What is Rent seeking and why is it bad?

The Aba community was going pretty well. It grew to 12 farms and houses, was producing a variety of goods both agriculture and manufactured and was trading its excess with the Gol community and buying Gol goods. The Money exchange system with the Gols was working well, even if the Abaites could not understand why a community would use a useless metal as Money rather than the new technology of the abacus recording the block of coins and the chain of transactions. No mining resources involved.

As time went by, the Money activities grew exponentially with internal Aba buying and selling, trading with the Gols in foreign Money Golcoins and creating and destroying Abacoins through loaning Money and Abacoins being repaid. Ab who controlled the Abacus technology and therefore the Money system was doing very well, maybe too well.

Most of the wise heads, old and young, shared the concern that Ab had too much power and was using that power to enrich themselves at the expense of the Aba community. So they met, sans Ab on Monday, rather than the Sunday discussion about the universe.

As usual Mo was the first to speak. “Whilst I don’t understand this new-fangled Abacus technology, I know Money and I know that Ab is getting paid way too much for what is a community service. FFS Ab is talking about building a mansion on the hill. How can he afford that many Abacoins?”

“That may be right Mo” said No “but we are beholding to Ab to run the Abacus technology. No one else can do that, so what can we do”?

One of the younger wise heads put up their hand to answer No. “Ab has been very smart to keep the Abacus technology to themselves but Ab is not a genius or the only one in the Aba community that could run the Abacus system and all its services.”

No said, “I did not know that” and the majority nodded in agreement.

The younger wise head suggested a solution. “Using subtle and non-specific threats, we should convince Ab that its in their best interest to train 5 young wise heads to run the Abacus technology. In this way we would not be solely reliant on Ab and could set the prices charged for using the Abacus without the fear of the system not being run properly because we’d always have an alternative to Ab or whoever, even if it’s never used”.

Mo shouted, “That’s brilliant! We don’t want to get rid of Ab or not use their expertise. We just want Ab to only charge a fair price for their services. This is the way”.

When Ab was told what the wise heads had decided they were very upset. Ab argued that they had a right to exploit their Abacus technology any way they could and that any restriction on that right would stifle innovation. Ab also added that it was not right for the Aba community to change the rules whenever they want, a sovereign risk as it were.

“Ab I’d be careful what you say” said Mo. “Throwing around fears of economic disaster for the community just because you don’t get to rip-off all the Abaites is not on. Firstly, if you are paid a fair price, that will not stifle future innovation. Secondly, the Abacus tech is core community infrastructure, that community can make rules to better manage that infrastructure for the good of all the community. That is not sovereign risk.”

“I have an idea” said No being positive for a change. “If we guarantee Ab a long-term contract, say, 10 years, at a fair price, that will guarantee them a good long term income”.

Ab could see the sense in the arguments and agreed. Besides, to not agree would seem a very risky strategy.

So, the Ab community resumed its position as a prosperous community for all but
with the Abacus tech infrastructure being run for the benefit of the whole
community with built in safeguards that ensured that the situation continued
without overt exploitation

What is Rent seeking and why is it bad?

Rent seeking is not a difficult concept and can be understood by all citizens but it can be difficult to explain simply.

When a party can control an asset that for society or the economy provides necessary goods or services, and then uses that privileged position to extract ‘rent’ for the use of that asset more than the Money it could charge in a competitive environment, it is referred to as Rent seeking. Great if you are the seeker, but not so great if you’re a citizen spending limited Money.

As an example, where you have a situation in a country where there is a limited supply of a commodity to produce energy, and that supply is controlled by a single party or group that can charge Money more than the value of the commodity in a competitive environment due to the necessity for energy for homes and businesses, that is Rent seeking.

Rent seeking involves extracting extra Money from citizens for goods or services that could be used by those citizens on other necessities or productive pursuits. Rent seekers channel that extra Money charged to citizens into unproductive purposes. That’s because other productive investments do not meet the criteria for risk and return that Rent seeking activities enjoy.

Rent seeking is not limited to just critical infrastructure (e.g. energy) but can occur in all areas of critical infrastructure. Food markets, health, housing, transport, banking, communication, and education are all areas that are ripe for Rent seeking when the right circumstances either arise, are granted by governments or inaction by governments.

Australia is rife with Rent seeking opportunities. The two supermarket giants, the four major banks that form most of Megabank, the few property developers that hold most of the development approved land, the toll road operator, and the natural gas cartel, to name just a few. In many of these situations it’s argued that there are restrictions by regulation on charges, or that excess charging through Rent seeking is necessary to encourage investment. This is rubbish and not supported with substantiated evidence, or, what is observed by Money flowing to the Rent seekers from excessive pricing.  Let me stress, Rent seeker arguments justifying their position have been adopted by governments and the media and used to brainwash citizens into believing the totally unjustifiable with very negative consequences as we’ll see.

Now that we know what Rent seeking is and that it pervades the Australian economy, why is Rent seeking so bad?

As is our theme, just follow the Money. Money held and then circulated by citizens on goods and services adds considerably to economic activity. If those goods and services are provided in an efficient and cost competitive way, the Money circulation is maintained to improve economic activity. However, if Money is paid for goods and services in a non-efficient manner, then Money circulation decreases, reducing optimum economic activity. Citizens have less funds to circulate and Rent seekers retain Money for further Rent seeking and not productive activities, because that’s the Rent seeking business model.

Contrary to Rent seeker claims that reducing their pricing power will reduce investment, Rent seeking only encourages investment into more Rent seeking activities, because that is the benchmark for risk and return. Rent seeking creates a positive feedback loop with the negative consequences of stifling the flow and circulation of Money.

Reducing or even eliminating Rent seeking activities from an economy is an easy win for a government, as most citizens benefit from a reduction in Rent seeking. So why is it such a problem to fix? Governments being captive to Rent seekers through donations and ignorance, and citizens simply being so misinformed for so long that Rent seekers are believed, even lauded, when defending their activities by misrepresenting the benefits and leaving out the costs, are several reasons that Rent seekers rule.

Try not to laugh, economists refer to the proceeds of Rent seeking as “Savings”. No wonder ordinary citizens are confused.

Solving Rent seeking leads to Rule 13:

Rule 13: Rent seeking is not capitalism. It is socialism for the wealthy. Rent seeking removes Money from citizens and invests that Money in more Rent seeking. Rent seeking destroys the value of Money and concentrates the access to Money in fewer and fewer business owners.

Trickledown Effect

The Trickledown Effect is dogma originated in the 1980’s as a basic tenant of neo-liberalism and justification for Rent seeking. Trickledown begins with concentrating Money into the top ‘1%ers’, rather than an equitable distribution across citizens. The dogma is that Trickledown is good because the 1%ers will spend or invest that Money in economic activity, creating a Trickledown of the Money to the benefit of the remaining 99% of citizens. Great marketing, but nothing is further from the truth. There is absolutely no evidence that Trickledown exists or is an economic benefit. There never was any evidence, and there never will be. But if citizens hear a suggestion often enough, it can find a fake truth in society. The reality of Trickledown is the opposite.

Rent seeking causes a Trickle-up effect that is alive and kicking and all around us. Citizens paying too much for goods and services transfers Money up the pyramid, not down. Rent seeking through Trickle-up enables Money to be more and more concentrated in the hands of a few 1%ers to the detriment of the remaining 99% of citizens.

In theory Rent seeking and the trickle up would result in most Money ending up in the hands of just one person with all other citizens effectively wage slaves. Practically that’s impossible due to said Rent seeker needing services and protection that would also keep increasing in price through associated Rent seeking. However, an organisation could congregate most Money in a controlled population for a very long time. The CCP in China and oligarchs in Russia would be obvious examples today but history has many examples. However, all societies tend to Rent seeking being dominant and its only democracy or revolution that has the ability to reset Rent seekers but the facts certainly demonstrate that any reset is difficult.

The top 20 people on Forbes’ 2023 richest list have added $310 billion to their fortunes. Together, they have a combined wealth of $1.9 trillion, a 30% increase from a year ago. To give a sense of how significant their growth is, these 20 people now hold 40% of the total wealth of the entire Forbes 400 list.

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 [JW1]rephrase