Commentary

How Economists Duped Us into Attacking Capitalism Instead of Parasitic Rent-Seeking

Time to resurrect an old idea: economic rent

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By Dustin Mineau

Have you ever heard of the term “economic rent”?  No?  That’s probably because of the greatest political coup in the history of our republic.  In politics, true power comes – not from your argument – but from the ability to steer the conversation to what you want to talk about and away from what you don’t want to talk about.  The true elites in our society have continued “winning” the political debate by removing a very important concept from the political conversation.

I admit, reading the term, “economic rent” can cause eyes to glaze over quickly.  A more accurate description is “unearned income”.  It is people and companies who make money by doing zero work and risk little or none of their own assets.

Taking Back Adam Smith and “Classic Liberalism”

Many conservative economists claim to be staunch followers of Adam Smith.  They shout slogans such as “Supply and Demand!” “Capitalism”! “  “Let the markets work!”  However, for anyone who actually read Adam Smith, you would note that the “invisible hand” was not his only observation of the inner workings of capitalism.  Adam Smith recognized that many in the economy were making gobs of money, but weren’t contributing anything.  He was referring to what was eventually called “economic rent”.

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Smith observed that all production required 3 things.  Land, Capital, and Labor.  A very simple example would be a brick factory.  The building and oven needed to create the bricks are the “capital” – the owners are the capitalists.  The people making the bricks is the “labor” – the people doing the actual work.  The Land the factory occupies and the clay used to make the bricks is the “land” – the owners of the land are the “Rentiers”.  Any money made by selling the bricks is then divided up between these three groups: the rentiers, the capitalists, and the workers.

Adam Smith observed that only 2 of the 3 groups made any real contribution to the production process.  The workers contributed their time.  The capitalists contributed their capital that they either bought, but is now used and worth less than before it was used.  The Rentiers contributed their land, but have lost nothing.  Once the manufacturing of the bricks is done, they get their land back and it is still worth the same as it was before.  Any income they made by renting out their land was made without work, and without risk to their assets.  There is a word for someone that only takes, but doesn’t give back: a parasite.  Smith and those who carried on his work used the nicer term, Rentier. This is where the phrase “economic rent” originates.  It originally described a no value-ad landlord.

Adam Smith and future classical economists existed in a time where the noble families of medieval Europe were still the large landowners.  The nobles had just turned into Rentiers.  Because they owned the land, they were able to rent it out to capitalist and workers and claim a portion of their profits and wages by charging “rent”.  They were able to do this without ever working. It was unearned income.

Much of the work done by economists from Adam Smith until the late 19th century was all about finding and identifying “rent-seeking”.  These classical economists didn’t want to overthrow capitalism, they wanted to free it from the “rent-seeking” parasites.

The Neoclassical School “loses” rent

Right before the turn of the 20th century a new school of economists appeared.  They were later named the Neoclassical school and it continues today.  When the transition from classical to neoclassical occurred, one of the things that was lost was the concept of “economic rent”.  The Neoclassicals started treating land and capital as the same thing and therefore interchangeable.  In a world without land, economic rent no longer makes sense.  Some would argue(e.g. Gaffney’s Neo-classical Economics as a Stratagem against Henry George – pdf) that this was intentional.  If it was intentional, it was the greatest coup of ideas the elite class came up with to justify their existence since The Divine Right of Kings.  On the other hand, It may have just been a simple intellectual decision based on their new approach to economics.

In any case, the decision to treat land and capital as the same, haunts us to this day.  If land is treated as capital then the concept of “rent” goes away and rentiers can masquerade as capitalists and cloak their unearned “rent” income as justifiable profit. John Maynard Keynes blew away everybody and what they thought they knew about economics in the 20s and 30s.  In response to Keynesian economics, the neoclassical economists didn’t die, they decided to fight back.  Milton Friedman is the most famous of this group.  To fight against keynesian economics, he and his contemporaries tried to lay claim as resurrecting the classic school of economics that said “less government is good”.  They even called themselves New Classicals.  However, this “revival” of the classical economics was actual a revival of the neoclassical school.  They, like the neoclassicals before, again conflated capital and land.  Therefore, many modern economists no longer make a distinction between land and capital.  They group together income from rent and income from capital and call it profit. This school remains in the mainstream and therefore the concept of economic rent is no longer discussed in our politics.

Rent-Seeking

In the late 60s and early 70s “economic rent” saw a small revival among select economists.  For those select few, “Rent-seeking” was no longer defined as just “ownership of the land”.  It can take several shapes.  Rent-seeking is any income that is unearned. An alternative definition is “profit without a corresponding cost of production”.  “Economic Rent” can come from ownership of land and just “renting” it out for money. It can also come from collecting so much capital that a firm now has a monopoly and can set the price independent of supply demand considerations, It can be from government monopoly granting, control of other “land” like our rivers, broadband spectrum, or “mineral rights” of land.  It can come from control of financial assets like capital gains, dividends, and interest on loans(especially usury). It can also come from political favors from the government.

Political Implications

Economic rent was something I’d learned about in school several years ago and quickly forgot about it once the class was over.  Now in a post bank-bailout world, I ran across it again one day while researching another article, It was like a light-bulb clicking on in my head.  (A high-efficiency light bulb).  This is what progressives are currently fighting against.  This is the concept, the vocabulary, the name for the rage I feel in my gut at what’s happened.  The rentiers have taken over our country by masquerading as capitalists. How did this happen?

It was simple, once the neoclassicals removed the entire concept of “rentier” from the economic, and eventually political, conversation. It was all capitalism and capitalists in their world.  Therefore, now when progressives rail against the unearned income of the rentiers, we lack the vocabulary to properly express what is happening. Instead, conservatives try to make it look like liberals are railing against capitalism itself or against businesses in general.  In some cases we may even come to believe it ourselves.  Many times when we’re fighting against the “excesses of capitalism”, what we are actually fighting is parasitic rentiers that are hurting the true capitalists as much as the workers.

  • When a company has a monopoly and can charge whatever they want, that’s not being a capitalist or an entrepreneur, that’s being a “Rentier”.
  • When oil company’s make “windfall profits” as the price of oil goes up, that’s not profit, that’s “economic rent”.
  • When a drug company can keep the government from negotiating lower prices, that isn’t capitalism, that’s classic “rent-seeking” behavior.
  • 99% of the money made on wall street is nothing but pure rent-seeking.
  • Companies lobbying for tax loop holes is just more unproductive rent-seeking.

Fortunately, some well known economists do talk about The Rentiers.  Unfortunately, not nearly enough are.  I’m guessing it’s because the vast majority of influential economists are still neoclassicals and don’t believe land and rentiers exist. They can try to deny their existence, but when I see the top 1% of the country make more money in one night while they are sleeping then most will make working at their job for 6 months, it’s hard to deny their existence.  It’s unfortunately that our intellectual class “lost” these words and concepts from the mainstream discussion.

So where does that leave us now?  One could argue history is repeating itself. 200 years ago, the conservative vs. liberal mantra was that conservatives were fighting to keep the power of the nobles and large landlords intact.  The liberals were the ones trying to free themselves politically and economically from their control.  Today it’s the same.  Conservatives are fighting to maintain the privilege of the Rentiers by pretending to defend capitalism itself.  And once again, us liberals are fighting to free the market from the parasitical Rentiers.

2016 November 19

Originally published here.


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  • Here’s a rough draft of our upcoming Proposal to do away with ‘rent’: http://www.EarthVote.org/property.html

  • Frankbex

    Before I met Evonomics I didn’t realize that there were other people thinking as I do. I’m very pleased with the articles I’ve read so far.

    There is many years that I have the same thoughts that you brought here to my knowledge.

    I’ve always knew “economics rent” but you brought that terminology.”

    • Mary McGuirk

      when you think of GDP, you think of productivity, but the way we calculate GDP is backwards…we count things like FINANCE, INSURANCE and LEGAL as productivity, and INFRASTRUCTURE as an expense or cost, when it is the other way around Finance et al. are COSTS, not productivity, and Infrastructure is productivity. And when you realize that at least 10% of our so called productivity is Finance, it is no wonder we are going into debt as a country.

  • Rick Derris

    Extremely weak article. There are many forms of economic rent, including sucking money out of the taxpayer or competitors through government rules and regulations. Elon Musk is the biggest rentier in the country now and I’ll be that Dustin worships the guy.

    • Duncan Cairncross

      Goes to show that even on decent websites we still get some know nothing trolls

  • Luis Gutierrez

    What about “basic income” for all as a corrective to “unearned income” by a few? What about basic income, coupled with ecology taxes — and no income taxes?

    • Duncan Cairncross

      I agree about basic income – but why no income tax?

      • Luis Gutierrez

        Taxing the use of resources can generate enough revenue for basic income and all other public services. Eliminating income tax then would provide additional incentive for people to work even though they have a basic income, and do so creatively, seeking to add value without harming the commons.

        • Duncan Cairncross

          Luis
          If the economic view that people were paid according to their value to the “company” was correct I would agree with you
          BUT as people are actually paid in accordance with their power to extort money from the company I would continue to keep a progressive (much more progressive than now) income tax

          • Luis Gutierrez

            This is debatable, but it seems to me that, with basic income and strong ecological taxation, working to add real value to business and society, rather than just extraction/extortion, becomes more appealing. Some income taxation may still be necessary to mitigate greed, but income taxation rules must be much simpler and without so many loopholes.

          • Duncan Cairncross

            There are not that many loopholes in “income tax” – mainly the insane idea that “earned income” is taxed at higher level than “unearned income”
            It (in the UK at least) used to be the other way around!

            But a big issue is sharing the proceeds
            If a company pays the CEO 400 (or more) times the amount it pays the workers – that is all to do with power NOT contribution!
            When I lead a team I expect to get a wee bit more for the leadership – on top of my “engineer” pay – But NOT the “Lion’s Share” – that is silly and counterproductive

          • Luis Gutierrez

            Agree. In the ultimate analysis, the fundamental issue is the patriarchal culture of domination/subordination, which applies not only in male/female relations but in all human/human and human/nature relations. This is the fundamental issue facing humanity, how to transition from patriarchy to a more egalitarian and sustainable culture.

          • Duncan Cairncross

            Luis
            We used to be there – for 70,000 maybe 200,000 years
            The present inequality only came in with agriculture a scant 6000 years ago (in most places less than that)
            Turchins book – Ultrasociety – is well worth a read

          • Luis Gutierrez

            Thanks, will get a copy, but now the issue is how to go forward, we cannot go back to prehistorical times, we must find a way to restore human civilization to a culture of solidarity and sustainability, letting go of what is bad while keeping what is good. The future of humanity depends on finding a radically new synthesis that is still invisible, but we must keep fostering the required cultural evolution, without violence.

          • Duncan Cairncross

            I found Pinker’s – Better Angels of our Nature a totally illuminating piece on where we have come from and how far we have gone
            From my POV this was mindblowing – I had always considered that while we had a civilisation that we (humans) were all still just the same – cavemen with suits
            Then Pinker shows (with volumes of data) that we are getting better!

          • Luis Gutierrez

            Yes, slowly and painfully, but we are getting better! 🙂

  • js290

    https://youtu.be/4uZ6RdkWtlA feudalism may be the basis of terrorism there should be no earned income tax… taxes on unearned rents

  • Frank

    I struggle with the initial example. How, again, is the land any different from the capital (and by extension the land owners any different from the capitalists)? If the land owners want their land back, yes they can evict the brick production operation, but now their land has been transformed in such a way that it is specifically tailored to brick production. So it is now worth less than it was before. Additionally if the brick making operation is unsuccessful, and the operators default on rent payments, then the land owner looses out on potential income (so he/she is taking a risk). Aren’t loss of value and lower than expected return the exact same negative outcomes that capitalists worry about when they make investments?

    That said I agree with many of the concepts in this article of this article. Your bullets points (aside from the completely unsubstantiated claim that 99% of all of the money that wall street makes are pure rent-seeking – although you might be able to convince me on that one too if you provided even a little supporting evidence) are all excellent examples of activities that we spend a lot of time on, but produce absolutely nothing of value. And I agree that it would be of great value if we could eliminate all that wasteful activity from our economy. I’m just not convinced that a landlord charging rent on a property is one of those activities that we need to do away with.

  • BetterFailling

    I’m afraid I have to make some amends.
    After brick making stops the owner of the land is no longer in an equivalent situation to that before brick making had started.
    He no longer has a flat piece of land but a big hole and some ruined brick owens.
    What Smith had in mind when discussing about ‘rent’ was not the land itself but the differences between diverse plots of land. Fertility, for instance. Or ‘position’ – if someone wants to build a road on your land it becomes way more valuable than that of your neighbor without you ever doing anything about that.
    Also even agricultural land has to be cared for, otherwise in a very short span of time you would have it exhausted.
    But there is something even worse than rent seeking. Rent creation.
    As in “Companies lobbying for tax loop holes”

  • Duncan Cairncross

    Excellent article short accurate and to the point

  • Lethalmiko

    It is grossly incorrect to think of Rentiers as parasites or to think that they contribute nothing of value. Rentiers go through a process of ACQUIRING land that involves getting it surveyed, placing beacons and obtaining title deeds. That process, which costs the Rentiers time, money and effort adds value, especially since (for example) a factory needs land on title to be built.

    And even if the concept of title deeds didn’t exist, taking possession of vacant land and defending it to the exclusion of everyone else is also something of value to a Renter since they only have to deal with one person who has put everything together.

    Many Rentiers who obtained vacant land will create an access road, put a fence around, build a basic structure, bring electricity, water and internet there. The Rentier may have made the effort to acquire land in a strategic location and made things easier for the Renter. How anyone can see all this as of no value is beyond me.

    • Travis Adams

      You’re confusing labor with economic rent, a long with a million other things.

      Check out henrygeorge.com

      • Lethalmiko

        QUOTE FROM ARTICLE: “Any income they made by renting out their land was made without work, and without risk to their assets. There is a word for someone that only takes, but doesn’t give back: a parasite. Smith and those who carried
        on his work used the nicer term, Rentier. This is where the phrase “economic rent” originates. It originally described a no value-ad landlord.”

        This is what I was responding to. How does labour come in and how am I confusing anything with anything?

  • MigT

    The capitalist / rentier distinction can be as misleading as failure to distinguish.

    A pure capitalist profits from what he owns (capital) rather than what he
    does (otherwise he is, to that extent, also a worker). An entrepreneur
    bringing capital, land and labour together is a worker trying to become a
    capitalist. If he subsequently employs buyers, estimators, managers, HR
    etc to do it for him, we call them workers, not capitalists.

    A capitalist qua capitalist no more “earns” his cut than a landowner. He
    might have worked and created value to get there, but so might a
    landowner.

    • Travis Adams

      No. Improvements to the land are a result of labor and that value is rightly owned. Economic rent is the unearned increment.

      • MigT

        “No” what? I’m saying the same applies to capital.

  • John Hersey

    It’s the so called liberals (Democrats – Clinton) who are backed by the entire institutional parasitic rent-seekers. It’s the Socialist Liberals (Bernie, Stein) who are advocating more tax of wages and profit, and more spending which ultimately accrues to the parasitic Landowning rent-seekers.
    .

  • Paul Buffoni

    The Keynesian belief of the need for “big government” and constant interference by way of interest rate manipulation and monetary stimulus is the greatest economic problem in the world by a country mile. Keynesian theory doesn’t even recognise stagflation – rising inflation (the way it’s measured now is laughable) coupled with an economic slowdown. The fact that virtually all central bankers are Keynesian’s is proof. These reckless lunatics are driving the world economic bus at break neck speed with no brakes headlong into the abyss.

    • Catherine Bay

      Chuckles and facepalm… oh the “100% free economic world where we do whatever we want” just like the 7-year old brat and hurting others in the process of “earning” profits is cosidered to be the liberty… you know animals do almost exactly the same thing as the “neo”liberals, hurting, killing and even killing their owns to stay in the top of the food chain to hoard. we have doing the exact same but in different styles for millennia. We are still primitives who dress ourselves with fancy clothes and electronics while calling ourselves as “intelligent” and “self-aware” while we act just like those animals unconsciously…

  • Why is receiving rent money unearned? Don’t landlords invest in land and construction in hopes to receive return on investment in the form of rent?

  • Trotar

    I don’t disagree with the idea that ‘rent’ is basically free money.

    But it’s such a weird way to look at production.

    To me it seems there are only 2 things needed for production, resource and work.
    Land it just another resource.

    If you don’t have both of those, then you probably need money to fund it. That’s where rent come in. But if you already had the land and all the other resources. Then the only other part you would need is work. Rent wouldn’t be part of the equation then.

  • Jeff

    This article is horribly confused. The standard definition of economic rent is the one you’ll find in Wikipedia: “economic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production.” It has nothing to do with “earned” vs “unearned”, nor is there any moral opprobrium necessarily attached to the idea. And it is definitely not news to economists: we all learned about it in MicroEconomics 101. It’s just that people tend to forget most of what they learn in class if they’re not thinking about it every day.

    Lebron James is going to be paid over $30 million this season by the Cleveland Cavaliers. Lebron is paid so much because talent like his is very rare, so he can let the team owners bid against each other for his services and take the best offer. If the best offer were, say, $20 million, would he still play? Probably. It’s not like anyone’s going to offer him more than that to do something else. But let’s make a further assumption that he won’t play for less than $20 million. Then according to the standard definiton, $10 million of his current $30 million salary is economic rent. But I doubt that anyone thinks Lebron is somehow immoral for taking what he can get. It’s not like the Cavs are going to lower their ticket prices if Lebron gives up a third of his salary. And even if they did, who’s to say that the fans are more worthy of keeping that money than Lebron is?

    • FinStockton

      A poor choice of example, I’m afraid. LeBron’s ability to “take the best offer” is constrained by the NBA collective bargaining agreement, negotiated between the players union and the league every few years. It restricts maximum player salaries to 35% of the salary cap, or 105% of their previous contract, whichever is higher.

      LeBron’s ability to negotiate his maximum possible salary is restricted by a legal agreement intended to encourage a healthy level of competition, reduce salary inequality and allocate fairly the fruits of the league’s financial success. If LeBron wasn’t party to that agreement, his “true value” would almost certainly be north of $50m/year.

      We frequently create rules for markets to encourage them to be healthy, competitive and fair.

  • Jeff

    The reason Henry George thought of rent paid for land as “economic rent” is that he thought the owners of land will always put it into production so long as the return for doing so is positive. Even a very small rent, after all, is better than no rent at all. Another way to say this is that the supply of land is fixed or constant. Since it’s always in production, anything paid to the owner of it is economic rent.

  • mhassed

    Magnificent article. So clear and well written. Bravo.

  • Terry Dwyer

    This article is basically correct. In my 1980 Harvard PhD thesis now published by Wiley as “Taxation: The Lost History” I tracked how the concept of economic rent as the ideal economic basis for fiscal systems had been pushed out of the literature for no good reason. The arguments against taxing land rents just don’t add up.
    Maybe people will wake up and see you don’t need to have international tax wars over it – as land rents is essentially a territorial revenue source.
    Dr Terry Dwyer
    Dwyer Lawyers
    http://www.dwyerlawyers.com.au

  • Tom Marchesello

    Excellent Article. So few people understand this simple truth. Thank-you for sharing.