Rent Seeking 101

In our highly polarized political environment, we sometimes overlook areas of agreement between otherwise warring portions of the political spectrum. A recent post at Political Animal pointed to one such area between libertarians and liberals: opposition to “rent seeking” aka “corporate welfare.”

Those of us who genuinely value markets and market economies understand that much of what passes for capitalism these days is anything but, and that the influence of the “haves” is routinely used to ensure that they “have” even more. Libertarians protective of true capitalism and market economics see this state of affairs as undermining the integrity of the economic system; liberals note that it exacerbates the widening gap between the 1% and everyone else.

They are both right. Per a lengthy paper by John Teles of Johns Hopkins, a few examples:

Car dealers, for instance, have a sizable presence in the top 1% of earners, have a major lobbying presence in almost every state capital, and have made contributions to almost every member of Congress. That should not be surprising, because regulations (again, often at the state level) protect car dealerships from competition by limiting direct sales, restricting the termination of franchises, limiting the entry of new dealers, and preventing manufacturers from offering preferential pricing to larger franchisees. Together, these rules, economists Francine Lafontaine and Fiona Scott Morton found in a 2010 study, “almost guarantee dealership profitability and survival,” while simultaneously driving up costs to consumers…..

A concentration of high incomes also characterizes the field of government contractors, such as private-prison managers, defense contractors, and for-profit colleges. All these industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power between firms and their government counterparts.

Or consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates. As Christopher McKenna shows in his book, The World’s Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the rent they extract from performing a legally mandated due-diligence ritual for firms or from performing tasks that could otherwise be done at lower cost by public employees. These are not, in short, meaningfully “private” firms at all, despite their high profitability.

You should really read the whole thing….

There is a compelling case to be made for properly operating market economies—“properly operating” meaning markets operating in economic areas where buyers and sellers have equal access to relevant information (a characteristic that would exclude health care and other goods and services involving inescapable asymmetries of information), and where the sorts of creativity, hard work and entrepreneurial prowess that improve life for everyone are incentivized and rewarded.

There is no case—compelling or otherwise—to be made for the rent-seeking that characterizes American economic activity in the 21st Century.


  1. Say what? Tried to “read the whole thing”. Just tell me what I should be doing, what my power is, other than voting.

  2. As he has done before, did Larry Flynt play a decisive roll in fomenting the disarray among Republican Congress members? Did Larry send his anti-hypocrisy letters once again?

  3. One of my pet gripes are car dealers. They are entrenched solely through politics. They offer zero market value yet they can afford to build these giant temples of worship to brand marketing that blight the landscape of urban America. Why? Their hold on our politics.

    Elon Musk, one of the few remaining examples of a visionary thinking capitalist in America knows that dealers are a complete waste of resources. He sells Teslas through mall storefront order takers. Online order taking requiring a trip to the mall for questions or first hand experience.

    His biggest obstacle? Several states will not let this progress in the door because of the reliable political donations of wealthy car dealers. Mega wealthy car dealers.

    Actions that should be criminal restraint of competition are in fact empowered by law that exists solely as a result of bribery.

    And we are deluded into thinking that we are a capitalist nation.

  4. Semantics has always been a precursor to effective thinking.

    We use to use the word “bribery” for every incident where someone bought favor from someone with power. Nice and clear.

    Now we have confused ourselves with words like “lobbying” and “corporate free speech” and PACs of every stripe into believing that buying political favor can be a good thing.

    Why is it ever a good thing when it is clearly anti-democratic? Our country was founded on the principle that who governs should be determined by counting only votes. Not dollars. One person one vote.

    Are we ready to toss the founder’s vision for freedom and define something new to protect the freedom of the few at the expense of the many?

  5. I’ll admit I’m no economist; however, I do understand the simple concept of a seller price gouging/spiking the price for questionable reasons.

    This is a personal anecdote that, at least for me, reflects price gouging via collusion of corporate entities for financial gain. In 1988, my family physician urged me to stop smoking as he had, he wrote a prescription for Nicorette (a product of Denmark at that time) which was filled at the local pharmacy. It cost me roughly $5.00 using my health insurance and would have cost approximately $10.00 without insurance.

    Fast forward to 1996, when the FDA approved Nicorette as an OTC drug and when the price of Nicorette tripled to approximately the same price as a carton of generic cigarettes using 1996 dollars. Coincidence or collusion between the tobacco lobby and the pharmaceutical lobby?

    As the price of a carton of cigarettes has increased over the years, so too has the price of a box of Nicorette, now approximately $60.00, roughly the price of cigarettes by the carton. By contrast, while visiting in London in May, 2015, I noted the same Nicorette product was selling OTC for less than 10 USD. Visiting Canada a few years back, I also noted the price of Nicorette as under $10.00.

    Good news is that I quit smoking years ago.

  6. Standard corporate lore is that pricing is based on supply and demand and is independent from cost.

    So the one rule of capitalism being make more money regardless of the cost to others boils down to only sell products where supply vs demand assures that revenue over cost is maximized no matter the cost consequences to others (customers, other corporations, tax payers, etc).

  7. I’d say the demand for nicotine, as per its highly addictive property, has been a constant for years and years; however, with the Surgeon General’s 1970-something warning that smoking cigarettes is harmful to one’s health, suddenly a new system of nicotine delivery w/out the toxic chemicals in smoking tobacco was introduced hence becoming a health-oriented and lower-priced competitor with cigarette manufacturers. I’m left thinking somewhere along the line there were backroom meetings among lobbyists representing perhaps tobacco, pharmaceuticals, and healthcare industries.

    By the way, Nicorette is used in the IU School of Dentistry’s Smoking Cessation Program.

  8. @Pete, of interest to those folks who innately are given to researching an idea, drilling down as far as possible before hitting bedrock, here’s what I learned about Nicorette as marketed today in the US and sold at my local CVS pharmacy. Yes, I do keep a pack of Nicorette on hand just in case…

    From the packaging: Nicorette 2mg, nicotine polacrilex, distributed by GlaxoSmithKline, Moon Twp, PA. Made in Sweden.

    Here’s the GlaxoSmithKline web page from Sweden, will need a translation app unless you read Swedish.

  9. Here’s their translated website.

    The Consumer Healthcare Products
    We deliver oral care products, OTC drugs and nutrition to millions of people. Many of our medicinal products are known worldwide as Sensodyne, Panadol, Aquafresh, and NiQuitin. In Sweden we are best known for Alvedon and Nezeril. (Click drug names for more information.)

    Our Consumer Healthcare products are an exciting and growing part of our business. As with our other drugs they have their base in science and innovation. With four research centers in GSK fully dedicated to the Consumer Healthcare products and non-prescription medicines constitute medical excellence is as important as skills in marketing.

    A complete list of the prescription medications we provide in Sweden is available on the

  10. Supply and demand are meaningless concepts where monopoly pricing is involved via patents, collusion and the like. Without competition, those who sell goods and services can charge what the market will bear. You and I are “the market.”

  11. Just askin’…do public utilities fit into this “rent seeking”/”corporate welfare” issue?

    Public utilities are a monopoly; we cannot opt out of IPALCO or Citizens Energy Group to seek more economical lights, gas and water. The latter company combined gas and water/sewer billing to help residents save money (lol) as decided by Ballard and the City-County Council. We have not only seen increases in water/waste water (sewer) bills with more increases on the table but the current property tax bill found a new way to charge us for storm water sewers. (By the way; I received a reply to my request for info that those storm water tax bills, our dirt tax, were to be mailed last Friday.) Storm water sewers are a city utility, billed on our property taxes in past years – OR – will it now be a separate billing annually?

    The increase of public utility rates are decided by the City-County Council; this makes it a political issue and the current CCC election is “full of intrigue” as stated by John Tuohy in his article in the Star today. This is due to the fact that districts have been redrawn – that old and familiar gerrymandering issue.

    Are our public utilities indeed public services, privately owned corporations, or a political issue…or all of the above?

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