Rent Seeking and Economic Methodology

Overview

Productive labor and voluntary trade are the foundations of any healthy economy – together, they make wealth generation possible. This does not mean, however, that they are the only means by which individuals can accumulate wealth. By manipulating the political or social environment in which productive activities occur, individuals and corporations can gain wealth disproportionate to their productive labor – a strategy known as “rent-seeking.” This Plan uses game theory and economics to examine the causes, benefits, and downsides of rent-seeking strategies such as theft and lobbying.

While rent-seeking has the potential to enrich its practitioners, it has a net negative effect on the economy as a whole. Rent-seekers do not create new wealth for the economy; they only capture a portion of the wealth created by others. Companies and individuals affected by rent-seeking are often forced to counter it with law enforcement or their own lobbying, further growing non-productive sectors of the economy. Additionally, companies that rent-seek to preserve a monopoly or reduce competition often do so at the expense of the economy as a whole. Economists can improve economic productivity by critically analyzing cases of rent-seeking and limiting them where necessary.

Excerpts

“Rent seeking refers to socially wasteful efforts to acquire a share of preexisting wealth. It can appear in various forms, including businesses lobbying for preferential treatments, corrupt officials seeking bribes, or simple theft.”

“Monopolies gain a great deal from lobbying, and so we should expect them to invest resources in lobbying activity – potentially up to the total cost of the rent. While beneficial to those engaged in lobbying, this activity is wasted from the perspective of society; resources that could be spent creating goods and services are instead expended on lobbying.”

“Rent seeking is a useful concept, but to make a real difference it must be removed from the game theory box that it has been locked in and applied on a case by case basis to instances of real social waste.”