#28 - What is Rent Seeking?

How we've evolved from Feudal Lords into Bankers, Lawyers, and Consultants.

Another term you’ll hear thrown around in political discourse is “rent-seeking.” But as with many other terms, its often not fully understood.

The economic textbook definition of rent-seeking is the act of trying to increase one’s share of existing wealth without creating any new wealth. A classic example provides a good visual for this: a feudal lord who owns part of a river puts a chain across the river and has a toll collector there to collect from any passing ships. This generates no new wealth or productivity (indeed the river is now tougher to cross), but it does line the lord’s own pockets.

In modern day, rent-seeking isn’t much more subtle than that. Businesses lobby government for regulations that work in their favor and act as competitive moats. Just as insidious though: large companies tend to turn from true innovation into rent-seeking innovation and partner with other companies to ingrain their economic advantages without creating anything new. Banks and Realtors are great examples of this and create their own barriers through cartel-like behavior to ensure their advantages.

If you look at any economy as a whole, it’s easy to see that you want as little rent-seeking as possible. Since it does not create wealth and instead creates barriers, it makes an economy inefficient quite quickly by preventing innovation.

Let’s look at the toll collector in the example above. The lord’s rent-seeking creates an illusion of productivity that occupies that collector’s time. He may feel good about his role, but in reality his time is a waste. He may feel so excited about his role that he’ll form a union or advocacy group about the importance of his toll collecting. Yet ultimately he is only acting to hinder the economy rather than help it.

Of course, the lord could also claim that he his keeping that portion of the river safe, and that the toll is a necessary act to fund the protection and curation of that portion of the river. This is how lines are blurred. Is he providing some value? Perhaps. But it’s still going to be rent-seeking in most cases because human nature is hardwired to look for easy profits.

So it goes in the modern world as well. Rent-seeking won’t necessarily be a 0 to 100 thing – some jobs and industries may be doing 30% wealth generation and 70% rent-seeking or vice-versa. Realtors and Bankers have real purpose and value, but also engage in rent-seeking behaviors. There’s a reason that BLCs (bankers, lawyers, and consultants) are often referenced as the classic rent-seekers, with government workers often acting as the willful dupes to not just allow but enable such behavior.

I know a few too many BLCs to say too much more than that. Needless to say that this generalization doesn’t imply any one person’s virtue, vice, or value.

But when asking yourself what you should do with the time that you are given, rent-seeking is not the virtuous answer.