Friday, June 19, 2015

Rent-Seeking Predators

What should we call the heartless, greedy, amoral cretins who are responsible for destroying our nation's economy, and for ruining the lives of countless million Americans?  Lets cut right to the heart of the matter and call them Rent-Seeking Predators! 

According to Wikipedia, "predation is "a biological interaction when a predator (an organism that is hunting) feeds on its prey." If you watch NatGeoWild, you know all too graphically what that means in the natural world. Predation in human society, of course, is an analogy. It does not involve actual ingestion of one person by another, but the practical effects on the well-being of "the prey" are every bit as gruesome and catastrophic. In our unnatural and hypercompetitive world, depriving someone of the opportunity to earn a decent livelihood and to realize their full potential is tantamount to devouring their life-chances, and--all too often--cutting short their lives. Many who would not think of committing such inhuman atrocities as individuals often do so--blissfully unaware--as members of predatory organizations and institutions. 

But why call these particular predators "rent-seeking"? Probably the most instructive way to understand what such liberal economists as Joseph Siglitz, James K. Galbraith, and Paul Krugman,    mean by "rent" is  the polar opposite of "profit." Ideally, they consider profit to be the legitimate product of invested capital, ideas, and labor--an award for risk-taking and the most productive utilization of resources. Rent, on the other hand, is the illegitimate "payment made (including imputed value) by non-produced inputs such as location (land) and for assets fortified by creating official privilege over natural opportunities (e.g. patents)." They are income reaped from other people's investment, ingenuity and work, as well as from conditions created by society and government. In simple terms, economic rent is "an excess where there is no enterprise or costs of production." It is "unearned and passive income," and "has important implications for public revenue and tax policy. One of the nastiest words in the economists' lexicon is rentier.

"As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance." In other words, modern. democratic  governments can tax as much of economic rent as they decide, under constitutional due process, because it is the common property of all its citizens, i.e. "unearned" by any additional effort made by "rentiers." Economic rents are "excess returns," above the "normal levels that are generated in competitive markets--a return" in excess of the resource owner's opportunity costs." They are "extra returns that firms or individuals obtain due to their positional advantages."

The rentier mindset was succinctly captured by Adam Smith in The Wealth of Nations  "As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sown , and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was held in common, cost the laborer only the trouble of gathering them." Once the land is privatized, "he must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of the land."

Rent-seeking, according to Wikipedia, is "an attempt to gain economic rent (i.e. the portion of income paid to a factor of production in excess of that which is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than creating new wealth. Rent-seeking implies the extraction of uncompensated value from others, without making any contribution to productivity. Rent-seeking is distinguished from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions. Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions, such as the power of government, to redistribute wealth among different groups without creating new wealth. In a practical context, income obtained through rent-seeking may contribute to profits in the standard, accounting sense of the word. An example is spending money on political lobbying for government benefits or subsidies, in order to be given a share of wealth that has already been created, or to impose regulations on competitors, to increase market share....The concept of rent-seeking would also apply to corruption of bureaucrats who solicit and extract bribes for applying their legal, but discretionary, authority for awarding benefits to clients. Tax officials, for example, may take bribes for lessening the burden of tax payers.            

A closely related concept is regulatory capture, which refers to collusion between firms and the government agencies assigned to regulate them, an extensive rent-seeking behavior, especially when the government agency must rely on the same firms for knowledge about the market. The chair of the British Financial Services Authority, Lord Adair Turner, has argued that innovation in the finance industry is often a form of rent-seeking. The high proceeds of drug trafficking are generally regarded as rents, because they are neither legal profits nor the proceeds of common-law crimes. Rent-seeking also involves a  major moral hazard, because the proceeds are entirely unrelated to any contribution to total wealth or well-being, and because it results in a sub-optimal use of resources--money spent on lobbying rather than on research and development, improved business practices, employee training, or additional capital goods--seriously retarding real economic growth, which depends on actual, rather than ersatz, innovation. In The Rise and Decline of Nations, Mancour Olson argues that, as countries become dominated by organized interest groups, they lose economic vitality and fall into decline. Some critics have argued that rent-seeking has decreased total income in the USA by 45 percent, while many agree that total rent-seeking costs "equal the sum of aggregate current income plus the net deficit of the public sector." Joseph Stiglitz has argued that rent-seeking contributes significantly to income inequality through lobbying for government policies that permit the wealthy and powerful to acquire income, "not as a reward for creating wealth, but by grabbing a larger share that would otherwise have been produced without their effort." Such students of international economics as Thomas Piketty and Emmanuel Saez have concluded that "much of  income inequality is a result of rent-seeking among wealthy tax payers."              

In The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, University of Texas economics professor James K. Galbraith bluntly defines our "rent-seeking predator state" as "a coalition of relentless opponents of the regulatory framework on which public purpose depends, with enterprises whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal." They" seek to control the state partly in order to prevent the assertion of public purpose and partly to poach on the lines of activities that past public purpose has established" They "have no intrinsic loyalty to any country," and "operate as a rule  on a transnational basis, and naturally come to view the goals and objectives of each society in which they work as just another set business conditions, more or less inimical to the free pursuit of profit." They "assuredly do not adopt any of society's goals as their own, and that includes goals that might be decided upon, from time to time, by their country of origin, the United States. As an ideological matter, it is fair to say that the very concept of public purpose is alien to, and denied by, the leaders and operatives of this coalition."

None of these enterprises has an interest in diminishing the size of the state, (in fact, they want ever bigger government)  and that is "what separates them from the principled conservatives" Their raison d'etre "is to make money off the state--so long as they control it. And this requires the marriage of the economic and the political, which is what, in every single case, we actually observe...The major battlegrounds of American domestic politics emerge clearly once there is an understanding of the Predator State." The real political conflict is not "government versus the state." It is a continuing battle over "who gets cut in on the deal--and a corresponding argument over who gets cut out, and how, for there is profit in both cutting in and cutting out." We actually live in "a corporate republic, where the methods, norms, culture, and corruption of government have become those of the corporation."  A narrow coalition of the high plutocracy actually rules, "mainly from the resource industries (oil, mining, and agribusiness) and the surviving old-line industrial firms (notably automobiles, steel, and defense), combined with big media, insurance, and pharmaceuticals. Ironically, Galbraith insists that this alliance found itself "entirely dependent on noneconomic issues directed at low-income working Americans through the one social institution that effectively reached most of them: their churches." Well, beer commercials help a lot.

But, he cautions, this does not constitute class war, because "not everyone who is successful under capitalism is a fan of the Predator State." It is a "the enemy of honest and independent and especially of sustainable business, of business that simply want to sell to the public and make a decent living over the long run." Predatory regimes, are "more or less exactly, like protection rackets." They are feared, but neither loved or respected. Its demise, he proclaims, will come "only when the more reasonable, more progressive part of the business community insists on it and is willing to make common cause with unions, consumers, environmentalists, and other mobilized social groups to bring the predators to heel." It is, he intones, "a race against time."      

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