Rent-seeking has been a popular topic on this blog over the past week. In the comments of this post, Mike M asked if a company seeking to sell its products to government is rent-seeking.
I replied, yes and asked him what he thought.
Here are excerpts from Mike M’s well-thought out follow-up:
I think there is a difference between “selling” your product (goods or services) to the government (just like an other consumer) and convincing them to buy your product (as opposed to others) and seeking to have the government (as a third party biased referee rather than as a consumer of your product) afford you some privilege that gives you an advantage (such as subsidizing your product or taxing or regulating the competitor’s product).
In the first case, as long as the government representative is truly acting for the benefit of the government, he should be seeking to make a trade at FMV.
A “rent” is essentially an excess return above the “normal” return in a competitive economic market.
Typically, we use the term to imply that one has lobbied the government to obtain some special privilege – something that’s been going on since governments and economies have existed and is not a unique occurrence in any economic system (although that does not mean that it is meant to be a part of that system). Rent-seeking differs from profit-seeking, in which two parties seek to extract value by engaging in mutually beneficial transactions.
What is important for us to realize is that the costs spent on lobbying for these privilege eliminates some of the beneficiary’s gains for the privileges and results in an economic inefficiency, i.e. less output results from the same inputs. The cost of obtaining the rent represents a use of real resources and is a loss to the economy as a whole.
I agree. Also, I think it’s worth highlighting that the cost of obtaining the rent is the rent-seeking.
The next excerpt, however, starts to get at one reason — after going through a similar thought process as Mike — I erred on the side of yes.
Of course, this goes out the window if he’s your cousin or you’ve offered him a bribe and he buys your product at an inflated price, but I think that’s a different “crime” than rent-seeking.
Unfortunately, so much of government spending, even if it initially starts out on the up-and-up, devolves into rent-seeking. That’s how we end up with $800 government hammers and toilet seats. That’s how education spending per student triples in a few decades with nothing but shiny buildings (and wealthy builders) to show for it.
While the bribe is a different crime than rent-seeking, it is also rent-seeking, because it is spending resources to gain something without creating value.
Next, government spending comes from taxes. Taxes are not value creating transactions. Rather, they are redistributive. So, government vendors are ultimately lobbying government officials for a slice of their redistributive taxing power.
How is that different from lobbying government for its other powers like enacting a tariff on sugar or restricting competition in a market?
One objection I can imagine to my case is that some of the money spent by government does create wealth.
This is true. But, to say these things create value isn’t enough. They have to create net value relative to opportunity costs.
Roads are great, for example. I’m eagerly awaiting a new road being built near my home. It will be profitable for me, because it will shave many minutes on my commutes.
When I think of that new road creating value for me, I think only of the benefit — how much time I will save. But, I never know the cost. If the local, state and Federal government (all are pitching in) said I could have that road or $100,000, I might decide to take the $100,000 and continue to put up with the extra minutes on my commute.
So, even when I see government spending that appears to have created some wealth for society, I don’t really know if it did relative to the alternative that could have been if someone had spent the resources more carefully.
What do you think, Mike? What am I missing?