Wednesday, November 28, 2012

Rent Seeking

The quickest way to get rich is to occupy some valuable resource and collect a lot of rent for doing it. Wikipedia on Rent Seeking:

In economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One example is spending money on political lobbying in order to be given a share of wealth that has already been created. A famous example of rent-seeking is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures. People accused of rent seeking typically argue that they are indeed creating new wealth (or preventing the reduction of old wealth) by improving quality controls, guaranteeing that charlatans do not prey on a gullible public, and preventing bubbles.

Many current studies of rent-seeking focus on efforts to capture various monopoly privileges stemming from government regulation of a market. The term itself derives, however, from the far older practice of appropriating a portion of production by gaining ownership or control of land.

One problem with rent seeking is that unlike innovation or production, it doesn't add anything to the economic pie.

Chrystia Freeland, in her book Plutocrats, has a fascinating chapter on how rent seeking has led to vast new fortunes all over the world. the precipitating event was the wave of economic liberalism (not to be confused with what conservatives in the US consider to be liberalism) that swept the world since the 1980s. The collapse of the Communist regimes, and socialist ideas more generally, led to a vast sell off of government owned enterprises. Because these companies had been badly run under socialism, they were often undervalued, so the bold and competent who had money could often pick up bargains, especially if they had valuable contacts and were willing to appropriately grease the wheels with bribery.

This led to an explosion of billionaires in Russia, India, Mexico and other countries.

Rent seeking in other countries like China and the US was usually more indirect, but active nonetheless. The key is usually the manipulation of government officials and institutions. Raj, the pseudonymn of one of Freeland's informants, has a perspective: “

You could be a billionaire if you moved to India, too,” he tells me. “All you need is the luck to meet the right government official and a willingness to risk going to jail.”

Freeland, Chrystia (2012-10-11). Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (p. 202). Penguin Group. Kindle Edition.

Of course it's not always necessary to take that risk. In the US it's perfectly legal to bribe Congress and other officials with campaign contributions, even tens of millions to Super Pacs, thanks to our Supreme Court, itself populated by some judges (Scalia, for one) who don't think they are being bribed by taking rides on private jets and accepting other valuable considerations.