Rent-seeking and inequality: thinking beyond Joseph Stiglitz

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Nobel memorial prize winner Joseph Stiglitz

Inequality in the US is in part a political choice. This is the claim of Nobel memorial prize winner in economics Joseph Stiglitz, who has written extensively about it. Some of his views are outlined by Eideard here.

The claim is that inequality in the US has become self-reinforcing. The wealthiest are able to spend resources lobbying politicians, who then tend to support policies that favour them, such as tax cuts for high earners. If so-called ‘trickle-down’ economics fails to work, as indeed it has for many years, and dramatically so since the Great Recession, then the majority do not benefit from policies that favour the rich. The resources or economic ‘rents’ that accrue to top earners as a result of government policies promote further lobbying or ‘rent-seeking’. Thus rather than economic growth benefiting the majority, only those at the top make substantial gains, and the process continues. Economic gains create pockets of political power for the richest few, and further economic gains at the top, while growth stagnates, inequality rises, and the political system becomes more and more captured by a plutocracy.

Rent-seeking, according to the work of Mushtaq Khan and Jomo K S, is the expenditure of resources on the creation, maintenance or changing of rights or institutions on which rents are based. Rents are defined as incomes which are ‘higher than the minimum which would be accepted by an individual or firm given alternative opportunities’. Rent-seeking is seen by mainstream economists as economically inefficient, and as always costly to the economy. However, as Khan argues this analysis ignore the potential economic benefits from the resulting rents. In addition, rent-seeking can take many forms in both rich and poor countries. In the former, it is often lower and more institutionalised in the form of lobbying or advertising. In developing countries it may be more extensive and informal, and is often blamed by economists for the failure of development to occur.

What mainstream economists fail to acknowledge is that some developing countries have had corrupt and undemocratic political systems and societies, with plenty of rent-seeking, but have developed rapidly. This is because it is not so much the corruption itself that prevents development, but the net effects of the rents that are created through the rent-seeking, and the net social losses which result. Improvements in governance and reductions in corruption and rent-seeking more often result from the development process and the expansion of the middle and working classes and their increasing political influence, rather than ‘good governance’ in itself promoting development.

Rents can promote growth if they encourage innovation (as with patents), or simply a learning process which allows firms to catch up technologically with their rich country peers (conditional infant industry subsidies and protection). They can also prevent economic progress if they maintain inefficient monopolistic firms or other poor performers which fail to improve their efficiency sufficiently to compete on world markets.

In applying these ideas to rich countries, Stiglitz makes a good case that rent-seeking is a problem in the US and is promoting and maintaining inequality. However what may matter more to reversing these trends is not eliminating rent-seeking altogether but changing the kind of rents that arise from it through political action by the working and middle-class majority, and a strong change of policy direction in Washington.

The rich and powerful in the US currently have incentives to maintain their rent-seeking and the kinds of rents they capture. Changing this requires a new political activism, which should aim to promote policies which benefit the wider majority more directly, in the form of high levels of employment, rising wages and productivity and an improved social safety net. There should also be less emphasis on support for the financial sector. The growth of the latter in the last three decades has been encouraged and maintained by massive rent-seeking and policies which bailed out financial firms every time they ran into trouble, while effective reform was continually put off, leading to increasing moral hazard. It played a large role in increasing wage inequality at the top of the income scale, and in the huge growth in private sector debt, which ultimately led to the financial crisis and recession, in which the poorest and weakest in society have suffered the most.

Thus in heterodox economics and political economy, rents and rent-seeking are pervasive across all sorts of economies and societies. Rather than try to eliminate rents altogether, which is unrealistic, the aim in the US and elsewhere should be to create rents which promote economic and social progress, and reduce poverty and inequality.

In the divided US system, and given a widespread loss of faith in politicians across the west, it may be that new political movements prove more effective in bringing about real change in the mainstream of society through their rent-seeking activities. In the UK, political allegiance has fractured, and the lack of a proportional voting system disadvantages the newer, smaller parties, to the benefit of the larger parties. However, with some combination of good ideas and political influence, they can surely work to bring about progressive change.

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