Another excerpt from Michael Hudson’s J is for Junk Economics, his heterodox ‘guide to reality in an age of deception’. Here he defines and discusses rent-seeking (p.199-200), an important concept in economics. For those seeking a rich and detailed non-mainstream treatment of the theory of rents and rent-seeking and its application to development, I can definitely recommend Khan and Jomo (2000), but Hudson’s discussion is still interesting and provocative:
“Rent-seeking: A zero-sum activity in which one party’s gain is another’s loss, unlike new capital investment and hiring that expand an economy’s production and income stream. The classical meaning of “rent-seeking” refers to landlords, natural resource owners or monopolists who extract economic rent by special privilege, without their own labor or enterprise.
Neoliberals have diverted attention from the land rent, resource rent or monopoly rent that classical economists associated with the FIRE (finance, insurance and real estate) sector. They have re-defined “rent-seeking” to refer only to politicians and labor unions lobbying for “special privileges”, such as Social Security, a minimum wage and public programs to meet other basic needs. But these programs have nothing to do with classical rent-seeking. They are proper functions of government.
In introducing the term “rent-seeking” in 1974, Anne Krueger applied it to import licensing and quotas that she claimed interfere with free trade, and extended the idea to government regulation in general – including legislation setting a minimum wage, claiming that this led to rising unemployment. Gordon Tullock, a follower of Ludwig von Mises, defined rent-seeking as lobbying by politicians for special privileges such as higher Social Security payments.
As a high-ranking World Bank and IMF official defending free trade, Ms. Krueger opposed agricultural protectionism designed to save foreign economies from food dependency on US farm exports. Conflating rent-seeking with subsidies to modernize, her 2012 book Struggling with Success (p.86) accused all government regulations, tariffs and subsidies of being bad and wasteful. “Ultimately, regulation has negative effects on the market in the country imposing the regulation…” The political effect of such deregulation and non-subsidy is to let “the market” pass by default to financial managers – as if their own major aim is not to seek classic economic rents to empower themselves as monopolists and financial rent-seekers!
Nobel Prize-winner James Buchanan’s euphemistic “public choice” anti-government philosophy (that government should make no choices, except to disappear) goes so far as to claim “that a tax with more excess burden,” such as taxing wages or industrial profits (adding to the cost of living and doing business) is better than a more reasonable tax on land rent with less burden. His argument is that classical rent theory would work, but that this would increase government power, precisely by being reasonable and economically efficient – “because government, if allowed to tax in the less burdensome way, may get more revenue,” which Buchanan opposes.
Such language makes a travesty of economic vocabulary. It strips away the classical association of rent with the FIRE sector, applying it only to the “cost” of government regulations and pretending that only government bureaucrats receive economic rent, not private sector rentiers. This leaves out of account the obvious fact that a strong government is needed to overcome opposition from predatory vested interests. The political effect of “public choice” ideology and its self-proclaimed “libertarian” doctrine is thus to serve as a handmaiden to oligarchy. It relinquishes economic rent to the FIRE sector instead of taxing it.
At the end of this road, imagine everyone paying user fees for everything from fire hydrants to schools, turning every road and parking space into a toll road. Payment for these erstwhile free public services would be made to owners and financiers of these natural monopolies, free from public regulation or other “Big Government” acting to save the economy by preventing predatory fees. In the name of opposing economic rent as “socialism”, AKA “the road to serfdom”, “public choice” doctrine thus prepares the groundwork for classic rent grabbing, financialization and kleptocracy.”
The Political Economy of Development 