Rent-Seeking as a Threat to Modern Capitalism

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What is the best way to ensure fairness and free competition in our economy? Many people believe that a large government that actively regulates the private sector will prevent large corporations from achieving undue market power. But this view ignores the concept of rent-seeking. In broad terms, rent-seeking “involves seeking to increase one’s share of existing wealth without creating new wealth.” In the context of government regulation, it means firms spending resources to influence regulators to tilt the rules of the game in their favor, thus harming actual and potential competitors. In today’s “revolving door” environment where successful and well-connected people often move back and forth between jobs in government and the private sector, rent-seeking is all too common.

Angus Deaton, who won the Nobel prize in economics for his work on global poverty, said in a recent speech that rent-seeking rather than income inequality was the principal threat to global capitalism. He cited the financial industry during the 2008 crisis as well as pharmaceuticals, where lobbyists have convinced Medicaid to fund prescriptions of dangerous opioid drugs for low income workers, as prime examples. “All that talent is devoted to stealing things, instead of making things,” he said, and pointed out that raising taxes on the wealthy does not address this problem.

Concerns about rent-seeking go back at least as far as nineteenth century economist and philosopher Henry George, who influenced the work of AIER founder E.C. Harwood. George advocated a tax on rents from unimproved land and other natural resources as more fair and less distortionary than other taxes, because “pure rent is a payment for which the recipient provides no production to society in return.” Writing in 2004, William Baumol observed that in the modern economy, this is equivalent to big business seeking to increase its market power through influence of regulators and other means: “When, for example, a business conspiracy accumulates large monopoly earnings in an industry whose output is, if anything, reduced in the process, then economists deem that collaboration to have resulted in the acquisition of substantial ‘rent.’”

Economists with libertarian views also identify the dangers of rent-seeking and the government’s powers to tax and regulate as enabling this process. In Man, Economy and State, Murray Rothbard wrote that “the more government intervenes and subsidizes, the more caste conflict will be created in society, for individuals and groups will benefit only at one another's expense.” Similarly, the Foundation for Economic Education noted in a primer on rent-seeking that “if the rules say that it’s okay to use political means—the government’s authority to initiate violent aggression and fraud—to contrive rents by preventing others from competing with you or by forcibly taking the wealth of others, people will naturally tend to spend valuable resources trying to gain access to them.”

One mistake I think people make when they ignore this side of government regulation is that they look at both business and government as monolithic actors rather than complex organizations of individuals responding to their own incentives. When a corporate lobbyist and a government regulator have taken several trips through the “revolving door” and know each other well, there exists both economic and social pressure for mutually beneficial deals. This happens without direct conspiracy or “greed” on anyone’s part. To be sure, opposing rent-seeking isn’t equivalent to opposing all government regulation, and some would advocate efforts decreasing the connections between regulators and the businesses they regulate. Others would argue that rent-seeking is an inevitable consequence of regulation, and that the only way to reduce the problem is to reduce regulation itself. But either way, economists with a diverse array of views agree that rent-seeking through efforts to influence regulators is a highly problematic aspect of our modern economy.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.