Source of evil

My blog received a big boost in traffic this week because, according to commenter Stephen (with minor corrections):

Founder of Crossfit had a talk in which he used rent-seeking as a reference and why that was bad for crossfit and against his business model which he likened to “Striving to excellence instead of striving to make money is a better way to run a business”

He then posted a link to a blog post I wrote in 2011 to distinguish rent-seeking (or as one of the excellent regular commenters here, Mike M, put it, “privilege seeking”) from capitalism. So, I’d like to thank the Founder of CrossFit, thank all who visited Our Dinner Table and thank to all who left a comment to advance the discussion — even those who disagreed with me.

I’m guessing he posted a link for rent-seeking because, as I point out in that blog post, so few people understand what rent-seeking is and the term itself is not intuitive.

Privilege seeking is a more intuitive term. Seeking privileges at the expense of others is about as spot on description as I’ve heard, so far.

Rent-seeking is using government to reduce consumer choices for the benefit of a special interest.

In my 2011 post, I used the sugar tariff as an example of rent-seeking. It works like this: Government adds a tariff to sugar imports, which results in a higher price paid for sugar products in the U.S. by consumers. The higher price benefits domestic sugar farmers who get to charge more since their foreign competitors’ sugar prices includes the tariff.

The objective of my previous post was to highlight that to the extent the tariff allows domestic sugar farmers to charge more, those profits are not earned through capitalism. But, too often folks see that as capitalism. In their eyes, profit and capitalism are almost interchangeable.

I’d like to commend the founder of CrossFit for shunning rent-seeking (it’d be great if he could hook me up with a set of pipe/monkey bars and maybe a small climbing wall for my basement :)). That means his strategy is to attract and retain customers by making their lives better, rather than using government to restrict their alternatives.

As it turns out, I happened to also listen to a Harvard Business Review podcast this week with guest John Mackey, Founder and CEO of Whole Foods Market. He has a new book titled, Conscious Capitalism.

capitalism

capitalism is actually beautiful (Photo credit: wallstalking.org)

In the podcast, Mackey describes his journey from spouting progressive to appreciative capitalist — and it sounds a lot like mine, except I haven’t founded any big companies, yet.

He discovered that how he viewed businesses when he was young — as greedy, singularly focused money-makers — wasn’t all true. He learned that businesses (usually) succeeded by providing something customers value, which is a tremendous overlooked (or perhaps taken for granted) benefit for society. It may be fun to hate on capitalism, but by gosh, don’t take away my iPhone, sort of thing.

But, I think Mackey misses something BIG. While I applaud Mackey and the Founder of CrossFit for eschewing rent-seeking and favoring customer value creation, i.e. for being capitalists, not all businessmen are capitalists.

One thing almost all business people have in common with the rest of us is that they are human. And one thing nearly all economists know about humans is they respond to incentives (though they differ in their beliefs by how much).

So, it follows that business people respond to incentives. They make more money when their companies do well. One way to guide their companies to success is through good-ol’ capitalism — providing the customer with products they value enough to buy.

But, another way for business people to make money is through rent-seeking. Whether it’s a sugar tariff that allows you to charge more or a state giving special tax breaks for auto plants to ‘attract jobs’, as government at all levels have gained more power, the value of rent-seeking has increased along with it. As Harry Browne put it:

Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, “See, if it weren’t for the government, you wouldn’t be able to walk.”

You can blame greedy business people who are unlike John Mackey and the CrossFit founder for seeking profits without creating customer value, but you’d be blaming the wrong people. The right people to blame would be us, for letting government out of its cage to sell the power we give it to the highest bidder to do things like transfer $40/year of our money to rich, rent-seeking sugar farmers so they can continue to buy that power…with our money.

Think about that for a second, $40 isn’t much (which is why we’re not picketing in the streets about it). But, wouldn’t you rather use that $40 to buy something you value rather than give it to the sugar farmer so he can use it to keep getting it from you?

That’s a double-whammy. Whammy one: You lose your chance to buy something with that $40 that makes your life better. That value never materializes in society. Whammy two: Some of that money goes to do nothing more than to convince politicians to continue getting it. If you understand that, it shouldn’t be hard to see that shrinking government can help the economy.

About these ads

13 thoughts on “Source of evil

  1. “Rent-seeking is using government to reduce consumer choices for the benefit of a special interest.” – Seth

    When you have an opportunity, take a gander at pages 167 and 168 of Thomas Sowell’s book Knowledge and Decisions, 1996 edition regarding reduced consumer choices or as Sowell depicts it reduction in possible transactions due to coercion of a third party via threat of force.

  2. Hilariously enough, part of the CrossFit philosophy is to encourage people to stop eating sugar. It’s meant as a health recommendation but perhaps it could double as a protest against government subsidies.

    • Hi Wally — That’s something else I agree with in the CrossFit philosophy. I have a few other posts that CrossfFitters might be interested to read that I will link to. Thx for commenting.

  3. According to the original CrossFit post (made by a CrossFit staff member who is not the founder) that used the term “rent seeking” in a pejorative manner to insult Bryan Kelly of Anthos Capital (a private firm), rent seeking is “the pursuit of profit absent the creation of new value.” To summarize, the founders of CrossFit were apparently involved in a divorce and the wife was in negotiations to sell her half of the business to Anthos Capital. The husband and the CrossFit staff evidently did not want this to happen and claimed the moral high ground in an appeal to their affiliates. Eventually, Crossfit secured enough capital from “Summit Partners” to purchase the wife’s half. With victory in hand, the post mentioned above was written insulting Mr. Kelly for having the gall to do the same thing (make a private purchase of the wife’s share of CrossFit) that the husband and/or his associates (via their “loan” from Summit Partners) did.

    THERE WAS NO RENT SEEKING INVOLVED!

    Mr. Kelly and Anthos Capital were simply painted as greedy, evil venture capitalists eager to make a profit. Now, if I had the opportunity to purchase half of a franchise based company whose franchisees charge in the neighborhood of $2000 per year for what amounts to a gym membership (sans pool, tennis or racquetball courts, etc.), I would likely enlist my affiliates to engage in what some might term a blackmail campaign – evidently, franchisees were encouraged to declare that they would “dis-affilate” from CrossFit if the sale to Anthos went through.

    Maybe Anthos Capital would have used its business acumen and economy of scale to allow affiliates to build or operate their facilities at a cheaper cost and perhaps passing some of this savings along to consumers, thus creating value.

    • It’s possible that Anthos Capital getting involved could have improved things. But from my perspective as an affiliate owner, it didn’t seem likely. CrossFit has a very strong online presence (as you noticed when you got linked from their site). When you affiliate, you get the ability to use the CrossFit name. When you use the name, people pile in your doors. I literally have trouble keeping up with the number of new people who come through my doors wanting to try the program.

      I think my reluctance to trust Anthos Capitol was also due in part to the iconoclastic nature of the program. CrossFit originally appealed to folks who viewed the American fitness industry as broken. Many of those people who it originally appealed to are now affiliate owners. Given the nature of the original sell (being iconoclastic) I think it would have been really tough for a corporation to win the hearts of many of the affiliate owners.

      That’s my opinion on the “bigger picture” of why it was easy to paint Anthos as “bad guys”. I bought it. I’m thrilled with the current model and wasn’t interested in taking a gamble.

      Also, I’d like to respectfully disagree that CrossFits are just a gym membership. At my own gym and all the other gyms I’ve been to (which admittedly is a very small sample), all classes are small and instructor led. There is an emphasis on skill development (as in not just running on the treadmill) and improvement. I *think* that this is part of the philosophy that makes CrossFit so popular but (as you can tell) I’ve already drunk the kool-aid. :)

      • Great dialogue. I’d add that I would guess that Anthos was seeking profit (mutually beneficial/value-creating transaction), whether it would have turned out to be or not.

        I believe both profit and rent-seeking has risks of not paying off as intended. One feature of rent-seeking that makes it attractive, I believe, is that it can continue on indefinitely when it is not mutually beneficial, which creates a distorted feedback loop.

        The feedback loop on a profit-seeking activity is much better.

        Glad to hear that business is good, Wally! I have to admit, I think CrossFIt is cool.

      • Wally,

        Thanks for your reply. I followed this in the CrossFit forums as it evolved and I agree that Anthos was painted by CrossFit HQ as a bad guy who would “corrupt” the existing culture that was supposed to be about state of the art fitness first and profits as a secondary effect – and I’m sure, that for many affiliates, the non-monetary enjoyments are a big or “the” big reason for what they do. However, as you note, the CF label is great for marketing. This is not only true for the numbers, but for the premium fees that affiliates are able to charge. By premium, I mean in comparison to the cost of renting/buying space and outfitting a box versus what similarly outfitted “gyms” can charge. This is due, at least in part, to the Cult like status that CF has become for SOME (see later paragraph). Don’t get me wrong. It’s a free market transaction and both the affiliates and the members are voluntarily entering into a mutually beneficial agreement.

        My point is, a CrossFit franchise can be an extremely profitable venture with “relatively” low overhead. Understandably, this made affiliates very reluctant to rock the boat. As you surely realize, 4000 plus affiliates X $3000 affiliates fees (in addition to certs, etc.) gives CF HQ ample reason to maintain the status quo.

        Likewise, I’m sure you recognize the hypocrisy of claiming that Anthos wanted affiliates to sell certain sponsored supplements, engage in merchandising, etc. when many affiliates (e.g. Rogue) and CF HQ (can you say Reebok?) are already doing the same thing.

        Now, I do think that many in the CrossFit community have done a great job in terms of moving us away from the big box gyms which were previously the only option for many by bringing in experts such as Dan John, Robb Wolf, Greg Everett, Rip, Mark Twight, etc. And that’s where I have a problem with CF HQ. While they claim to have the desire to seek the best way to do things with an open mind, it seems that the same story has repeated itself over the years – (1) expert comes in and shares his knowledge with CF HQ and the community, (2) the expert and CFHQ/founder have a falling out (often because of what seems to be a “my way or the highway” attitude by CFHQ, (3) expert leaves and CFHQ claims that the knowledge imparted by the expert was an original idea of CFHQ. Now, I realize that many or most affiliates recognize this problem (but say nothing due to feared retribution form CFHQ), but there are also many in the CF community that have swallowed too much of the Kool-Aid and accept at face value whatever spin CFHQ puts on it – that’s where I think it’s taken on a cult like status for some.

        Ironically, many of the iconoclasts that are so eager to throw out the old dogma and institutions (Gold’s Gym, etc.) seem willing to replace that with a new dogma and new high priest. I say this with all respect and in the spirit of friendship as a die hard “gym rat” – don’t forget why you took the path you took.

        • Meet the old boss, same as the new boss. I don’t disagree. Revolutionaries tend to become bureaucrats. I think it’s typical enough that I hesitate to call it ironic. Instead let’s call it Newton’s second law of power:

          Those who are in power tend to want to stay in power. :)

Comments

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s