In economics and public choice theory, rent-seeking is a behavior that is aimed to
increase one's existing wealth without creating new wealth for others. In other words, it
describes the tendency of some people to seek profits without doing any real work.
A classic example of rent-seeking is the story of a lord. The lord inherited a lot of land
and wealth and never worked a day in his life. However, as the lord knows of another man who
has even more than him, being wealthy isn’t enough. He needs more and he has an idea.
The lord sets up a chain across the river that flows through his land
and hires a collector to charge fishermen a fee if they want to pass through.
There is nothing productive about the chain.
The lord has made no improvements to the river and is not adding value to society in any way,
directly or indirectly, except for himself.
All he is doing is finding a way to make money from something that used to be free.
To society there are three costs to this
First, the direct costs . The fisherman, who now has to pay a fee, needs to sell the fish at a
higher price to make a living. On the market fish become more expensive for everybody.
Then the opportunity costs . The lord invests his money and resources into equipment that
adds no value to society , instead of investing into something meaningful,
such as fixing up the broken school building.
Lastly, the moral costs. The fisherman feels that paying for something that used to be free
is unfair and, following the lord’s example, is more likely to engage in rent-seeking himself.
What if he were to eliminate all his competitors and then increase prices?
The fisherman turns to his friend — a smooth talker who cares for the environment — to
help him convince the lord of an idea: If a fence were to be running down the banks,
it would protect the river from overfishing because access would be limited.
When rent-seekers and moral advocates lobby in teams, economists speak of bootleggers
and baptists. The lord agrees and soon after the river is being protected.
Once the fence is built, only a few fishermen are able to access the
river . That means our fisherman not only has more
fish than ever before , but he can also keep selling them at very high prices.
To keep it that way, the fisherman and his lobbyist soon form the fishery department
under the royal patronage of the lord . From this day on, only those who pay a license fee
are allowed to fish in the river. The lord gets a nice cut for his growing empire
On the market the fish has become so expensive that the commoners begin to
complain. Unfortunately there is little they can do.
Without ever taking notable risks the landlord, the lobbyists,
and the fisherman get richer every day. Or as economists would say, without having skin
in the game, they create a lot of wealth for themselves but no wealth for society.
In theory, rent-seeking behavior reduces economic efficiency through the misallocation of resources.
It also hinders the creation of wealth, reduces government revenue, increases income inequality,
and potentially leads to national decline. The term itself was coined by the British
economist David Ricardo, who had built his ideas on the thoughts of the Scottish economist
Adam Smith. The original meaning of "rent" does not refer specifically to payment on a lease,
but to gaining control of land or other natural resources.
In 1776 Adam Smith wrote: “As soon as the land of any country has all become private property,
the landlords reap where they never sowed, and demand a rent. The wood of the forest, the grass
of the field, and all the natural fruits of the earth, which, when the land was incommon, cost
the laborer only the trouble of gathering them, come, to have an additional price fixed upon them.
He must then pay for a license and must give up to the landlord a portion of what his
labor either collects or produces. This portion constitutes the rent of land.”
How about you, where do you see rent-seekers?
Are they in your government and in the corporations?
Or do you see them in the streets in the form of gangsters or corrupt police?
Maybe you even have your own personal story where you seek to profit without adding any value?
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