rent-seeking re-examined

["Devine, James" <jdevine@xxxxxxx>]

Title: rent-seeking re-examined

[was: RE: [PEN-L] pen-l masochism revisited]

I wrote that to clarify the concept of "rent seeking," we should >>add
adjectives or adverbs to qualify abstract nouns or verbs: ... we could
distinguish between political rent-seeking and "purely economic"
rent-seeking (within a market). Chicago/Virginia "laissez-faire"
economics would say that the latter doesn't exist... The left would say
that usually rent-seeking involves both political and economic elements,
so that purely political or purely economic rent-seeking are extremely
rare. ...<<

David writes: >It seems silly to argue about semantics, but I think the
semantics create unnecessary confusion.  Chicago/Virgina economics says
"purely economic" rent-seeking does not exist, because it DEFINES
"rent-seeking" as "political."  However, a Chicago/Virginia economist
would, I assume, have no problem agreeing that economic actors attempt
to maximize their profits through both "political" and "purely economic"
behavior.

>To pursue the point, a Chicago/Virginia [C/V] economist analytically
separates political behavior from economic behavior, because the
economist wants to demonstrate that political behavior is a bad idea and
economic behavior is a good idea.  You may disagree.  However, what I do
not think you can do is argue that the distinction is nonexistent or
analytically useless.  The fact that we can think of examples where it
is difficult to distinguish political from economic behavior, and the
fact that government activity is so pervasive and embedded even in the
most capitalistic of countries, does not obviate the fact that there is
recognizable "political" activity and recognizable "economic" activity,
so why call them the same thing?<

This brings up further good points, that I'd been distracted from in the
effort to distinguish between micro-level rent-seeking and society-level
historical processes. (For one good academic critique of the concept of
"rent-seeking" and its use, see Honderich, Kiaran. 1996. Producers and
Parasites: The Uses of Rent Seeking. _Review of Radical Political
Economics_. 28(2) June: 54-76. My view is slightly different from hers,
but I won't try to make the differences clear, instead focusing on my
perspective alone.) 

We need to go back to the key distinction between "normal" and "good"
profit-seeking and "bad" rent-seeking. The difference between these two
is that the former is seen as giving consumers a good deal, often by
providing new products that are wanted, promotes long-term beneficial
economic growth, etc. On the other hand, rent-seeking is a bad thing:
businesses get profits without contributing to the welfare of consumers
either now or in the future. It's really a normative distinction: in the
case of "normal" profit-seeking, the benefits of business activity
outweigh the costs (as judged by the economist), while for rent-seeking,
the benefits are less than the costs.

But C/V economists see themselves as doing only positive economics
(assuming that the positive/normative distinction could ever be
sustained in the real, empirical, world). So it's common for C/V
economists to try to weasel out of the normative nature of this
distinction by asserting that the only judge of what's good or bad is
what consumers are willing to pay for. Of course, this implies that
because "national defense" isn't purchased by consumers on the market,
it's not a good thing. So the normative nature of the distinction still
applies. Further, the assertion that consumers' dollar votes are the
only test is of course a normative assertion. Among other things, it
assumes that the heroin addict knows what's best for him or her -- and
for the societal and natural environments.

My emphasis concerning rent-seeking was that it involved merely
redistributional actitivity: capitalist A gains profits by doing X but
it does so by reducing the incomes of someone else, often another
capitalist. Often X involves seeking a monopoly in the market. By using
the coupon scheme on me, Safeway is struggling to destroy its rivals (in
LA, Ralph's and Albertson's) in the oligopolistic game, hoping for total
dominance (or at least as much as the trust-busters allow). This of
course involves normative elements, but they can't be avoided.

But let's get back to the main topic. The C/V economists argue that
there's a one-to-one correspondence (or close to one) between normal
profit-seeking and the purely economic sphere of market relations on the
one hand, and rent-seeking and the political sphere on the other. That
is, as Dave says, >it DEFINES "rent-seeking" as "political."<

This correspondence doesn't make any sense, so that the C/V definition
of rent-seeking as "political" simply represents their normative
political position and their pre-exising world view, i.e., their
ideology. First, it assumes that "purely economic" profit-seeking under
competitive conditions is always beneficial to consumers, as if there
were some god-like Invisible Hand that made sure that greed was always
good. This is not supported at all by even mainstream economics. A
business that pollutes the air dictates to the world that it must have a
polluted environment, while trespassing on our lungs. A business can
seek profits by figuring out how to externalize internal costs, e.g.,
dumping expensive-to-clean-up toxic wastes in the forest, poisoning the
water table, the plants, the beasts, and the people. It is cheaper for
an automobile company to use engines that encourage global warming than
to charge a high price for cars with more expensive, clean, engines.
There are only a small number of consumers who can afford to pay extra
for a Toyota Prius that pollutes significantly less than the average car
(and their decision to do so is encouraged by a Federal tax break and a
Hollywood fad). Most consumers can't take external costs and benefits
into account when making their "dollar votes." The reality of external
costs and benefits (what Friedman and H*yek try to minimize as mere
"neighborhood" effects, even when the "neighborhood" is the entire
ecosphere) totally trashes the idea that greed is always good in
competitive markets. There are also a lot of other real-world
limitations to the benefits of competitive markets, such as information
problems and economies of scale.

Second, the C/V school's posited correspondence assumes that government
activity is always unproductive or downright wasteful if it gets beyond
the "necessary" activities of enforcing individual claims on society's
resources (property rights), enforcing contracts (the "rules of the
game"), and national defense. Of course, this assertion makes the
invalid assumption that individual property rights, voluntary contracts,
and national defense are always a good thing.

But let's get to the stuff beyond this holy trinity. The C/V school
basically doesn't believe that "public goods" beyond the property-rights
system and national defense should be produced by the government,
because the "private" sector could be providing them and would do a
better job at doing so. This doesn't make sense at all. Any true public
good won't be provided by the "private" sector precisely because the
individual profit-seeking logic of that sector encourages free-riding,
i.e., taking advantage of public goods without paying for them. There
are lots of "impure" public goods. But to the extent that the resemble
pure public goods -- i.e., to the extent that they can't be divided up
among individuals and owned/controlled/benefited from by individuals --
profit-seeking in markets fails to provide them.

Related to this, Virginia economists such as Buchanan have an extremely
cynical and silly vision of politics. In addition to the assumption that
politics works according to "one person/one vote" in many cases (when
"one dollar/one vote" would be more accurate), the Virginia school
assumes that people vote _only in terms of what's good for them as
individuals_. Lars Udehn's book THE LIMITS OF PUBLIC CHOICE is an
excellent critique of this view. In the electoral sphere, people have
the ability to express their non-individualistic social values in a way
that is precisedly prevented by the market venue. Most people can't
afford to use "dollar votes" in the market to buy a
ecologically-friendly Prius in an effort to balance the societal costs
and benefits (i.e., the value of a clean natural environment). But they
can vote to elect people who then give tax-payers a break if they buy a
Prius. Kenneth Arrow once noted that individualistic greed is encouraged
by the market venue while the _expression_ of social values is encouraged
by the political venue (though he said it in more academic terms). Of
course, the C/V school would likely dub the special tax break for
purchases of environment-friendly "super ultra low emission vehicles" as
simply a matter of "rent seeking." But they're wrong.

>This is all started because there was a reference to somebody who said
that "free trade, too, is a form of protectionism and rent seeking."
Well, if free trade is a form of protectionism and rent seeking, then
what type of economic activity is not a form of protectionism and rent
seeking?  ...<

I'm all in favor of using clearly defined concepts as much as possible.
(The empirical world is too multifaceted, gray-shaded, ambiguous, and
confusing to give in to this fuzziness and confusion in our minds, too.)
I wouldn't say that "free trade is a form of protectionism and rent
seeking" except in specific circumstances, which I outlined. The main
point is that the _rhetoric_ of "free trade," "privatization," "free
markets," etc. is in practice often a cover for rent-seeking.

Jim