Monday, September 2, 2013

Rent-Seeking vs. Rent-Collecting

When historians of the future are writing the epitaph for the west, I imagine that one of the characteristics that will strike them about the present age is the increasing prevalence of rent-seeking.

As the government inexorably expands in size and scope, it becomes more of a suckers game to simply outcompete the opposition, and more lucrative to lobby the government to have them shut down.

This might take any number of forms - ludicrous licensing requirements that lower supply, absurd restrictions on competitor firms, tax breaks for your particular boondoggle industry - whatever works.

If you want a list of some of the more outlandish ones, browse through the cases the Institute For Justice has fought over the years. It's a Sisyphean task, alright.

The strange thing, though, is that most people profess to hate rent-seeking. So how come we end up with so much of it?

Part of this is simply political economy. A small but organised group fighting for a large benefit will often out-lobby a large dispersed group (e.g. taxpayers, consumers) who each suffer a small harm.

Part of it is just rank hypocrisy - when other companies lobby for their licensing requirements, it's just to squelch consumers, but I'm deeply worried about customers not getting their hair braided correctly.

Nobody is the villain in their own narrative, after all.

But I don't think that's all of it.

I think that to really understand the extent of rent-seeking, you need to appreciate those who enable them - the rent-collectors.

The way I would characterise it is that rent-seeking, properly defined, is about lobbying for socially inefficient laws and regulations that will benefit you privately.  The trial lawyers lobby turns up to argue that we really truly ruly need to have a legal system where the loser doesn't pay the other side's costs, for instance.

Rent-collecting on the other hand, is what happens when a party simply takes advantage of a bad law that is already on the books. Unlike the rent-seeker, the rent-collector does not actively push for socially inefficient legislation. Instead, he simply takes the inefficient law as he finds it - somebody is going to get the rents due to the bad law, and it may as well be me.

These are the much wider circle of folks who are thus corrupted by the process - their own self-interest stops them agitating for a repeal of the bad laws, but their lack of involvement in the initial setup means that their consciences are clean.

For every community organiser who gets a cushy job on the rent-control board, there are hundreds of tenants getting a few hundred bucks a month for free from their landlord.

For every creep in the restaurant lobby fighting to outlaw food trucks, there are hundreds of restaurant proprietors vaguely relieved to not have a truck parked nearby.

And sometimes, the rent-collectors (at least indirectly) will be people who in other circumstances would be the first ones to crusade against rent-seeking.

American securities class action lawsuits are like something out of a Kafka novel. The shareholders of a company collectively own the company. Suppose the company makes some screwup and causes the share price to drop. Based on the fact that the company is a separate legal entity, some lawyer and a gold-digging lead plaintiff will file suit on behalf of the shareholders against the management of the company that they themselves own. The management is of course protected by the company, so money is coming out of the company coffers (which the shareholders own) to nominally compensate the shareholders of the company. Got that? Well, actually, the current shareholders (who don't owe an actual duty to anybody) are indirectly paying money to the old shareholders (who often overlap substantially with the current shareholders). In theory, anyway. Part of the money is coming from insurance companies who write the professional indemnity insurance for the directors, but the company is going to be paying that back in higher premiums in no time flat. You can rest assured that the only people making any money off the whole farce are the lawyers.

Or are they? Who else benefits from this ridiculous charade?

A lot of the time, it's economic consulting firms. They make a decent living defending companies against these lawsuits, and showing that the damages aren't as high as the often ludicrous plaintiff's claims make out to be. These are some of the most free market types you can imagine, with economics degrees from the best universities.

Don't get me wrong, in the scheme of this whole monstrosity, these guys are far and away the most defensible. They're fighting for good guys, so to speak.

But still - how many of them would be out there lobbying to get securities class action reform to eliminate all this absurd waste? How many of them would honestly greet such reform with the same zeal that they would if it happened in any other industry? Even if it put them out of a job?

To ask these questions is to know the answers.

When despotic regimes take prisoners of war, one of the things they often try to get the captives to do is to write out statements that are disloyal to their home country. Sooner or later, cognitive dissonance takes over - the things you wrote down that you originally didn't believe, you come to believe, because you subconsciously prefer this view to the alternative that you wrote cowardly and disloyal things rather than face punishment. The extreme form of the result is Stockholm Syndrome. There's a reason that making disloyal statements is punished as a serious offense.

The reality is that behind every rent-seeking lobbyist are thousands of rent-collecting regular joes who have convinced themselves either that a) the current regime is either downright sensible, or b) at a minimum, it's terribly unfortunate but there's really nothing to be done, old chap.

Thus are the sheep corrupted to be complicit in their own fleecing. They'd all acknowledge that, sure, this is just robbing Peter to pay Paul. They'd further acknowledge that, sure, everyone here thinks they're Paul, and sure, they can't all be right. But still, when all's said and done, I really will be Paul, and that's all that matters, right?

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