Professor Paul Frijters recently wrote about the role of economists in the fight against rent-seeking.
The search for more privilege is normal but, in order to have a healthy society, so must there be a perennial fight against it for otherwise the privileged end up lording over the rest who just have to grin and bear their inferior status. And if any profession is tasked with thinking about how to tackle privilege, it is economists. It is one of the good things we do.
It’s a noble cause, and one that I support. Having been involved on both sides of the market for political influence – property developers on one side, and government departments and regulatory bodies on the other – I feel I have gained a certain perspective on this issue that doesn’t quite resonate with the mainstream economic view.
From the comments it is quite clear that economists generally support the idea of a ‘fair go’ for all, and to cut back rent-seeking privileges wherever possible. But unfortunately, as I have mentioned many times, mainstream economics has no accepted model of economic rents in a market economy. Rents are always a result of market failures, regulatory capture, or some kind of other favourable regulation. If the market was perfect, economic rents would evaporate.
This theoretical baggage is not helpful. Funnily enough, it leads to a focus on government as a breeding-ground of rent-seeking, since perfect markets eliminate any such activity – at least in their model.
A proper starting point would acknowledge that economic rents are generated at all times by productive activity. Each time we improve output per unit of a particular input, and that input is fixed, owners of that input gain an economic rent.
Land is the obvious focus for the study of rents. But consider the same concept in a slightly more abstract setting – time. Without saying it explicitly, when we talk about economic growth and output we usually mean per unit of time. Thus, every improvement of output per unit of time goes to those ‘owners’ of time. Which is everyone. The perfect tax is a ‘head tax’ which is in fact a time tax per person.
But since rent also accrues to land owners, owners of intellectual property and copyrights, owners of quotas and licences, and all fixed inputs into production, they may very well compete for both improvements in output per unit of their input, AND the surplus generated by increasing output per unit of time.
The distribution of rents through society ultimately depends on the legal, institutional and social arrangements of a country. It is a choice.
The general rule of thumb is that rents cannot be destroyed, only reallocated. Thus, if we focus on taxi licences, pharmaceuticals, and government spending as areas to eliminate the ability to procure rents, then remaining rentiers will benefit – landowners, banks, and the like. Indeed, if eliminating these rents improves the overall productive capacity of the economy, the rents accrue to other owners of fixe factors of production may be great than those taken from the targeted sector.
If economists want to be society’s heroes, they need a fundamental market model that can be used to analyse the distribution of the economic rents generated by society.
Let’s look at Frijters’ list of cases where rent-seeking could be targeted, and my reaction.
1. banana import bans,
Well, there is far more to ‘free trade’ than most economists realise. This is possibly the smallest issue around right now.
2. the take-over of semi-public institutions by overpaid bureaucrats,
This is of course the problem with attempting to create government owned entities that are able to act like private enterprise. Is it an argument for government departments to directly operate all government activities? Or for privatisation, where overpaid executives will capture rent through their pay and options, which might be ten times higher?
3. over-subsidised medicines,
I have no idea what this means. Subsidies for medicine simple fall under the banner of public health, which we all seem to agree is a priority. Some medicines may be over-subsidised, some under-subsidised, but by what measure I don’t know.
4. differential costs of government deposit guarantees across financial institutions (which was probably instrumental in killing off many of the smaller financial players),
Well, there is far more to banking than having another player join the mix, only to siphon off revenue to over-pay their senior executives.
5. and the National Broadband Network
I have no idea what is wrong with this.
These are all small fry, especially when compared to land owners and bankers. In Frijter’s follow up post he explains how privileged rent-seekers are protected by the myth, or folk-story, that surrounds them. He explains in the case of the medical professions –
…medical specialists have a legally guaranteed monopoly on particular medical activities…
Now, whilst this reality is known by the insiders, this is not the public face of medical specialists at all. In the eye of the public, these are the heroes in Dr House and Gray’s Anatomy.
The economics profession as a whole has in fact fallen for their own folk-story about the nature of rents in regards to land ownership and banking (where private banks generate rents through seignorage). When the profession debates rents, these largest of rent-seekers are absolutely ignored.
The problem of course is that economics as a discipline does not a have a core working model of rents. Which means it is hard to put your finger on what is rent seeking. They get part the way there with models of monopolies, duopolies, imperfect competition. But invariably they all lead to the conclusion that there exist conditions, where markets are perfect or close to it, that economic rents cease to exist.
This is nonsense.
Since economic rents always exist, the question is how they are best distributed to achieve the social goals of society? The history of political-economy and moral-philosophy used to debate these very topics that economists ignore. And we need to bring back this debate. No longer can economists claim to be ‘technicians’ – with objective approaches to analysing distribution.
We shall wait and see what Frijters’ future posts on this topic reveal about the mainstream view, where it is useful, and where it falls short.
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