3 Rent Seeking

3 Rent seeking The theory of rent seeking Up to this point, Tullock’s contribution to public choice has only been lightly touched upon. However, he is clearly one of the leading public choice theorists. In addition to his early work with Buchanan, he is probably best known for his seminal insights into the theory of rent seeking. Indeed, rent seeking is perhaps one of the foremost advances in modern economics. In his most recent work on the subject, Tullock defines rent seeking as “the manipulation of democratic [or other types of] governments to obtain special privileges under circumstances where the people injured by the privileges are hurt more than the beneficiary gains” (Tullock 1993, p. 24, cf. p. 51). Rent seeking is a natural outcome of the political process, especially in democratic nations. Special interest groups seek political favors and politicians seek re-election primarily (although cash seeking does play some smaller role) (Tullock 1993, p. 31). As Boettke notes, “The problem, as Mancur Olson ar- gued in his Rise and Decline of Nations, is that as political stability occurs, entrenched interests form which, eventu- ally, through their rent-seeking activity, retard the further economic development of a country” (Boettke 1992, p. 71). 42 Then as the condition of demosclerosis becomes more pervasive and critical, rent seeking develops into part of the normal course of business. Firms begin to see various taxes, both explicit and implicit (i.e., via regulation, liabil- ity rulings, takings, inflation, etc.) as normal expenses, along with the increased expense of hiring professionals to minimize these taxes. Thus, they seek means to secure rents from the political process that either offset or exceed the tax expense. Once an economy is inundated by rent seeking, the level of distortion in the economy and the level of resource misallocation will be so high that it will be hardly possible to measure the social costs of rent seeking. Table 3.1 Rent seeking Definitions of rent seeking from Tullock and Buchanan: (1) Tullock defines rent seeking as “the manipulation of democratic [or other types of] governments to obtain special privileges under circumstances where the people injured by the privileges are hurt more than the beneficiary gains.” (2) Buchanan says that “the term rent seeking is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than social surplus.” Some evidence of the historical tenacity of rent seeking Rent seeking effectively grants monopoly power to the suc- cessful seeker. Wealth is transferred from consumers to these firms or special interests, with the legislator, bureau- crat, or third party broker receiving a commission from the boodle. Remarkably, while rent seeking has reached un- precedented levels today, it has been a problem previously, especially among democratic societies. Consider the com- 43 ments of French politician Frederic Bastiat in 1850, who might be considered a forerunner to public choice theorists. The law has been used to destroy its own objective [to serve as a defense of life, liberty, and property]: It has been applied to annihilating the justice that it was sup- posed to maintain; to limiting and destroying rights to which its real purpose was to respect. This fact [that force is entrusted to those who make the law], combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law…instead of checking injustice [it] becomes the in- vincible weapon of injustice…This is done for the bene- fit of the person who makes the law, and in proportion to the power he holds…the few practice legal plunder on the many… It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder. As long as it is admitted that the law may be diverted from its true purpose—that it may violate property instead of protecting it—then everyone will want to par- ticipate in making the law, either to protect himself against plunder or to use it for plunder. The person who profits from this law will complain bit- terly, defending his acquired rights. He will claim that the state is obligated to protect and encourage his par- ticular industry; that this procedure enriches the state because the protected industry is thus able to spend more and to pay higher wages to the poor workingmen. Do not listen to this sophistry by vested interests. The ac- ceptance of these arguments will build legal plunder into 44 a whole system. In fact, this has already occurred (Bas- tiat 1990/1850, pp. 9, 11, 12, 18). Hence, public choice problems are not new. Those whose consciences normally would not permit them to steal from their neighbors are pacified when a law sanctions the plunder. Moreover, since some people are using the law for their profit at the expense of others, many others are deter- mined to do likewise. “Thus, the beneficiaries are spared the shame, danger, and scruple which their acts would otherwise involve...the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime” (Bastiat 1990/1850, pp. 13, 17, 20-21). Sometimes the plunder is purely a matter of the profit motive and other times its true motivation is dis- guised by a layer of false philanthropy. Furthermore, Bas- tiat argues that as “government failure” becomes wide- spread as a result of government fostering legal plunder (i.e., rent seeking), the inevitable result will be revolution, just as there have been relatively frequent revolutions in France. Therefore, politics must receive an education from economics. As Bastiat said, “A science of economics must be developed before a science of politics can be logically formulated” (Bastiat 1990/1850, pp. 66, 67, 71). Table 3.2 Objectives of a rent seeker Two goals of a rent seeker: (1) create monopoly power or (2) create artificial scarcity. Rent seeking as positive science: three levels Public choice theory is positive science, and as such it is not interested in accusing rent seekers of committing crimes. However, what Bastiat argues is compelling, and is congru- 45 ent with public choice theory in the sense that he recognizes the natural tendency of men to use the political process for their own gain. It is not that some men are particularly evil and thus they seek rents, but because the natural course for any person, either in business or in politics, is to avail himself of profitable opportunities. The fact that Bastiat points out this very thing over a century prior to the advent of public choice theory demonstrates both his insightfulness and the fact that rent seeking problems have been pervasive and onerous. As Buchanan notes, the existence of rent seeking today should come as no surprise to economists. Rent is that part of the payment to an owner of resources over and above that which those resources could com- mand in any alternative use. Rent is a receipt above op- portunity cost…So long as owners of resources prefer more to less, they are likely to be engaged in rent seeking, which is simply another word for profit seeking…The term rent seeking is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than social surplus…As institutions have moved away from ordered markets toward the near chaos of direct political alloca- tion, rent seeking has emerged as a significant social phenomenon (Buchanan 1980, pp. 46, 47). Buchanan goes on to explain his understanding of rent seeking. While entrepreneurs and innovators can secure short-lived monopoly benefits in the market, they are quickly dissipated in the absence of barriers to entry as others rush to capture the potential profits. In other words, competition is a natural check against long-lived monopoly. However, the one who obtains monopoly power via rent seeking causes a long term and socially distortive loss in consumer welfare. 46 Suppose that, instead of discovering a new commodity or service or production process, an innovating entrepreneur discovers a way to convince the government that he “de- serves” to be granted a monopoly right, and that government will enforce such a right by keeping out all potential entrants. No value is created in the process; indeed, the monopolization involves a net destruction of value. The rents secured reflect a diversion of value from consumers generally to the favored rent seeker, with a net loss of value in the process…Rent seeking…refers to…the activity motivated by rent but leading to socially undesirable consequences (Buchanan 1980, pp. 50, 51). A larger public sector will produce greater amounts of rent seeking and vice versa. When rent seeking occurs, it serves to create artificial scarcity—that is, demand for products that would not otherwise exist (Buchanan 1980, pp. 52, 53). Yet rent seeking can take different forms. Bu- chanan identifies three levels of rent seeking (Buchanan 1980, pp. 56, 57). "# Lobbying for government-sanctioned privileges. "# Excessive waste of resources for training and for campaigns to advance bureaucrats and politicians to positions with better salaries or more power. "# Attempts by special interests to secure political favors or abatement of threatened costs by regulation. Normative vs. positive rent seeking analysis Tollison adds that monopoly rights may be given to rent seekers by (1) venality, e.g., bribery, (2) selling the monopoly right to the highest bidder and giving government offi- cials control over them, likely leading to higher wages for them as a result, or (3) selling it the same way but then dis- 47 persing the booty to increase expenditures or cut taxes (Tol- lison 1982, pp.

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