.e. that our premises are all true and that the truth or the premises logically entails the conclusion. If either our argument – in a logical sense is invalid – or one or more of our premises is false, the soundness of our argument – while its conclusion may be true by mere coincidence – is lacking.

        With all due respect, I think that Jef adheres to (and suffers from) the left’s delusion – and one stated in Obama’s Audacity of Hope – that there is no absolute truth (and according to Obama, that’s the absolute truth), that truth is relative and depends on what each person thinks it should be.

        But since Jef brings up “life experience” as important in determining the economic effects of such a tariff, perhaps he can enlighten us about his first hand experiences with (a) the foreign sugar cane workers (or slaves as he puts it) and how it has impacted them, and (b) the “wonderful” living conditions of the US sugar cane workers in Florida. I’ve lived and worked in both areas and spoken with workers in both locations. When compared to their countrymen, US sugar cane workers are far worse off. The foreign sugar cane workers wonder why they are singled out by the US government for punishment.

        • Well put, though I’ll push back on your nitpick. For logic, a valid point or argument is exactly what you describe, a point that can be logically derived from the premises.

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  18. The author seems to lump in rent-seeking behavior with regulation, since regulation is how one would disguise rent-seeking if one were corrupt. I think that’s throwing the baby out with the bathwater.

    If your argument that the US government is rent-seeking, I disagree. Thats why people flock from around the world to start businesses here and they will continue to do so. The country subsidizes its food production and protects it, which is a smart thing for a country to do because then you won’t rely on other countries to feed yourself and you can’t blockade s and starve us out. That’s a huge geopolitical plus, lots of countries wish they had that to protect with a tariff.

    If you think that the capitalist system in the US is flawed, explain why and give a credible solution.

    Finally, lots of capitalist companies engage in what you would call rent-seeking behavior. They should and would throw their weight around to try to “collect rent” from entrepreneurs and start-ups if there weren’t government regulations to curb this behavior. And they are driven to this rent-seeking by the desire to return more capital to their shareholders, because that is their job. So the idea that rent-seeking is not a product of capitalism doesn’t make sense to me. And only governments have the power to keep investors from demanding that the companies they invest in trade and collect rent at every chance they get.

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