0069 Rent-Seeking and Wealth Destruction

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Rent-Seeking and Wealth Destruction
by Ben Stone

There are words and phrases used by economists that can be confusing. Bad economists can intentionally use confusing words for the purpose of deception while covering the crimes of banks and governments. For example, an economist may say something like, “We need a degree of quantitative easing to jump-start the economy and prevent price stagnation.” Or perhaps he says, “Deposit multiplication is a legitimate function of the banking system.” These statements can be compared to a charlatan spiritualist telling you that the dirty money in your bank account is preventing your long dead relative from blessing you with the wisdom of Heaven. Of course, transferring that dirty money to the spiritualist can solve the problem. So no matter the profession of the charlatan, the theft occurs and is covered by the sweet words of deceit.

That said there are good economists that can be confusing as well. Not because the economist is attempting to deceive, but because the economist is using an older more accurate word or meaning than its current more common usage. An example could be where the economist is referring to the medieval practice of denying true land ownership to the peasant class by the privileged gentry. In modern terms most people would call this ‘property tax’ but the good economist would more accurately call it ‘quitrent’. An equally confusing phrase could be ‘rent-seeking’. Twisted by today’s common vernacular, a person could think this phrase has something to do with a landlord trying to fill vacant apartments. But actually the meaning is quite different.

The simplest definition of rent-seeking is the expenditure of resources for the purpose of enriching oneself at the expense of another without adding goods or services into the economy. This is slightly different than outright theft, which simply transfers wealth from one to another. Rent-seeking actually destroys wealth while enriching one person at the expense of the other.

An example of rent-seeking could look something like this:
A crime gang moves into an area. Two representatives of the gang begin visiting the local bars and taverns. In the weeks that follow they observe the activities and patronage of the various nightspots around town. Then on a busy Saturday evening the owner of Willy’s Blues Connection, the most popular tavern in town, walks into his office to find the gang members waiting for him. They explain to the tavern owner that for a slight charge each week, they will offer their protection and assure that nothing unusual will happen to his tavern. All too clear is the implication, so the tavern owner agrees and the gang members now take a cool 1% of the gross sales at Willy’s Blues Connection.
This type of extortion is called rent-seeking because the gang invested expenses, time, and energy to investigate and set up the victim. The gang members used resources as they traveled around town familiarizing themselves with the local bars. And with time, the gang invests more resources to support the two members who maintain the gang’s income flow from Willy’s while they seek other suitable businesses to include in their protection racket.

Perhaps a simpler version of rent-seeking could look like this:
A law firm employs two staffers who spend their days surfing the internet using key word searches. Their purpose is to find small-to-medium sized businesses, blogs, and forums that are using images, sounds, or other material that may or may not be covered by so-called “intellectual property” or IP laws. The law firm will use any of several means to claim ownership of the IP and then threaten to sue the user unless a fee is paid. Since such a lawsuit can easily cost a small business a million dollars or more to defend against, they negotiate a settlement of several thousand dollars rather than fight the law firm.
This is rent-seeking because, as in the gangster example above, the law firm has to maintain the employment of the thugs and invest in the ongoing expenses of finding and obtaining the IP rights in order to collect the funds rightfully earned by others. And, like the gangsters above, the law firm adds nothing to the economy so the result is an overall loss.

In both these cases, the key element is that the gang and the law firm are a net loss to the economy as a whole. Even though the gang and the law firm are enriched, overall the result is a drain on the economy as productive dollars are wasted in the process of rent-seeking. This as opposed to a simple robbery where there is no net loss to the economy when the wealth is simply transferred from the victim to the thief.

One last example of rent-seeking:
There are two companies that raise and sell rabbits.
Linda’s Loving Bunnies is a small operation run by a 16 year old girl in her spare time. She hand raises rabbits for pet stores and has been in business 2 years, turning a net profit of $86 the first year followed by $237 the second year. She’s building a reputation with the pet stores for supplying healthy rabbits, well adjusted to handling by humans. In other words, her bunnies don’t bite. Linda, with the help of her parents, is planning to expand their business with hopes that someday it will be big enough to pay for her college education.
On the other side of the county, DEVMEAT Inc. is a meat supplier for the cat food industry. They use high intensity methods to raise rabbits for meat production and as a side; they sell their older “breeder” rabbits to the pet stores once they fall off on their production quotas. These breeder rabbits tend to be somewhat less friendly than is desired by the pet stores.
The regional sales manager at DEVMEAT notices his local sales are steadily falling each month as the pet stores prefer Linda’s Loving Bunnies to his product. For no reason whatsoever, he calls his friend at the local office of the United States Department of Agriculture (USDA) and they plan a day golfing at the local club with several company attorneys and an accountant. Later that month Linda’s Loving Bunnies is visited by a USDA inspector who finds her in violation of an obscure regulation regarding cage design. One thing leads to another and Linda and her parents are looking at a $90,000 fine for their business that has never made more than $30 in any one month.
To be fair, DEVMEAT is inspected the same day and is fined $26,000 for violations similar to those found at Linda’s. The reason the fine is so much smaller is because DEVMEAT was able to put a team on the problem and fix it on the spot, whereas Linda couldn’t afford to replace all of her cages and associated supplies within the time given by the USDA.
This is rent-seeking in the sense that DEVMEAT is willing to lose money in the short run in order to monopolize the rabbit market for the long term goal of continued domination. While at the same time, this is rent seeking on the part of the USDA since they are simply acting in the exact same role as the gangsters in the first example and the goon lawyers in the second example.

The immorality of rent-seeking should be more than obvious to the reader, but for the purpose of clarity I should explain why it violates the Zero Aggression Principle. Rent-seeking, on any level and committed by any person or persons can only function by using either aggression, the threat of aggression, or fraud upon the property of others. Without the implied threat, the tavern owner would laugh at the gang members’ request. Without the threat of the fist of the State, IP laws would be unenforceable, as they are purely a product of the State. And finally without the fist of the State the private rabbit producer would out perform the corporation on the niche level and eventually grow to threaten them on a wider scale.

This brings up the impact of rent-seeking on the economy as a whole. Each time a person or a group engages in rent-seeking they reduce the overall wealth available to all of us in two ways. First, their act of rent-seeking uses resources from the economy that they do not replace through their own production. And second, the victim of the rent-seeking will use resources in defensive ways that would otherwise be available for production and commerce. When you consider that gangs and other criminals working outside the law are limited as to the kinds of businesses they can extort, how many businesses they can extort, and how much money they can extort without killing the business, it becomes clear that the outlaw element has a minor impact on the economy. However when you consider that the State faces no limits on what kind of victims, how many victims, or the degree of extortion applied to each victim, and then you multiply that by the mind boggling numbers of State actors employed for the sole purpose of rent-seeking, the good economist is overwhelmed at the massive amount of wealth destroyed on a daily basis.

Reversing one’s thoughts, and considering the potential condition of the economy if State sponsored rent-seeking were recognized for what it is and consistently condemned by the general public in the same manner that we condemn gang sponsored extortion, a whole new world of wealth and production would pour into the economy stimulating savings, investment, innovation, and invention. Thinking of the amazing accomplishments of the market in the last 150 years and then extracting the impact of State sponsored rent-seeking during that time is enough to bring a hardened man to tears at the thought of the world that could have been.

At this point in the discussion, polite words fail me as I contemplate the evil Beast that has consumed more wealth in the last century than has existed throughout most of human history combined.

Ben Stone Ben
2011

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