Rent seeking

The Volokh Conspiracy has a good article by guest writer Ward Farnsworth on one of the reasons that economists consider "rent-seeking" to be harmful -- or rather, had a good article. It seems to have disappeared from the website, although it's still visible in Yahoo's cache.

(Rent-seeking in this technical sense is related to, but not precisely the same as, the common-English sense of renting equipment or housing.)

Suppose the wreck of a ship is found on the ocean floor. Four teams race to lay hands on a treasure chest the ship is known to have on board; it contains artifacts worth ten million dollars. Each team spends about three million dollars trying to get there first. Eventually one of them succeeds, and the others are out of luck. Question one: do you see why this outcome is perverse?

Answer: A total of twelve million dollars was spent to recover something worth less than that. The result is perverse from a social standpoint -- i.e., considering all the costs and benefits involved in the aggregate, not from the point of view of any one party. Looking at the salvors as a group, they would have been wealthier if the treasure hadn't ever been found in the first place. Indeed, spending anything more than the bare cost of raising the treasure is a waste; all the other money just goes into efforts by the teams to beat each other out, and there is nothing to show for it once the treasure is raised.

The essential difference between this example and (for example) four companies engaged in searching for minerals at the bottom of the sea is that in this case, there can be only one winner. When companies compete to search for oil or minerals, each company runs a risk of finding nothing, true, but it is not a winner-takes-all situation except by accident. The first company that finds oil or minerals is merely the first, and does not prevent the others from succeeding as well.

Rent-seeking can be, naturally, very lucrative for the winner who takes all, and that's why people do it, regardless of the greater economic inefficiencies.

The idea, to oversimplify only a little, is that there are two general ways to increase your wealth: by creating things people want, or by fighting over prizes that already exist — things other people have created or found. Either strategy might be more successful than the other, and perfectly rational to pursue; it depends on the circumstances. [...]

The difference between these methods of gaining wealth -- between, say, competing to build a better restaurant and competing to get to the treasure first (rent seeking) -- is that the first one creates wealth, or better-offness, for the world. Customers are made happy, and restaurants gradually get better. Fighting over who gets the treasure isn't like that. The treasure doesn't get bigger as a result. In a sense it gets smaller because wealth is eaten up in the effort to lay hold of it.

Think of this on a larger scale and you can see that the more a society spends on rent seeking -- on quarrels over who gets what -- the poorer it becomes. If that's all that anyone did, everyone would starve in due course.

While rent-seeking is usually an economic bad, there are arguably situations where the good it does outweighs the harm. For example, most nations artificially restrict the supply of doctors by insisting that only those who have passed an approved training programme can practice, rather than allowing anyone to call themselves a doctor. Even the most laissez faire supporters of the free market generally accept that this is better than leaving it up to the free market to drive the bad doctors out of business -- although there are exceptions.

The situation is less clear for other trades such as teacher, plumber, electrician and others. These trades, like doctors, are restricted to those who pass a government-approved course, which therefore artificially reduces competition in the field. Whether the harm to society from that reduced competition is more or less than the reduction in harm from allowing unqualified teachers and plumbers to practice is unclear.

Another classic example of rent-seeking is the patent system, where the first person to file a patent can gain a monopoly over an entire range of ideas, regardless of who invented them. While it is an article of faith that patents do more good than harm, there is remarkably little actual evidence to support that idea.