The term “rent seeking” is a derogatory term that implies companies and people seek to take more than they earn. It hearkens to some Marxist ideology as well. However, especially when combined with regulatory capture and bureaucratic corruption, rent seeking is a valid concept. What happens when the shoe is on the other foot and people and organizations engage in rent seeking from a social justice perspective? Is it rent seeking or corruption for actions to secure social justice? Does the end justify the means?
Investopedia defines rent seeking as follows: “Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.”
Political scientists and economists traditionally apply the term “rent seeking” to capitalists, especially the so-called robber barons from the Gilded Age. However, what the definition does not seem to consider is value creation. Value creation could be a subset of the “contribution of productivity,” but productivity does not mean value creation. We can be highly productive in activities that produce little value or may even destroy value. While the robber barons could be cruel and demanding by virtually any measure, they created the economy and infrastructure that saw the United States through two world wars. The robber barons also provided tremendous social value with the libraries, universities, and museums they funded along with their other charitable activities. These benefits do not excuse their predatory actions, but they created extensive value, which mitigates the amount of rent-seeking behavior.
The term “rent seeking” and its definition hearken back to Karl Marx’s terminology and critique of capitalism. He was most decidedly against any form of rent seeking. Perhaps it is no accident that unions grew and perhaps reached their high point during the Gilded Age. After the Russian Revolution in 1917, the West, particularly the US, turned away from anything resembling communism. The term “rent seeking” is still a charged term and concept however.
The definition of rent seeking says it is often a function of government programs. I have covered this in several blog entries (“Defending the Republic: Scenario 1 Regulatory Capture,” “Defending the Republic: Scenario 2 Policy Domination,” “Regulatory Capture and other Bureaucratic Problems,” “DIE Hydra,” and “Critical Thinking and Policy Development and Analysis”). Organizations use regulatory capture to engage in rent seeking from government programs.
A good example of rent seeking among government programs is a homeowner that builds a house in an area with frequent floods, fires, or hurricanes, yet he does not purchase the appropriate hazard insurance. When disaster strikes, the homeowner expects, if not demands, the Federal Emergency Management Agency (FEMA) to pay the costs to rebuild. FEMA does—why? Is there some deep regulatory capture going on by the home lenders and insurance companies? More study is required, but I suspect so.
Let us now look at a (hopefully) fictitious scenario. Suppose someone you have never met before walks into your house, opens the refrigerator, and starts helping themself to food. Then, they take your ATM card and withdraw half of your bank account. Next, they sleep in your bed. What would you do? Is this theft? Would you offer them the rest of your bank account, food, and shelter, or would you call the police?
In a sense, this is rent-seeking behavior. The person is taking what belongs to you and offers nothing in return. The person does not offer any compensation or services to pay for the food, money, and use of your home.
Now, let us look at a few examples we see in the US today.
- There are demands for the rich to pay “their fair share” of taxes. What is a “fair share”? Does it matter? The National Taxpayer Union wrote,
New data from the IRS find that the top 25 percent of earners paid nearly 89 percent of all income taxes in 2020. This is the highest share of income taxes paid seen in the tax data available going back to 1980. Lower income earners carry little of the overall income tax burden, with the bottom 50 percent of earners owing 2.3 percent of the national share.
Is the bottom 50 percent engaging in rent seeking? Do the rich owe more taxes?
- Illegal aliens come into the US and immediately receive food, shelter, and money. They have done nothing to earn it and almost certainly will not pay it back. In addition, schools get crowded and must pay to educate children that are not prepared for their grade level and do not speak English.
- Standards are lowered to allow people who are otherwise not qualified to get positions or attend programs. People who are qualified may not compete for the positions or a place in the programs.
- City attorneys do not prosecute crimes. Some say the individuals are entitled to steal to make up for past discrimination.
- The Biden administration wants to forgive student loans. Students may choose degrees that have little or no relevance to jobs. Then, they cannot get jobs and cannot pay their student loans. Meanwhile, people who chose degrees that are relevant to the job market and can pay their loans, as well as people who pay taxes but never went to college, are required to pay for the student loan forgiveness program.
- Likewise, the administration wants people who do not need to pay large mortgage origination fees to pay higher fees so people that do not qualify for lower fees can pay lower fees.
These examples all meet the definition of rent-seeking behavior. They also have a corrosive impact on society. They lower standards, reduce personal responsibility, and penalize a large segment of society. However, corrosive acid can be used in valuable applications, such as acid etching.
We still see the value the robber barons created from both their commercial efforts and their charitable/social efforts. It remains to be seen whether we will see value from the social justice movement. One thing is for sure, the corrosive effects of rent seeking eat away at the rule of law, which is a foundation of American prosperity.
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