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The Calling: Why “Rent-Seeking”?

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Public Choice theory, especially in the hands of James M. Buchanan and Gordon Tullock, has given libertarians a very effective set of arguments against government intervention. In the face of cries of “market failure,” when real-world imperfect markets quite understandably fall short of the unrealistic model of perfect competition that mainstream economists use to portray free markets, the Public Choice school gives us a theory of political failure that indicates why government intervention will not improve on market “imperfections.”

Tullock in particular has developed one part of this argument by noting that the costs of government intervention include not just the direct welfare losses caused by the policy, but also the resources wasted as private individuals who expect to benefit or be harmed by the intervention attempt to influence the politicians. This so-called rent-seeking activity is waste piled on top of inefficiency.

When people encounter this idea for the first time, they are often confused by the term “rent-seeking,” because it’s not clear what “rent” has to do with it.

The answer comes from the history of economics. The classical economists thought that their object of study was physical resources: land, labor, and capital. Each type was thought to generate a payment — rent, wages, and interest, respectively. In particular, the rent earned by a piece of land was believed to depend on its particular characteristics, such as location, and the improvements that owners made to it, such as clearing away brush. The advantages of one piece of land over another enabled it to earn a higher rate of return, or more rent.

After the marginalist revolution in the 1870s, people abandoned the “objectivism” of the whole land, labor, capital scheme. However, the idea behind rent became generalized to refer to any superior return that a valuable object was believed to earn because of its special properties. For example, suppose I can make $100,000 teaching economics and my next best option (my opportunity cost) is to write a restaurant-review column for a newspaper at $75,000 per year. Economists would say that the $25,000 difference is a “rent” to my particular skills at teaching economics. So in modern parlance, the term “rent” has become defined as “any return above opportunity cost to a specific factor of production.” In other words, it is like “profit,” but applied only to a single resource or input rather than to a whole enterprise.

The link to “rent-seeking” is that when you obtain a government privilege, like a monopoly in producing some good, it enables you to earn profits in excess of what you would earn otherwise. The privilege is like another input that generates a return above opportunity cost. You might spend $100,000 lobbying to get a monopoly that generates $1,000,000 in profits. The extra profits are due to the government-granted privilege. The privilege generates a rent, or a return above cost. The early Public Choice theorists chose to frame the pursuit of such privileges in this way and adopted the term “rent-seeking” to describe the expenses people undertake to obtain the rent from a privilege. It was also convenient to have a term to distinguish the attempt to make profits in the market by creating value (plain “profit-seeking”) from the attempts to profit from political privilege.

So there is a reasonable explanation for the odd-sounding term “rent-seeking.” Even so, we might be better off with a term that is more descriptive of what’s really going on. My own preference, as might be gleaned from the prior paragraphs, would be to call it “privilege-seeking.” What government does when it intervenes through regulation, subsidies, and monopolies is to bestow privileges on some firms, which enables them to earn additional profits not available to their (potential) competition. The notion of privilege suggests something “unearned,” which is exactly what the profits derived from government privileges are, if we think of “earned” as “providing value to consumers.”

Libertarians can raise all kinds of objections to government intervention and its associated rent-seeking, but for non-libertarians, the use of the language of privilege might be especially helpful in tapping into their belief in equality — a belief that libertarians should share since it is a part of the liberal tradition. Whatever one’s view of the market, if one thinks people should be equal before the law, then one should object to government privileges. Whenever we talk to the general public, we should avoid the use of “rent-seeking” and use “privilege-seeking” instead. Not only is it less confusing, it names the problem for what it is and suggests that an important feature of the libertarian world is the absence of such privilege.

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    Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY and an Affiliated Senior Scholar at the Mercatus Center in Arlington, VA. He is the author of two books, Microfoundations and Macroeconomics: An Austrian Perspective (Routledge, 2000) and Monetary Evolution, Free Banking, and Economic Order (Westview, 1992), and he has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and the economics and social theory of gender and the family. His work has been published in professional journals such as History of Political Economy, Southern Economic Journal, and The Cambridge Journal of Economics. He has also done public policy research for the Mercatus Center, Heartland Institute, Citizens for a Sound Economy, and the Cato Institute. Horwitz is also a Senior Fellow at the Fraser Institute in Canada and a contributing editor of The Freeman. He has a PhD in Economics from George Mason University and an AB in Economics and Philosophy from The University of Michigan. He is currently working on a book on classical liberalism and the family.