G.E.’s business strategy

Profit from rent-seeking.

If you don’t get it, please read this post.

If you don’t believe me, please read this article.

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?