Thursday, September 5, 2013

Rents and Rent Seeking

Borepatch started a very interesting conversation about Rents - not the kind of rent most people think of when we use that word.  But the Economist and apparentl,y Historian meaning of the word.  To quote Borepatch:

Liberals like to say that "government is the things we do together". Libertarians like to say that government is the use of power to take money and privilege from unfavored groups to give to favored groups.

Historians call these transfers "rents" and the desire for them "rent seeking". Rents and rent seeking seem to have been with us since the very dawn of history.  -- Borepatch

I'm not a historian, I'm an economist (kinda sort of - it's one of my degrees, but not an occupation).

Risk adversity seems to be rather directly related to standard of living.  If you're just getting by, the reward for any given risk is better - or the risk for the same reward is lower depending on your point of view.  Some risks may be be unavailable to a lower standard of living.  Stocks for example - if your standard of living requires every penny you can earn just to get though the week, stocks are not going to be a risk you have the ability to take or benefit from.  Theft might how ever be a risk you deem worth taking - if you have little to lose, spending a few years in prison might be a minor risk for the reward.  If you're making 100K a year, a couple years in prison and a prison record could be very, very expensive.

As your standard of living increases, the rewards need to be bigger for the same risk in order to tempt us.  One of the ways we reduce risk is by spreading the consequences across a broader group - insurance works this way (well it's supposed to anyway). If you really want to benefit from your risk, you want to create one group that benefits from the risk and a different group that bears the cost.  We create the pool of consequence bearers using,  taxes, laws, regulations (laws created without over-site) - Rents in other words.

We are in essence a victim of our own success.  When life get's too easy for a large group of people, it gives them time to spend on new rent schemes, and the incentive to do it. 

The rise of Agriculture is probably the trigger point. A pre-agrarian society for the most part didn't have the concept of ownership.  You used what you needed, when it became scarce, you moved.  Eventually you learned that given enough time the scarcity would correct itself - you became migratory.  You didn't own land, you used it, and only as much as you needed at the time.  Taking more meant waste, waste meant scarcity, scarcity meant hardship.

With Agriculture came the idea of ownership.  "We claim this land because we've invested a lot into it and now our lives depend on it".  Once you go down that path it becomes obvious that more ownership means more security. Excess crops reduce risk and improve the standard of living. All of a sudden, we're worried about growth, and maintaining control over property - we now have the concept of wealth. Ownership and wealth lead to growth.  Growth requires specialization.  Specialization leads to productivity and more wealth.  Specialization leads to specialized interests - special interest groups.  Which in turn leads to rent seeking as a means of risk avoidance, and a desire to control the benefactors to a specialized group, rather than the whole and to push the consequences onto the group who doesn't benefit. - Maximize profit.   

The die is cast. 

Wealth leads a drive to obtain and retain wealth. It becomes a end in and of itself.  The drive to obtain and retain that wealth leads to rent seeking, and effective tool for both risk reduction and transfer of wealth.  Paradoxically, wealth is considered a form a freedom - which, in a desire to get more, you restrict with additional rents - around and around we go.  I suspect the wealthy pursue this path believing that their wealth will keep them outside the ever tightening circle of rents while reaping the benefits.  I think, in the long run, they won't like the result.

To control the proliferation of rents would require a constitution that made them extremely difficult and or painful.   e.g. every rent scheme has a 1 year twilight and requires an 80% vote. The obvious upside to this is that if you spend all your time trying to raise votes to get your rent scheme extended for another year - you don't have as much time to gather votes for a new one. 

When demand changes even a little bit, a vote will fail, a rent will twilight.  we're no longer stuck with an ever increasing burden of rents.

As things stand now, the creation of rent schemes is handled by lobbies for special interests. So congress get's to spend all of it's time voting for an ever increasing, never decreasing heap of rents. Congress does little more than bring a document created by a special interest to the floor, unchanged and I suspect in many cases unread or at best poorly understood. Then they bargain for votes.  Congress in essence has become nothing more than brokers for special interests groups, buying and selling votes.

There are other controls that would need to be put in place, and I doubt I've really done more than scratch the surface.   As long as risk adversity is a part of human nature, and wealth is a measure of success we will have rent seeking.   To remove wealth as a measure of success will require either a radical and global shift in how we think (good luck with that) I'm not talking about a petty little shift from capitalism to socialism or Communism, all of which are premised on ownership. I'm talking about a complete shift away from the idea of ownership.  The inability to benefit from using/taking more than you need.   In short - a utopia that is probably unobtainable.    The other possibility is something we may obtain even though the majority of peoples don't want it - the return to the hunter/gatherer life style preceded by a rather substantial reduction in population (say 97% or so). 

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