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Rent-seeking means that instead of creating economic value to exchange for your wants and needs you dupe the rest of society into transferring money to your bank account. It would be a kind of bureaucratic robbery, and it is essentially a form of free-riding.

One example would be for you, instead of being a fscking good designer, to find a way to pass a law whereby only people that went to design-school can be designers. There goes competition. For that matter you could say it is only people that went to the same design school you did, or only people who wear the same haircut as you do.

Now it seems ludicrous to demand someone to spend 4 years in college to use photoshop (and that is someone who did go to design school talking). But does it sound ludicrous to demand a Doctor to go to Medical Schools? Where lies the difference?

And for sure you can list me a couple differences — American Medical Association’s propaganda has been effective. That is why i like Van Gogh’s example.

As of today, you can’t escape the fact that Van Gogh is one of the greatest artists the human species ever spawned. But during his lifetime, no one agreed with this. His paintings were almost impossible to sell. Basically Van Gogh was free-riding in his brother’s bank account.

Altough Van Gogh was creative, he was not creative in the economic sense. Those two senses are subtly different and it is this difference i want to direct your attention to — for i believe it has important policy consequences.

It is very hard to assess artistic creativity. You could have come across the next Van Gogh yesterday and never know it. That is why it is relatively easy to pass yourself for an artist even if you are not creative. Economic creativity, it seems, is much easier to measure, it can even be measured at all. But i would suggest this ease is very illusory.

Some financial services are seen to be useful to society, but in the wake of the financial system having basically duped the rest of society, some of those services are being called “rent-seeking”. But i ask: Where lies the difference? At first sight it might look like there is a stark difference, but a closer look would show it’s as difficult an issue as with Medical Schools and Design Schools.

The accusation of “rent-seeking” basically turns the issue into a moral one. The difference between rent-seeking and economic-creativity is that one is “good for society”, but discussing what is “good” is a muddy activity. The rent-seekers are the knaves. It’s to blame on them. And that is exactly the kind of thinking the idea of “incentive” was supposed to avoid!

To assert the current worldly economic woes are due to the incentives promoting rent-seeking is more an assumption than an assessment, more a previous belief than dealing with the issue at hand as it presents itself.

I do not want to go any deeper than that into a criticism of market-think, at least not now, but in the stead of a conclusion i could venture that preventing free-riding can never really solve any structural problem, it can at best fix small leaks. There is every reason to believe the current crisis is much deeper than that. But maybe there are also reasons to believe the USA society is beyond the point of no return into losing the difference between creativity and economic-creativity.

A society that swaps subsidizing creativity for high-risk investment has lost an important part of it’s soul.

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5 Comments

  1. You make a really good point, that the issue of rent-seeking is a moral one, but you draw the wrong conclusion, that it shouldn’t been seen that way. In fact, it is only through a moral judgment that you can see the wrong that is being perpetrated. Rent seeking is the attempt to manipulate the rules so that they aren’t fair. In ordinary life, it’s called “cheating,” and yes, we generally use our moral sense to frown on it.

    The examples you give are seriously flawed (though marvelously instructive, and worthy of debate.) I love the distinction you make between being creative, and being “economically creative.” Van Gogh lived by the charity of his brother Theo, but that doesn’t make him a rent seeker. Many an artist, from the Renaissance greats on through, has lived by patronage rather than individual economic transactions. A rent-seeker in the world of art would be, say, an artist who painted icons, and who persuaded the Tsar to require everyone to purchase an icon in his particular style. (OK, implausible, but hopefully, you see the point.)

    As to physicians requiring medical degrees, this area is in fact a great example of an “edge case.” It is indeed reasonable for a professional group to require some kind of certification, but it is not reasonable for that group to then use that certification to suppress competition or to use their lobbying clout to require procedures that are not in the best interest of the patient, or that could be delivered more cheaply by less-trained medical practitioners. For example, you hear reports of associations of medical specialists blocking changes to reimbursement policy that would lower costs for consumers.

    As to financial firms, it’s clear that the industry lost its way long ago. Credit card companies charge rates that were once the very definition of usury, deceptive practices add hidden fees. Investment bankers trade against their clients, stealing billions, destroying the economy, and use their access to government to get bailouts when their schemes go awry.

    And don’t get me started on patent trolls.

    To me, the essence of rent seeking is to use access to government policy to create a situation where you capture more value than you are entitled to. It’s using access to the corridors of power to legalize cheating. Van Gogh didn’t cheat Theo, he relied on his kindness.

  2. The problem with moral standards is that they are good to keep a decision you already made, but not to make new decisions. (I suspect this is by definition, but i will not go seeking a definition of a moral standard that is universally acceptable in order to pursue this angle). This form of analysis will work for normal, predictable times, just to consistently fail every time something unusual happens. And i believe it is safe to say the present days are not ordinary.

    To put it another way, from a 2011 perspective it is pretty clear that CDOs did reap more value than they created, but i do not think you could know that from a 2005 perspective. At all.

    My point is not that Van Gogh was a rent-seeker, even if i do think he is a little over-hyped i am completely sure he was one of the greatest artists ever. But no one could know for certain that he was at the moment of his death, except by waiting 30 years and having his work recognized for all he was worth. My point is that i can’t see how any criteria for rent-seeking could include CDOs and exclude Van Gogh. That we can’t really judge anything truly “creative” ahead of time.

    And thus that measuring “creativity” by it’s weight in gold is simply crazy.

    My fear is that, implied in Umair Haque‘s original tweet [No economy where the returns to rent-seeking outweigh those to creating, building, and transforming can prosper.], there is a feeling of having “solved” the riddle of the present economic problems. My fear is that it is possible to confuse moral issues inside the economy with a “solution” for the economy.

    In fact, there is a very good case to be made that markets should work without the requisite for anyone to be “good”. Robin Hanson for example claims that more “wolves” and less “lambs” improves the decision-capacity of markets.

    On the other hand, one of the reasons why the economic discourse is allowed such weight in contemporary politics is that it is, in many ways, seen to be neutral. It is respected because it is not moral, because the productivity of the economy is seen to not be dependant on “hairier” issues like class or prejudice or human-rights. If you have 1 trillion dollars to invest in building new houses for people it can’t be a bad thing, can it? Except it creates dynamics that we can’t predict.

    If the world at large is to reconsider the place of the financial system, much finer distinctions will be needed than “good” and “bad” incentives. There should be more discussion, for example, about how money gets used as score-keeping in society, how the amount of money you have equals how good you are, because since money is an abstract quantity it is inherently “inventable” (and “optimizable” in Patrick McKenzie’s parlance) and thus any kind of financial system with any set of incentives will tend to create more complex dynamics than simply “rent-seeking” against “creativity”.

  3. By the way, i should totally apologize for trolling: If on the one hand i had gone to wikipedia/Rent-seeking a week before your tweet wondering about all these issues, on the other hand i totally mentally awarded myself a nerd-pride badge for having Tim O’Reilly comment on my blog. ;-)

  4. Hmmm. It’s pretty clear to me from what I’ve read about the financial crisis that many of those who were building financial instruments to bleed the system were well aware ahead of the time that they were building time bombs, and extracting value from the system rather than creating it. Perhaps when CDOs were first created, it was with good intentions, but certainly, long before the end, folks knew that they were screwing other people.

    It’s certainly true that you can’t always know in advance the outcome of your decisions, but we can do better!

  5. The thing is, supposedly «the Market» is more efficient exactly because it is ruthless and unbiased. Those time-bombs should be impossible, except if we give up on the whole assumption of the efficiency of the market, and then we will have to give up the assumption of the neutrality of money — can we go that far?

    I would leave this as is, but i found this post by Pepperell (discussing Marxism of all things) that, to my taste, spells out the huge amount of assumption (and mostly untested assumption) we swallow when we accept the whole discourse. I am pretty sure the connection with my post can seem puzzling or irrelevant, but here it is, for better or worse: the link.


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