Rent-seeking

Based on Wikipedia: Rent-seeking

The Chain Across the River

Imagine a landowner who installs a chain across a river flowing through their property. They hire someone to sit by the chain all day. When boats come along, the collector demands a fee to lower the chain and let them pass.

The landowner hasn't improved the river. They haven't made the water cleaner or the passage safer. They haven't created anything of value. The boats receive nothing for their money except permission to continue doing what they were already doing for free.

This is rent-seeking in its purest form. And it's everywhere in modern economies, just wearing better disguises.

What Rent-Seeking Actually Means

The term "rent" here has nothing to do with paying your landlord. It comes from the eighteenth-century economist Adam Smith, who divided all income into three categories: wages (what you earn from labor), profits (what you earn from investing capital), and rents (what you earn simply from owning something).

The original "rent" was land rent. You own a piece of ground, and people pay you for access to it. You didn't create the land. You didn't make it valuable. The value comes from natural resources, location, or improvements paid for by society at large, things like roads, schools, police, and fire departments that make the area desirable.

Rent-seeking extends this concept. It's the act of growing your wealth not by creating something new, but by manipulating the rules of the game. Instead of building a better product or offering a better service, you get rich by rigging the system in your favor.

This is fundamentally different from profit-seeking. When a company makes profits by building something people want to buy, both sides benefit. The company gets money, the customer gets value. Wealth is created. But when a company makes money by lobbying for regulations that crush competitors, or by securing exclusive government contracts through political connections, no new wealth appears. The company simply redirects wealth that already exists, or would have existed, into its own pockets.

The Curious Case of the Cheap Bribe

Here's a puzzle that kept economist Gordon Tullock up at night. If a company can gain a billion dollars from a favorable government policy, how much would they pay to get that policy passed?

A naive answer might be: up to a billion dollars. After all, anything less would still leave them with a profit.

But that's not what happens. In practice, rent-seekers often spend just one or two percent of their expected gains on lobbying and political contributions. A billion-dollar benefit might cost ten million to secure. Why is there so little money in politics, given how much is at stake?

Several explanations have been proposed.

First, voters notice when politicians live lavishly or take obvious bribes. This puts a ceiling on what politicians can demand without facing electoral consequences.

Second, politicians compete with each other to offer favors to rent-seekers. Just as competition between businesses drives down prices for consumers, competition between favor-sellers drives down the cost of favors.

Third, there's a trust problem. These are illegal or at least shady deals. Neither side can sue if the other breaks the agreement. There's no legal recourse, no reputational mechanism to enforce compliance. The politician might take the money and do nothing. The company might get the favor and forget to make future contributions. This mutual suspicion keeps prices low.

Finally, rent-seekers can pay in installments. Once you've received the benefit, you can use a small portion of your gains to keep the politicians happy, rather than paying everything upfront.

How Rent-Seeking Damages Economies

The costs of rent-seeking extend far beyond the money changing hands between lobbyists and legislators.

Consider a company deciding how to spend its budget. It could invest in research and development. It could train its employees. It could build new factories. All of these create real value.

Or it could hire lobbyists to secure a favorable regulation that hampers competitors. If the lobbying is cheaper and more effective than actual innovation, why bother innovating?

This creates a vicious cycle. The more rent-seeking occurs in an economy, the more attractive rent-seeking becomes relative to productive activity. Why build a better mousetrap when you can get the government to ban competing mousetraps? Resources that could fuel economic growth instead get poured into the competition for political favors.

A 1988 study estimated that rent-seeking had reduced total income in the United States by forty-five percent. That number is contested and difficult to verify, but the underlying logic is straightforward. Every dollar spent on lobbying, every hour spent cultivating political connections, every clever lawyer hired to exploit regulatory loopholes, that's a dollar and an hour and a mind that could have been creating something new.

The economist Mançur Olson traced this pattern across history. As countries age, organized interest groups accumulate like barnacles on a ship. Each group seeks to redirect wealth toward itself. Each regulation becomes an opportunity for someone to extract tolls. The economy slows. Vitality drains away.

Olson noticed something else, too. Countries that experienced catastrophic collapse, losing their existing political structures and entrenched interests, often experienced remarkable economic revivals. Japan after World War Two is the classic example. The war didn't just destroy factories and cities. It destroyed the web of cozy arrangements and captured regulators that had been strangling the economy. Starting fresh, Japan grew rapidly.

But new interest groups always form. New barnacles attach. The cycle begins again.

Regulatory Capture: When the Fox Guards the Henhouse

Governments create regulatory agencies to protect the public interest. The Food and Drug Administration ensures medications are safe. The Securities and Exchange Commission prevents financial fraud. Environmental agencies keep companies from poisoning the air and water.

But these agencies face a problem. They need expertise to do their jobs effectively. Where do you find experts who understand the pharmaceutical industry? Often, they come from pharmaceutical companies. Where do you find people who understand complex financial instruments? From Wall Street. The regulators end up populated by the very people they're supposed to regulate, or by people who hope to work for those companies after their government stint ends.

This is regulatory capture. The agency that was created to restrain an industry becomes its servant. Regulations get written to benefit incumbents and exclude newcomers. Safety requirements become barriers to entry. Licensing rules protect existing players from competition.

The result is a kind of legalized rent-seeking. The industry extracts wealth from consumers and potential competitors, but it does so with official government sanction. The chain across the river now has a government seal of approval.

The Inequality Connection

The Nobel Prize-winning economist Joseph Stiglitz has argued that rent-seeking is a major driver of income inequality in the United States. The wealthy and powerful, he suggests, often get richer not by creating wealth but by grabbing a larger share of wealth that would have been produced anyway.

Think about it this way. If a company lobbies for a tariff that raises prices on competing imports, consumers pay more. The company's profits rise. But no new goods or services have been created. Money has simply flowed from many consumers to a few shareholders.

The economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva studied tax policies across different countries and concluded that much of rising income inequality reflects rent-seeking by wealthy taxpayers. Those with resources to influence tax policy shape it to their benefit. Those without such resources pay more, relatively speaking.

In 2023, the economist Angus Deaton put it starkly:

In retrospect it is not so surprising that free markets, or at least free markets with a government that permits and encourages rent seeking by the rich, should produce not equality but an extractive elite that predates on the population at large. Utopian rhetoric about freedom has led to an unjust social dystopia, not for the first time. Free markets with rent seekers are not the same as competitive markets; indeed, they are often exactly the opposite.

The distinction matters enormously. Free markets, in the idealized sense, mean open competition where the best products and services win. Rent-seeking corrupts that vision. It creates a system that looks like free enterprise but functions like a protection racket.

Modern Examples All Around Us

Financial innovation provides a particularly interesting case. Economists like Paul Krugman and Lord Adair Turner, the former chair of Britain's Financial Services Authority, have argued that much of what gets celebrated as innovation in banking is actually rent-seeking in disguise.

When a bank creates a new financial product that helps businesses manage risk more efficiently, that's genuine innovation. When a bank creates a product whose main function is to obscure risk, evade regulations, or extract fees from confused customers, that's rent-seeking with a fancy name.

Occupational licensing offers another example. Medieval guilds restricted who could practice various trades, limiting competition and keeping prices high for consumers. Modern professional licensing often works the same way.

Some licensing protects the public. You probably want your surgeon to have demonstrated competence before operating on you. But when states require licenses for florists, or interior decorators, or hair braiders, the main effect is often to protect existing practitioners from competition by newcomers.

Taxi medallion systems became a textbook example before ride-sharing apps disrupted them. In many cities, you couldn't legally operate a taxi without a medallion. The number of medallions was strictly limited. In New York City, medallions once sold for over a million dollars.

That million dollars represented pure rent-seeking. It didn't make taxis safer or drivers more skilled. It simply created an artificial scarcity that transferred money from passengers to medallion owners. When Uber and Lyft found ways around the medallion system, those million-dollar licenses became nearly worthless, which tells you how much of their value came from the restriction itself rather than from anything productive.

The Bureaucracy Gets In On the Action

Rent-seeking isn't just a private sector phenomenon. Government officials can play the game too.

When bureaucrats demand bribes to process applications, that's rent-seeking. The bribe doesn't create any value. It just transfers money from citizens to officials in exchange for something that should have been provided anyway.

Studies have shown that rent-seeking by bureaucrats increases the cost of providing public goods. When tax collectors seek bribes, government revenue declines even as the burden on taxpayers rises. The missing money doesn't disappear. It flows into private pockets.

This creates a particularly insidious problem for developing countries. If bureaucratic positions become opportunities for extraction rather than public service, talented people seek government jobs for the wrong reasons. The most capable individuals might do better for society as entrepreneurs or inventors, but they choose instead to compete for positions at the toll booth.

Not All Rent-Seeking Is Created Equal

Some economists have pushed back against a purely negative view of rent-seeking. Shannon Mitchell has modeled scenarios where rent-seeking can provide net benefits, particularly when firms need to expand to capture export opportunities.

Others have questioned the concept itself. The economist William Samuels argued that labeling some activities as "wasteful" and others as "productive" involves hidden assumptions about what resources should be used for. In a world of scarce resources, people allocate those resources according to their preferences. Calling lobbying wasteful while calling advertising productive requires judgments that aren't as obvious as they might seem.

There's also the practical problem of distinguishing beneficial profit-seeking from harmful rent-seeking. When a company lobbies for subsidies for renewable energy, is that rent-seeking or is it advocating for policies that correct a market failure? When a professional association pushes for licensing requirements, is it protecting the public or protecting its members from competition?

The answer often depends on your perspective and your politics. This doesn't mean the concept is useless. It means applying it requires careful thought rather than reflex.

Immigration and the Welfare State

Rent-seeking concepts have been applied to immigration debates as well. Some economists argue that generous welfare states can attract migrants seeking benefits rather than productive opportunities. If you can live reasonably well without working, the incentive to work diminishes.

The flip side is more interesting. Productive people, those most likely to create wealth and innovation, may be the most likely to leave rent-seeking societies. If you're talented and hardworking, you have options. You can move somewhere that rewards your efforts rather than taxing them to fund others' rent-seeking.

This brain drain compounds the problem. The departure of productive individuals leaves a higher concentration of rent-seekers, making the society even less productive and potentially triggering further departures. It's another vicious cycle.

The Deeper Problem

At its core, rent-seeking represents a choice every society must make. Will we allow people to get rich by creating value? Or will we allow them to get rich by manipulating rules?

The answer is never purely one or the other. Every society has some rent-seeking. The question is how much, and whether the trend is toward more or less.

Democracies face particular challenges. Organized interests have powerful incentives to lobby for favorable treatment. The benefits they seek are concentrated and immediate. The costs they impose are diffuse and often invisible. A tariff that raises prices for millions of consumers might benefit a few thousand workers in a protected industry. Those workers will fight hard for the tariff. Each consumer, facing only a tiny price increase, has little reason to fight against it.

This asymmetry explains why rent-seeking persists and often grows, even when almost everyone would be better off without it. The winners win a lot. The losers each lose a little. Collective action is hard. And so the chains multiply across the rivers of commerce, each one extracting its toll.

Connecting to Education

What does all this have to do with teacher salaries?

Education policy is thick with rent-seeking dynamics. Various groups, teachers' unions, administrators, textbook publishers, testing companies, education consultants, all compete for shares of the education budget. Each can make arguments that their piece of the pie serves students. Not all of those arguments are equally valid.

When spending increases flow to administration rather than instruction, when mandated programs benefit vendors more than learners, when regulations protect incumbents rather than improving outcomes, rent-seeking is at work.

Teacher salaries exist within this ecosystem. Whether teachers are underpaid, and relative to what, depends partly on how much of education spending gets captured by other interests before reaching the classroom. Understanding rent-seeking helps explain why more spending doesn't automatically mean better-paid teachers or better-educated students.

The chain is there, across many rivers. The question is who's collecting the tolls.