This post, “Rent-seeking is ruining America,” is the forth part of my series “Ill fares our Nation. This series of posts is about four of the themes in Angus Deaton and Anne Case’s book, Death’s of Despair and the Future of Capitalism. These themes are how the working people of American are experiencing the stagnation of income, the destruction of health-care, the decline of education and the prevalence of rent-seeking in America. This post is about the increase of rent seeking in America. Most of this comes out of my head, ie out of my reading for the last ten years. In the next two posts I’ll try to expand this with some expert comment.
Rent seeking is basically capitalism gone awry. Let’s begin with some basics about capitalism.
Capitalism, like most things in the real world is two-sided. It has both a positive, beneficial side and a negative, harmful side.
The positive side of capitalism is growth, process and prosperity. This side of capitalism is very real. Before the industrial revolution around 1800, before capitalism became a large force in our world, the world was not a happy place for many people. Most people were often hungry, various diseases decimated human populations everywhere and there were no such benefits as public health, public sanitation, or effective public education. Not to mention the dearth of cars, railroads, jet planes, air conditioning, electricity or iPhones. All of this stuff takes money and technology and when these are not available, these things just doesn’t happen.
If you make a graph with wealth as the vertical axis and time as the horizontal axis, you get a straight line all along the bottom of the graph on the pretty much zero wealth line for 99.99% of the human existence. This straight bottom line goes on and on from the first origins of man about 300 million years ago all the way up to the Rennaisance while the line rises almost microscopically and then up to 1800 or so where it jumps up another micron and then you come to the 20th century and where the wealth line shoots absolutely straight up, right thru the ceiling. This is what capitalism and science and the industrial revolution did to the world. This is what economists call economic growth. Without economic growth there is no new technology, no new science, no prosperity, no 78 years of life expectancy, no old age, no retirement. None of the stuff that we can’t seem to do without these days.
But there is a dark side to capitalism also. We began to see this in the 19th century when the industrial revolution began to take hold. Capitalism basically began as the industrial revolution happened. These two major events in the western world are essentially part of the same thing. As the industrial revolution and capitalism progressed, people began to move off farms and into dirty, crowded cities where the new industrial jobs were. Here they were exploited in dark, unsanitary factories and lived in miserable, dirty, overpopulated slums. And then there were the robber barons who worked their employees, many of whom were children as young as five of six, to death and who took all the profits their employees made possible so they could live in unimaginable grandeur. This was the world that Charles Dickens described with so much colorful detail.
And as time went on, the darker side of capitalism and progress began to be seen even in our modern world where overpopulation, overconsumption, obesity, unhealthy food, a decline in education, the end of nature and climate change became more and more apparent. And now we are at the point where climate change and its sister, pandemic are beginning to look very dark indeed.
One of the main reasons for the dark side of capitalism is what many economists call rent-seeking. Actually, rent seeking is the end of progressive capitalism and its replacement with something that many people call capitalism but is actually a long, long way from what Adam Smith contemplated. Rent seeking is a a quick, fast and corrupt way of creating wealth for the few without the beneficial growth and prosperity that real capitalism provides. Rent seeking is really no longer capitalism at all.
The heart and soul of real capitalism is competition. Without real competition there is no real capitalism. If you are in business and you find you are going broke, and you live in a nation where the government keeps monopolies in check there are only two things you can do. You can lower your prices or you can make your product better. Both of these things, if done properly will make you wealthier and they can also make both economies and nations grow and get better for everyone. Cheaper goods and higher quality are the essence of growth and prosperity for all.
This is what good capitalism all about. Here is how this actually works:
Businessmen want to make a good profit and make more money. Which is a worthy goal. So they make more of their product, and since they want people to like their products and buy a lot of them, they make them of good quality and they sell it at a fair price. They do this so they can sell a lot of goods and make a good profit. But they soon find they can’t do this by themselves and so they hire more and more employees and buy more and more raw materials which means more and more employees for other people and more and more jobs everywhere. And it soon becomes apparent that if you want to make quality stuff you need quality, skilled employees who need to be paid better and better wages. Without happy, skilled, highly productive workers who demand a good salary, good things do not happen in businesses. At least in the long term.
And so this process of many merchants making more and more products and cheaper and better products soon involves all of the society. This is essentially how capitalism ends up in creating growth and prosperity for everyone.
This is why most good nations insist of having healthy competition. Without real competition none of these good things happen.
The opposite of competition is monopoly. In a monopoly there is no need to charge low prices or make good quality merchandise, or pay good wages. You just find a way to crush your competitors and then you can charge whatever you like and make shoddy products and your customers will be forced to buy your shoddy expensive goods. They will have no choice. There is no one out there offering anything better.
And this what rent seeking is all about.
Rent seeking is the stifling of competition, the destruction of competition and thus the destruction of real capitalism. And in the long run this ruins nations. It enables the select few who destroy competition to make all of the money. If unchecked, it resets in massive inequality. The few become filthy rich and all the rest have basically nothing.
Rent seeking shows up in various guises. One of the most common is using politics to quash all of your competition. If you can manage to buy your local politicians and maybe even the national government, then your political cronies can deny licenses to your competitors or make laws that favor you and drive your competitor out of business. This is basically called lobbying, or when it gets really bad it is called crony capitalism.
Or it can be much more sophisticated. You can make a deal with your paid-for government to bail you out if things go wrong for you. This is what happened in in 2008 when bankers and financiers managed to become so corrupt that credit froze up and no one could borrow money. And since borrowing and lending money is the life blood of big business and what banks do for a living, it wasn’t long before big banks were on the verge of bankruptcy. But the Federal government bailed all of them out and soon they were back in business and getting even richer and richer. And guess who lost? The people of course; they paid the real price for what came to be called the Great Recession in lost mortgages, lost homes, lost jobs and lost lives.
And it can be even bigger than this, much much bigger. Essentially the entire financial sector in America is engage in rent-seeking. Finance was once a legitimate business in America. It enabled those who wanted to be businessmen to borrow money to get started on. No one has enough money to buy everything they need to start up a business unless they have a super rich Mom and Dad and that doesn’t often happen. Most prospective business men need capital to open a business and reputable banks provided that capital for them at a price that is called interest.
All of this is normal and good and necessary in a capitalistic society where everything is working as it should. Business loans are a necessary part of good capitalism. Capitalism needs new businesses. And then these new businesses need more capital to grow larger and hire more employees. When this happens the entire economy grows and more and more people make good salaries. And then these people buy houses and cars and college educations for their kids. This is how the entire economy gets more and more prosperous and more and more fulfilled. This is also how the word “well-being” gets to be a real thing in real nations
In short, this is the way good capitalism creates good economies and good societies and happy, prosperous, healthy and well educated citizens.
But sometimes a few who are usually already very rich and powerful decide they want to get much richer and much more powerful, much more rapidly. And so they become rent seekers who decide to cheat. They decide to hire some friendly politicians to help them destroy all of their competition. And if the nation is a shortsighted and weak enough, they allow this to happen.
And pretty soon you have a nation like America has become. A nation of rent-seekers. A nation of a few incredibly wealthy men living in enormous luxury while the rest barely get along and many who don’t even do that.
I’m going to continue this current series on good and bad capitalism in a couple more episodes I think. I want to explain in more detail just how rent-seeking happens in America by looking at a great essay on the subject by James Surowiecki. And then I want to look at how Case and Deaton describe the way in which American was destroyed by rent seeking during the last 40 years.
If we want to save our American wild places and National parks, we are going to have to do something about the fact that rent-seeking is ruining America. We have got to realize that there are things more important than generating the most possible profit with the least possible effort.
More reading on this subject
This post, “Rent-seeking is ruining America,” is the forth part of my series “Ill fares our Nation. This series of posts is about four of the themes in Angus Deaton and Anne Case’s book, Death’s of Despair and the Future of Capitalism. These themes are how the working people of American are experiencing the stagnation of income, the destruction of health-care, the decline of education and the prevalence of rent-seeking in America. This post is about the increase of rent seeking in America.