What The Heck Is Rent-Seeking?

Rent seeking is the petitioning of governments for special privileges or monopolies that are made possible by governments’ power to coerce citizens to do things, e.g., pay money or obey laws. The purpose of rent-seeking is to gain a higher income.

Why isn’t rent-seeking called “profit” seeking?

Some say rent-seeking should be called profit-seeking. It is income-seeking via government privileges, but rents and profits are different kinds of income. Successful rent-seekers  gain “economic rents“.

If this is too technical, you could focus on the “privileges” government gives rent seekers. Special privileges containing words like “rights” or “incentives” or “subsidies” that governments grant political income-seekers are usually of a finite duration – one can only lease or rent them.

An example of rent-seeking

Rent-seeking was a term popularized by Gordon Tullock, a retired college professor and dean at George Mason University. One example Mr. Tullock used was the practice of New York City in granting taxi medallions to cab drivers for a fee.

In “Rent-Seeking: an Overview” in The Selected Works of Gordon Tullock, volume 5: The Rent-Seeking Society, Tullock called taxi cab medallions a transactional gains trap that occurs when “a government provides privileges for a group of people”.

Tullock believed only the original recipients of a government monopoly would benefit from it. Their successors would not gain anything. This belief appears to come from Pareto’s theory that monopoly is economically inefficient – when a monopoly is ended, “the loss to the monopolist will be more than offset by the gain in efficiency”.

The cab drivers who first paid the City $500 got to rent a medallion for a year. The medallion showed they were recognized by the City as official cab drivers. Why did NYC cab owners buy these medallions? Obviously a medallion created a higher income for them – they made more than the $500 that they paid for temporary possession of it.

Official cabs have privileges other cabs do not. They can park at places where it is easier to pick up fares, e.g., right in front of bus stations, train stations, airports, and entertainment venues. Police would fine other cab drivers who didn’t have a medallion if caught parking in these spaces.

Some passengers perceive the medallion, or in other places a cab license that can be posted in the taxi, makes these cabs safer to ride in. But, as the murders in San Francisco by a cab driver a couple of decades ago prove, that guarantee is a false one.

Cabs and other vehicles licensed to carry passengers are usually not subjected to inspection either. Some licensed vehicles may even lack seat belts, or as was the case of recent deaths in a San Francisco limousine, lack windows that can be knocked out from the inside to escape in the event of fire.

The main benefit a licensed cab offers is a unique number or name that enables riders to complain to a City about the service provided by a particular taxi driver.

Because of privileges given to a select few licensed cab drivers and the government-created disadvantages for being a “gypsy” cab driver, taxi cabs in New York became scarcer. The remaining cabbies could charge higher prices. This created fierce competition among cab drivers each year to get a medallion and among riders equally fierce competition to get a cab.

Why doesn’t rent-seeking apply to profit-making by government?

After all if rent-seeking increases incomes (even if just termporarily), why aren’t the monies paid to government called rent-seeking?

Because governments, at least democratic governments, do not “make profits”. Instead, governments “collect revenues”. They are supposed to spend their revenues for the good of those they govern. This is why governments often operate in the red – they should be providing services people need, not trying to earn profits.

The fees and fines that governments levy and collect for privileges like taxi medallions, business licenses, driver’s licenses, marriage licenses, drilling & mineral leases, downtown parking and other government privileges go to pay for processing applications; issuing certifications of the special privileges being granted; and law enforcement to support those privileges.

For rent seekers, the government supplying a privilege or monopoly will also spend revenues to try to ensure that the privileges granted increase the income(s) of the rent-seeker(s).

However, costs for rent-seeking from government are not necessarily paid for by the rent-seeker. Rent-seekers may pay all the costs. Or rent-seeking-costs may fall in part or whole onto the shoulders of all taxpayers or some private individuals who are getting little or no benefit at all from rent-seeking.

These kinds of wealth transfers by governments from the pockets of other citizens into those of rent-seekers is the subject of my current blog, “Grand Theft Government – Biggest Game in Town” on “Huffington Post.