Economic Principle: Bad Ethos of Rent-Seeking

Go Lean Commentary

Imagine a person making a resolution to improve their health…
… but they smoke cigarettes.

The expectation first would be:

Quit smoking!

One does not have to be a medical doctor, a PhD or a genius to glean this logic. It is now just common sense. Alas, common sense is not so common!

This commentary is not about smoking. It is about economics and public choice theory; see VIDEO’s below. In particular this commentary is about the bad Economic Principle referred to as “rent-seeking”. (This aligns with alternate Economic Principles regarding sources of income; other commentaries detailed the concepts of profit-seeking and wage-seeking). This is a big deal! Imagine a government public health department gifting cigarettes to people as a public health policy. Yes, it is that bad! This is the formal definition of “rent-seeking”:

CU Blog - Economic Principle - Bad Ethos of Rent-Seeking - Photo 1Rent-seeking is an attempt to obtain 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 by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. The classic example of rent-seeking, according to Nobel Laureate Economist Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free.[5]

“Finding a way to make money from something that used to be free”! How evasive is this practice? How can we identify it and how can we stop it?

The Caribbean is in crisis! Surveying the economic landscape of the region, we see a preponderance of rent-seeking as public policy in one member-state after another; see international Examples below. Alas, the book Go Lean…Caribbean, quoting famed economist Paul Romer (Page 8), declares that a crisis is a terrible thing to waste. Currently the region features unsustainable societal abandonment rates, exhaustive unemployment rates and near-Failed-State statuses.

The premise in this commentary is not an easy one. Just like it is common sense for a smoker to quit in order to preserve health/wellness, it is hereby acknowledged that this is “easier said than done”. Common sense is not so common! This heady discussion of advanced concepts in economics is an example of the heavy-lifting required to elevate Caribbean society.

The Go Lean book seeks to reboot and reform the economic engines of the Caribbean by being technocratic in applying best practices from the field of Economics. This intent is declared at the outset of the book with this Declaration of Interdependence (Page 10) for the region to work in unison to remediate the broken systems of commerce:

Preamble: As the colonial history of our region was initiated to create economic expansion opportunities for our previous imperial masters, the structures of government instituted in their wake have not fostered the best systems for prosperity of the indigenous people. Despite this past, we thrust our energies only to the future, in adapting the best practices and successes of the societies of these previous imperial masters and recognizing the positive spirit of their intent and vow to learn from their past accomplishments and mistakes so as to optimize the opportunities for our own citizenry to create a more perfect bond of union.

One of the basis of understanding this complex economic subject of “rent-seeking” is the review of the book The Rise and Decline of Nations by Economist Mancur Olson; in this publication, the writer traced the historic consequences of rent-seeking. He argued that the extremes of laissez-faire (the traditional economic philosophy in North American economies) and a command socialist economy (popular in Europe) would avoid rent-seeking, while a mixed economy would be subject to it.  Dr. Olson claimed two distinct groups (actors) with separate agendas: an encompassing organization with the broader social collective interest, versus the narrower distributional coalition – the special interest – who would naturally be a rent-seeking group that would slow down economic growth. See this detailed encyclopedic definition of the width-and-breadth of rent-seeking, here:

Encyclopedia Reference: Rent-Seeking

In the field of Economics and public choice theory – the application of economic thinking to political issues – “rent-seeking” is seeking to increase one’s share of existing wealth without creating new wealth. The effects of these efforts are reduced economic efficiency [in the community] through poor allocation of resources, reduced actual wealth creation, lost government revenue, and increased income inequality,[1] and, potentially, national decline.

Attempts at capture of regulatory agencies to gain a coercive monopoly can result in advantages for the rent-seeker in the market while imposing disadvantages on competitors. (The term regulatory capture directly refers to a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating). The term “rent-seeking” itself is attributed to Economist Gordon Tullock in its modern sense with political connotation but with antecedents and common sense back to Ricardo.[2]

The idea of rent-seeking was developed by Gordon Tullock in 1967.[2] The expression rent-seeking was coined in 1974 by former World Bank Chief Economist Anne Krueger.[3] The word “rent” does not refer here to payment on a lease but stems instead from Adam Smith‘s division of incomes into profit, wage, and rent.[4] The origin of the term refers to gaining control of land or other natural resources.

Georgist economic theory – economic value derived from natural resources should belong equally to all residents of a community – describes rent-seeking in terms of land rent, where the value of land largely comes from government infrastructure and services (e.g. roads, public schools, maintenance of peace and order, etc.) and the community in general, rather than from the actions of any given landowner, in their role as mere titleholder. This role must be separated from the role of a property developer, which need not be the same person, and often is not.

In many market-driven economies, much of the competition for rents is legal, regardless of the harm it may do to an economy. However, some rent-seeking competition is illegal – such as bribery, corruption, smuggling, and even black market deals.

Rent-seeking is distinguished in economic theory from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions.[6] Profit-seeking in this sense 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.[7] In a practical context, income obtained through rent-seeking may contribute to profits in the standard, accounting sense of the word.

An example of rent-seeking in a modern economy 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, in order to increase market share.

CU Blog - Economic Principle - Bad Ethos of Rent-Seeking - Photo 3A famous example of rent-seeking is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures. Taxi licensing is a commonly-referenced example of rent-seeking. To the extent that the issuing of licenses constrains overall supply of taxi services (rather than ensuring competence or quality), forbidding competition by livery vehicles, unregulated taxis and/or illegal taxis renders the (otherwise consensual) transaction of taxi service a forced transfer of part of the fee, from customers to taxi business proprietors. [Labor unions also fit the definition of rent-seeking].

The concept of rent-seeking would also apply to corruption of bureaucrats who solicit and extract ‘bribe’ or ‘rent’ for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to clients.[8] For example, tax officials may take bribes for lessening the tax burden of the tax payers; [and politicians take campaign contributions].

Regulatory capture is a related concept which refers to collusion between firms and the government agencies assigned to regulate them, which is seen as enabling extensive rent-seeking behavior, especially when the government agency must rely on the firms for knowledge about the market. Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition.[9] The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks economic regulations such as tariff protection, quotas, subsidies,[10] or extension of copyright law.[11] Anne Krueger concludes that, “empirical evidence suggests that the value of rents associated with import licenses can be relatively large, and it has been shown that the welfare cost of quantitative restrictions equals that of their tariff equivalents plus the value of the rents” [12]

CU Blog - Economic Principle - Bad Ethos of Rent-Seeking - Photo 4Economists have argued that innovation in the financial industry is often a form of rent-seeking.[13][14] [A common everyday examples in American life would be: Wall Street on the ‘right’ and labor unions on the ‘left’].

[A local example stems from the Bahamas 2nd city of Freeport. That city provides a monopoly to the local petroleum retailing company, Freeport Oil Company, Limited (FOCOL). On one occasion that retailer limited gasoline purchases to the more expensive premium option only, as opposed to the standard choices; see story here:]

Possible consequences
From a theoretical standpoint, the moral hazard of rent-seeking can be considerable. If “buying” a favorable regulatory environment seems cheaper than building more efficient production, a firm may choose the former option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal allocation of resources – money spent on lobbyists and counter-lobbyists rather than on research and development, on improved business practices, on employee training, or on additional capital goods – which retards economic growth. Claims that a firm is rent-seeking therefore often accompany allegations of government corruption, or the undue influence of special interests.[18]

Rent-seeking can prove costly to economic growth; high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus organizations value rent-seeking over productivity. In this case there are very high levels of rent-seeking with very low levels of output. Rent-seeking may grow at the cost of economic growth because rent-seeking by the state can easily hurt innovation. Ultimately, public rent-seeking hurts the economy the most because innovation drives economic growth.[19]

Government agents may initiate rent-seeking – such agents soliciting bribes or other favors from the individuals or firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer.[20] It has been shown that rent-seeking by bureaucracy can push up the cost of production of public goods.[21] It has also been shown that rent-seeking by tax officials may cause loss in revenue to the public exchequer.[8]

Mancur Olson traced the historic consequences of rent seeking in The Rise and Decline of Nations. As a country becomes increasingly dominated by organized interest groups, it loses economic vitality and falls into decline. Olson argued that countries that have a collapse of the political regime and the interest groups that have coalesced around it can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. An example of this is Japan after World War Two. But new coalitions form over time, once again shackling society in order to redistribute wealth and income to themselves. However, social and technological changes have allowed new enterprises and groups to emerge in the past.[22]

A study by economists David Laband and John Sophocleus in 1988[23] estimated that rent-seeking had decreased total income in the US by 45 percent. Both economists William Dougan and Tullock affirmed (1991) the difficulty of finding the cost of rent-seeking. Rent-seekers of government-provided benefits will in turn spend up to that amount of benefit in order to gain those benefits, in the absence of, for example, the collective-action constraints highlighted by Olson.

Nobel Prize-winning Economist Joseph Stiglitz has argued that rent-seeking contributes significantly to income inequality in the United States through lobbying for government policies that let the wealthy and powerful get income, not as a reward for creating wealth, but by grabbing a larger share of the wealth that would otherwise have been produced without their effort.[26][27] (See related VIDEO here). Economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva (2011) had analyzed international economies and their changes in tax rates to conclude that much of income inequality is a result of rent-seeking among wealthy tax payers.[28]

This historic information is being considered in conjunction with the book Go Lean…Caribbean; a publication designed to elevate the region’s economy (create 2.2 million new jobs), security and governing engines. The book features a roster call for some All-stars of the field of Economics; (1700s, 1800s, 1900s & today). Consider this list of those quoted directly:

Paul Romer 1955 – Page 8
Adam Smith 1723 – 1790 Page 67
Arthur Okun 1928 – 1980 Page 153
James M. Buchanan 1919 – 2013 Page 169
Elinor Ostrom 1933 – 2012 Page 183
Norman Girvan 1941 – 2014 Page 255
Alfred Marshall 1842 – 1924 Page 258
Jacob Mincer 1922 – 2006 Page 258
Gary Becker 1930 – 2014 Page 258
John Geanakoplos 1955 – Page 276
David Hume 1711 – 1776 Page 318
John Maynard Keynes 1883 – 1946 Page 318

CU Blog - Economic Principle - Bad Ethos of Rent-Seeking - Photo 2

A review of the work of these great men and woman constitute “Lessons in Economic Principles”. Why would these lessons matter in assessing today’s Caribbean status and fate?

The Go Lean book explains the significance of Economic Principles with this excerpt (Page 21):

While money is not the most important factor in society, the lack of money and the struggle to acquire money creates challenges that cannot be ignored. The primary reason why the Caribbean has suffered so much human flight in the recent decades is the performance of the Caribbean economy. Though this book is not a study in economics, it recommends, applies and embraces these 6 core economic principles as sound and relevant to this roadmap:

  1. People Choose: We always want more than we can get and productive resources (human, natural, capital) are always limited. Therefore, because of this major economic problem of scarcity, we usually choose the alternative that provides the most benefits with the least cost.
  2. All Choices Involve Costs: The opportunity cost is the next best alternative you give up when you make a choice. When we choose one thing, we refuse something else at the same time.
  3. People Respond to Incentives in Predictable Ways: Incentives are actions, awards, or rewards that determine the choices people make. Incentives can be positive or negative. When incentives change, people change their behaviors in predictable ways.
  4. Economic Systems Influence Individual Choices and Incentives: People cooperate and govern their actions through both written and unwritten rules that determine methods of allocating scarce resources. These rules determine what is produced, how it is produced, and for whom it is produced. As the rules change, so do individual choices, incentives, and behavior.
  5. Voluntary Trade Creates Wealth: People specialize in the production of certain goods and services because they expect to gain from it. People trade what they produce with other people when they think they can gain something from the exchange. Some benefits of voluntary trade include higher standards of living and broader choices of goods and services.
  6. The Consequences of Choices Lie in the Future: Economists believe that the cost and benefits of decision making appear in the future, since it is only the future that we can influence. Sometimes our choices can lead to unintended consequences.
    Source: Handy Dandy Guide (HDC) by the National Council on Economic Education (2000)

In psycho-therapy the approach to forge change for an individual is defined as “starting in the head (thoughts, visions), penetrating the heart (feelings, motivations) and then finally manifesting in the hands (actions). The people of the Caribbean must change their feelings about elements of their society – elements that are in place and elements missing. This is referred to as “Community Ethos”, defined as: “the fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society; dominant assumptions of a people or period; practices of a group or society; dominant assumptions of a people or period.

Rent-seeking is not one of the community ethos that is being urged for the Caribbean; just the opposite, it is a bad ethos to avoid!

VIDEO – The Rent Seeking of Both Left and Right –

Published on Jun 22, 2012 – For an alternative to our anti-democratic system check out Jim Rogers latest project to create a system that will hold politicians feet to the fire, and to put shackles on lobbyists so that they can no longer control the system. One day we might have a system that’s controlled by the people and is for the people.
This is an idea put forth for Americans but it can easily work in any other part of the world.

This bad ethos stems from an attitude of entitlement; to get something … for almost nothing. The Caribbean was colonized originally under this community ethos; a previous blog/commentary related how Papal Bulls and Royal Charters enabled entities to exploit Caribbean markets and trade with very little investment of their own. A direct quote from that commentary relates:

Most of the property and indigenous wealth of the Caribbean region is concentrated amongst the rich, powerful and yet small elite; an oligarchy. Many times these families received their property, corporate rights and/or monopolies by Royal Charter from the European monarchs of ancient times. These charters thus lingered in legacy from one generation to another … until …

The Go Lean book presents a roadmap on how to benefit from the above economic principles – and how to empower communities anew – without continuing rent-seeking practices. (For this reason this commentary opposes reparations for slavery and colonialism).

The consideration of the Go Lean book, as related to this subject is one of governance, (national, municipal and corporate governance), the need for technocratic stewardship of the regional Caribbean society. This point was also pronounced in the opening Declaration of Interdependence (Page 12) with these acknowledgements and statements:

xi.   Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest. The Federation must guarantee the executions of a social contract between government and the governed.

xii. Whereas the legacy in recent times in individual states may be that of ineffectual governance with no redress to higher authority, the accedence of this Federation will ensure accountability and escalation of the human and civil rights of the people for good governance, justice assurances, due process and the rule of law. As such, any threats of a “failed state” status for any member state must enact emergency measures on behalf of the Federation to protect the human, civil and property rights of the citizens, residents, allies, trading partners, and visitors of the affected member state and the Federation as a whole.

xxxiii. Whereas lessons can be learned and applied from the study of the recent history of other societies, the Federation must formalize statutes and organizational dimensions to avoid the pitfalls of communities like East Germany, Detroit . On the other hand, the Federation must also implement the good examples learned from developments/communities like … Germany, [and] Japan .

This Go Lean book serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU) to provide better stewardship for the 30 member-states of the Caribbean region. The CU is motivated by the positive community ethos of the Greater Good!

In general the Go Lean roadmap stresses key community ethos, strategies, tactics, implementations and advocacies necessary to transform and turn-around the eco-systems of Caribbean society. These points are detailed in the book as follows:

Community Ethos – Deferred Gratification Page 21
Community Ethos – Return on Investments Page 24
Community Ethos – Ways to Impact the Future Page 26
Community Ethos – Ways to Impact the Greater Good Page 37
Strategy – Vision – Confederate all 30 member-states/ 4 languages into a Single Market Page 45
Tactical – Fostering a Technocracy – Economists are Technocrats Page 64
Tactical – Growing to $800 Billion GDP – Adam Smith Case Study: Father of Modern Economics Page 67
Tactical – Separation-of-Powers – CU Federal Government versus Member-State Governance Page 71
Implementation – Ways to Pay for Change – Award exploratory rights in exclusive territories Page 101
Implementation – Start-up Benefits from the Exclusive Economic Zone (EEZ) Page 104
Planning – 10 Big Ideas – #3: Proactive Anti-crime / Corporate Governance Measures Page 127
Planning – Ways to Improve Trade Page 128
Planning – Ways to Make the Caribbean Better Page 131
Planning – Lessons Learned from 2008 – Glass-Steagall Case Study Page 136
Advocacy – Ways to Grow the Economy – Government’s Role: Protect Property Rights Page 151
Advocacy – Ways to Create Jobs – 2.2 Million New Jobs Page 152
Advocacy – Ways to Improve Governance Page 168
Advocacy – Ways to Better Manage the Social Contract Page 170
Advocacy – Ways to Better Manage Natural Resources Page 183

In considering this economic history, the CU/Go Lean roadmap is motivated to create value for Caribbean communities, not skim off the top with rent-seeking practices. The mandate is simple:

Foster good economic habits; abandon bad habits.

(At one point, smoking was encouraged, but now it is universally assailed; this demonstrates that communities can mature).

This is not common ground; this is a higher ground!

With the proper stewardship, we can create jobs, value, wealth,  trade networks, an educated society, plus develop new products and services that the world demands. Adherence to these best-practices – and aversion to bad community ethos like rent-seeking – would help us make our Caribbean community better to live, work and play. 🙂

Download the book Go Lean … Caribbean – now!


Appendix VIDEO: Public Choice – Rent Seeking –

Uploaded on Mar 1, 2007 – based on the textbook “Microeconomics for MBAs”

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