Pur Autre Vie

I'm not wrong, I'm just an asshole

Thursday, July 31, 2014

The Rent-Seeking Is Too Damn High

One of the things I really dislike about the way the world works - although I think it is in some ways inevitable, and maybe even defensible (a post for another time) - is that at some point in the educational system people are left to figure things out for themselves.  I don't mean that students are left to draw their own conclusions, or form their own opinions.  I mean that they are not taught the basic terminology and framework necessary to engage with the ideas they will encounter.  Now, as I said, sometimes they figure things out for themselves, but it strikes me as a weird kind of forced autodidacticism.

A good example is the classic distinction in economics among land, labor, and capital.  You can get a decent, if somewhat superficial, idea of the concept here.  In learning economics, you stumble across these ideas, but (at least in my experience) no one bothers to tell you what the terms mean, or what they traditionally meant when classical economics was being developed.  So most econ students can probably tell you what "rent-seeking behavior" is, but a lot of them probably couldn't explain why the phrase uses the term "rent" (which, after all, most people associate with the check that you send to your landlord every month).

So look, I'm an autodidact on this point (as on so many others).  But here's my basic understanding.  "Land" is meant to refer to scarce resources that do not require labor to exist.  You shouldn't take the term too literally - it can refer to fertile farmland or valuable real estate, but it can also refer to gold or iron or sunlight or wind or whatever.  You can see why they used the term "land," though - traditionally that would have been the most obvious example and probably by far the most valuable "land" in the economy.  The returns that stem from owning land are called "rents."

Now the thing about land is that it is valuable by itself, by virtue of its usefulness and its scarcity, and although private ownership probably helps put land to its most valuable use, the owner doesn't generally have to do anything in order to extract rents.  You can develop the land, but remember not to equate "land" with actual land.  If you, say, build a skyscraper on your plot of land in Manhattan, you are mixing land (the real estate itself) with capital (cranes, etc.) and labor.  Or if you plant crops on your farmland, you are again mixing land (the farmland) with capital (tractors etc.) and labor.  But you don't have to do any of these things.  You can rent out your land and enjoy a stream of income without doing any work or employing any capital.

Okay, so to be a rentier is to be someone who earns rents from ownership of scarce resources.  Unlike wages, rents are "unearned" (though of course you may have acquired the "land" with money that you earned from working, and you may have mixed your labor with the land to improve its value, as in the farming example).  Rent-seeking behavior involves trying to allocate property rights (or something similar) to yourself, and generally it isn't socially productive.  (The resources already exist, all you are doing is arrogating them to yourself.)

Sometimes rent-seeking behavior is really off-putting, but not always.  Imagine two farms are separated by a river.  The river shifts in its bed, and it's unclear where the boundary line between the farms should be drawn.  The farmers go to court to decide the matter.  It may not even be a rancorous dispute, they just need a legally binding answer so that they can both enjoy clear title to their own land.  But the resources that are spent at court are not going to make the land produce a single extra ear of corn.  It's purely a question of allocating property between the farmers.  If the system is set up in such a way that litigation is expensive and involves arms-races (each hires an expensive lawyer, procures expert testimony, etc.), then a lot of social resources can be used up in socially pointless rent-seeking.  And so a major part of designing a good society is avoiding these kinds of wasteful arms races.  (Bear in mind, the whole point here is that the rent-seeking behavior is individually rational but socially wasteful.  If one of the farmers "unilaterally disarms," he may lose a lot of land.  Lawyers, of course, eat that shit up with a spoon.  So the important thing is not to let lawyers, or anyone else who benefits from rent-seeking, design the system in a self-interested way.  If the returns from rent-seeking are too high, then people will put their efforts into that instead of earning wages.  This is a major critique of the modern financial system, by the way - that it draws an inordinate amount of resources into socially useless rent-seeking.)

There are some interesting implications here, and I might write some more about it.  But in my next post, I'll apply the "rentier" concept to the macroeconomic issues I've been thinking about.