The Rent Seeking Economy

http://intellectual-detox.com/2013/04/14/rent-seeking-economy/

by bokonist • 13 years ago

192 129 13 years ago

guylhem6• 13 years ago

Rent seeking can't and won't last. You don't need to go very far - just read http://reason.com/archives/2013/04/14/the-end-of-power on the frontpage today (the comments suck however - they basically try to deny the fact that for humanity as a species, the last century has been the best ever)

The basic idea stands - too many people have more comfort, want too many things, and are harder to control - and now more than ever.

The solution to rent seeking is basic capitalism, as in the use of reason.

Ayn Rand style capitalists do worry about the letter and the spirit of the laws and of a contract, because they know it is in their best interest. They are not into rent seeking because they know the end results.

She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."

Ayn Rand theory and work can be seen as one implementation of John Rawl theory of justice. He added a 2nd part about equality, but he also deconstructed the opposition between freedom and equality.

Basically, you only need a good premise, then you can work on it. The premise here is reason.

The only real "competition" could be from a belief not based on reason, such as racism or a kind of religious fondamentalism - but not any kind as explained by John Rawls, just the kind incompatible with democracy. I'll put islamism in that bag (the basic idea of stoning to death women who had sexual relation outside of marriage in this day and age is not very palatable to me).

Anyway, the remedy is the same for both diseases - science (and the occasional readings of libertarian books)

If you have ideological problems with Ayn Rand, read at least about John Rawls veil of ignorance on http://en.wikipedia.org/wiki/A_Theory_of_Justice

OGinparadise2• 13 years ago

>> (the comments suck however - they basically try to deny the fact that for humanity as a species, the last century has been the best ever)

Part of me says that the added stresses from never being happy, always want more, do rain on that parade. Maybe being "a dumb peasant" somewhere with a full stomach but otherwise no larger goals is best.

>> The basic idea stands - too many people have more comfort, want too many things, and are harder to control - and now than ever.

Yeah but they are not organized, at least not in USA. Those making bank are kicking back to the politicians that decide what system /laws us suckers have to follow. The greatest investment ever is in the political process, a million dollar donation can easily yield billions.

guylhem6• 13 years ago

Try buddhism or stoicism (I read Seneca) and you'll be happy my friend, even with less :-)

You'll even be happier to see everyone in the human race is getting more.

It even beats being dumb with a full stomach, because how good is happiness if it is based on ignorance?

sliverstorm8• 13 years ago

Maybe I'm just thick as a board tonight, but while you wrote a lot, you don't really seem to have explained "the solution to rent seeking" as you see it. Can you expound?

guylhem6• 13 years ago

Reason says rent seeking is improductive and self destructive behaviour. One will engage in such activities only if the expected returns outweights the costs, which include the destruction of the system.

A rational person will not come to this conclusion under a system where such inefficiency is discouraged - pure and perfect competition, capitalism.

Many people wonder whether capitalism is a good thing. Bring them reason, science, let them work it out and make their own basic decision. Let them fight the bad reasoning themselves, come out of their local optimas if you prefer a math analogy. Racism and religious extremism must have some value, or such behaviours would not have because so widespread. But they seem to be local optimas, or even destructive in the end, just like rent-seeking.

Here is another way to look at this - look at the immigration net flows: it seems that more people want to immigrate in capitalist countries than emigrate out of them.

If it is reasonable to doubt my deductions, is it reasonable to doubt so many people may have made the same conclusions independently ?

Read about how immigrants affiliate politically, which belief system they adhere to. Apparently a lot of them want to be paid for the fruit of their labour, and not for pure idleness, want to be left alone - and many other libertarian values.

I'm sorry if that is not a valid explain for you. It is for me.

brc5• 13 years ago

The challenge for most people is to understand that less regulation results in less rent seeking. Only a large and powerful state can implement the required blocks to form monopolies. Only a powerful state can entrench the class divide between the ruled and the rulers.

The solution, then, is to reduce the size of the state and allow for less central planning and involvement.

Further to this: the size of the state and those who run it seek to gain more power. Power is delivered through votes. Thus much that passes for political debate is not based on reason, but rather emotions and feelings - people finding and leveraging biases, beliefs and BS. Virtually no modern policy making is done using reason and simple analysis - instead it is done by emotionally trying to sway the argument - the 'think of the children' model.

A triumph of reason over emotion and reduction in the size o f the state. This creates the environment where those rent-seeking cannot fool those using reason, and they lack the all-powerful controls to enforce the monopolies.

pyre3• 13 years ago

  | I'll put islamism in that bag (the basic idea
  | of stoning to death women who had sexual relation
  | outside of marriage in this day and age is not
  | very palatable to me).

It's my understanding that rules like that (e.g. stoning) are not in the Qur'an, but are 'old' rules thought up by different sects of Islam.

1. This is like decrying Christianity as a cult because of David Koresh. Or getting angry at all Christians because the Catholic church tried to cover up the whole paedophile priest thing.

2. Even people that are part of these sects don't necessarily follow all of the rules. E.g. I've known Jewish people that ate ham.

guylhem6• 13 years ago

I'm not for or against any religion.

It's all a matter of proportion. How many Koresh are there? Enough to put beheading/stoning/etc. videos on youtube ? Islam seems to have the #1 "bad spot" at the time.

I feel very sorry about that, because as the human race it's like trying to advance without the help of a whole third of world population - and the worst thing is we do not let the people who refuse such belief system immigrate easily in democratic countries. Just look at the way muslims (and apostates) emigrating from north africa to europe are treated.

At the moment we are wasting a lot of human potential, and that's sad.

Hopefully things will change [even if I'm not sure about it when I see the "antilibertarian" downvotes posts, without even taking a minute to express why they think it does not contribute to the discussion. I guess I should know better about liberals and their so called values :-/]

EDIT: I was talking about the 1st post, about reaon, which took multiple downvotes but not a single dissenting reply in about 2 minutes. Prove me wrong, give me arguments to challenge my position - I'm begging for them.

But no, nothing at all. And my attitude is the problem ?? It's like watching a reddit gang in operation, sorry

anoncow• 13 years ago

AFAIK Stoning is from an authentic hadith. An interesting point that could be used to decrease this is Islam frowns on bitching and backbiting. So...

zeteo• 13 years ago

>Rent seeking can't and won't last [because] too many people have more comfort, want too many things, and are harder to control - and now more than ever.

That's a rather pie-in-the-sky argument. People pursue rent-seeking because it gives them comfort, material goods, and freedom. The businessman who lobbies for monopolistic benefits, the politician who takes his campaign contributions, the copywriter who creates attack ads: they all follow egotistic interests. Wild, unregulated, snake-oil-and-corporate-trusts capitalism is no solution to these problems.

waps2• 13 years ago

> In the modern world, natural resources are the limiting factor of production. It takes only a tiny percentage of the population to farm the arable land, mine iron ore, cut down and process the timber, and extract the oil. A somewhat larger percent converts those resources into the necessities of life – bread, vehicles, homes, roads, bridges, clothing, furniture, stocked grocery aisles, appliances, etc. The worker entering the economy has a problem. They must find a source of income so they can access resources and manufactured goods. But there are no unexploited resources and no surplus jobs to be had processing those resources. They need a job, but their labor is surplus and unnecessary.

This is the real problem. Everyone but a tiny percentage of the population is ... well ... not needed at all.

yarrel• 13 years ago

"Ayn Rand style capitalists do worry about the letter and the spirit of the laws and of a contract"

And Tolkein-style hobbits have hairy feet.

Nursie• 13 years ago

"She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."

Such a shame she let faulty premises and emotion cloud her writing and her philosophy then really.

acchow• 13 years ago

> In a dysfunctional society, people acquire wealth via corruption, rent seeking, and theft.

I believe these three are one and the same.

zanny25• 13 years ago

They are three sides of the same coin, but reflect on the subtlety of the robbery.

hcarvalhoalves2• 13 years ago

> Problem number two is that the economic system does not create incentives to produce the products or technology that generate the most utility. The economic system produces the incentive to create products where the entrepreneur can capture as much of the consumer surplus/utility created as possible.

This captures all that is wrong with most of current startups and VCs in two sentences.

I have the impression that some 2/3 of the investments are being poured into yet another social product with advertising business model. I see little money being thrown at harder problems, and literally zero at art.

bokonist4• 13 years ago

Kleiner Perkins invested in over 60 cleantech companies. Unfortunately, their cleantech portfolio seems to be having pretty lousy results - http://www.mercurynews.com/business/ci_22385874/kleiner-perk...

I think the proportion of VC funded companies that are doing an advertising bases social product is a bit exaggerated. I'd say the majority of funding is for paid subscription based SaaS web apps and software, stuff that manages some part of the enterprise, analytics, advertising optimization, security, backups, data management, etc. etc. See, for instance, one first tier venture firm's portfolio - http://www.generalcatalyst.com/companies

However, the point remains that few VC funded companies are attacking the areas that have the most potential for raising quality of life. I do not blame the VC firms for this - they are doing the economically smart thing. Software has a much greater potential for generating the high profits of natural monopoly with relatively low capital investment costs. Cleantech simply does not provide the same returns.

In reality, the solution may be more Solyndras. Maybe we need some public institution - government or philanthropic - to grant loans at a 2 to 1 match for equity investment in companies that are tackling socially useful problems. Many of these companies will fail. But the knowledge, know how, and personal experience generated will create the base for the next round of companies, or the round of companies after that, to create products that change the world. But currently it is not rational for VC's to play the long game, because there is little chance than any particular company they invest in will capture the value created by new innovations. Since much the result of the product will end up as consumer surplus/public surplus, it makes sense that the public contribute to the initial funding if the public wants the investment to happen.

waps2• 13 years ago

And what if "socially useful" - which effectively means whatever the current public opinion is - is ... wrong ? We are the very same people that once believed the earth is flat, and the people that proved that walking in a straight line between two points has to be less efficient than walking in a circle (the ancient Greeks. Why ? Because a circle is perfect. Despite proving that the shortest distance is just that straight line), were probably smarter than us, at least on average.

Then it will just be a big net loss to everyone.

Socially useful actually working is predicated on people's rational thinking actually producing good outcomes, and ... well, look at our history. The argument that "this time" we'll be right seems a bit unlikely to be true, doesn't it ?

The good thing/massive problem with capitalism is that it's an "intelligent" algorithm in it's own right, and the conclusions it reaches (the balance on your and everyone else's accounts) are guided by the algorithm, which doesn't care about morals, especially not about the fickle current version (we're < 40 years removed from the prevailing opinion being that skin color determines your worth. In lots of regions that's still true, like large parts of India, or the vast majority of muslim countries).

The differences of opinion between people and "the system" are not really different from the differences between a dictator and it's subjects. Except, of course that the capitalist algorithmic dictator has several advantages. First, he cannot go mad (before you disagree, read up on a few dictators. It'll put things like the Iraq wars and the patent system in the proper perspective). Second capitalism has actual, real information to base it's conclusion on, and nobody can unduly influence it's opinions for long. Third this dictator doesn't care about race, social status, ... (imho conservatives are not fair when it comes to race and religion ("the poor are immoral" argument), liberals are not fair when it comes to social status ("the poor are dumb" argument). I don't want either to stay in power for long).

We're switching to a world in which the vast majority of the population is useless, economically. There is no reason for them to be alive, no value in it. There is no way to prevent our capitalist dictator from realizing this is so, and it will -my biology book uses the term "correct". That's the real problem.

brc5• 13 years ago

>the solution may be more Solyndras. Maybe we need some public institution - government or philanthropic - to grant loans at a 2 to 1 match for equity investment in companies that are tackling socially useful problems.

This is just torching money. It's all very well to say you're trying to destroy value to reach a social goal, but if you throw good money after bad on failed business ideas - no matter how noble the quest - you're still making life worse off for everybody.

Any good business that provides social benefit and has revenues higher than it's costs will go on to provide the benefits for many people.

You can't just throw money at a problem and hope to make it go away. It's especially worse if you throw public money at a problem.

Creating the next round of profitable companies hinge on the people involved understanding what goes into making a company profitable. If you hire a bunch of people and get them to tip public money into dead-end projects, all you've done is trained people to waste money.

The problem in the argument you have made is that you're insisting that something like facebook doesn't improve peoples quality of life, when it's patently obvious that it does, or people wouldn't use it.

I'm going to paraphrase-quote a pg essay here, but the point stays : 'it might be lamentable that people prefer beer and football to fine wine and opera, but you can't call it wrong when they have made that choice of their own free will'.

jchrisa• 13 years ago

After The Future is a great start for anyone who wants to go deeper than the stale "capitalism bad" arguments.

PDF http://www.sok.bz/web/media/video/AfterFuture.pdf

Or give money to the publisher and I hope the author: http://www.akpress.org/afterthefuture.html

Spoiler alert - let's forget communism, quit our jobs, and work toward Autonomy.

hcarvalhoalves2• 13 years ago

Found this interview with the main points about the book:

http://vimeo.com/25367464

Good ideas here.

sliverstorm8• 13 years ago

A thought occurs to me- the standard historical approach to natural monopolies that people have generally been happy with is government involvement, ala power plants. Would it be insane for the government to get involved with social networking?

Would ISPs and/or cellular service be a good example of what happens when government does not get involved? I don't follow that stuff too closely, but I think both have in fact been de-regulated?

zanny25• 13 years ago

ISPs and cell service are exactly what happens when government gets involved. Power plants are actually less regulated.

Cell service is compeltely broken because the government "sold" radio frequency spectrum. They sold all of it. Now there is none left to sell or distribute. And now a few concentrated companies own the rights (another government construct) to broadcast on their frequencies. So there is a rigged, no competition market, because you can't erect cell towers and broadcast on any frequency anymore (at least those viable for cell service) because someone owns that frequency band.

ISPs, again, are poor government intervention - almost all of the ground wires were laid under government subsidy upwards of a hundred years ago for some phone channels, so all the current private owners of coax / phone lines almost exclusively got them from government that already laid them, and rarely ever lays them themselves (and when they do, they do slight extensions to already established backbone, they aren't laying it themselves).

In addition, these private providers will contract with local governments to provide exclusive service, and will bribe the town council to block competition from laying their own lines (or heavens forbid, the township itself own the fucking wires running under their streets). As a result, you can't lay your own cable / fiber / phone lines (unless you are Google and have billions of political pressure) and even if you could, you are at an insurrmountable competitive disadvantage because not only does your competition already have all their wire laid decades ago, they can readily drop their prices to run you out of the market because they have barely any overhead in providing your service. They are making hand over fist profit off of consistent customers that are paying year on end. And then, there is inertia, and market manipulation by the established players, to make "average joes" not consider switching providers.

On the other end of the spectrum, it is federally regulated that power companies need to be contractable, in that you can select the company you get "power" from, even though the actual power lines are carrying juice from a thousand plants at any one time, and a lot of peoples homes are feeding back into the system. It is also regulation that enables average joes to set up their own solar panels / wind turbine / generator and get reimbursed any power they feed back into the system - if power companies could do whatever they wanted, they would prevent their customers from setting up their own power backup since it hurts their profits.

In the end, it is not very complex I think - even though the examples can be - if you stifle the ability for new players to enter a market, easily, and compete with the established ones (be it through insurmountable subsidized initial investment to enter the market, actual law book regulation preventing it, or rigged business code favoring the monopoly) you direly hurt the economy by creating artificial monopolies.

Even if the monopolies do "reasonably" well (NASA, for example, basically prevented private space investment because for 30 years it was hugely funded by taxpayers to own the sector, AT&T owned phone service for 60 years by government mandate, etc) markets with only one player (don't even look further than personal computing or the Linux world - there was barely any innovation in GCC until Clang came along to provide competition, or how Firefox had to get a lot faster when Chrome became a real competitor). Competition drives innovation, and in any situation where you facilitate a one man market, you will starve innovation and improvement just by only having one force in the market, even if they have good intentions.

Competition is essential to progress. It is the fuel that produces a huge amount of improvement in every field and business. So if a government is going to craft any law, it should be to make new competition easier to found and enter a market with, not harder. The electric grid regulation makes it easier to enter the market (even if the individual power sources are heavily regulated / zoned / mandated, and the status of a player against a power company only exists for consumers to power co, not business to power co, etc - there is a lot of regulatory cruft behind the respectable outer cover) and as a result promotes competition and better prices for the consumer (the ability to "shop" your power company in a state is a huge reason US power costs are so much lower than elsewhere in the world).

It is why almost all the innovation right now is in web / computers. It is barely regulated, extremely easy to enter the market, and as a result a disproportionate amount of ideas go into it (even when other fields cry for innovation, like medicine, agriculture, telecom, etc) because the market is free and as a result it is healthy.

bokonist4• 13 years ago

"Cell service is compeltely broken because the government "sold" radio frequency spectrum. They sold all of it."

Usually the government selling something off is not cited as an example of government intervention. Most lazzei-faire types believe that is exactly what government should do - sell off the property to put it in the hands of the free market.

The actually problems are three-fold. 1) The government still owns large portions of spectrum that are underutilized 2) the government restricts changing the use of spectrum, such as changing UHF TV into 4G and 3) the government does not charge any sort of property tax based on the value of the spectrum, so there is no incentive for the spectrum to end up with the highest value use.

"ISPs, again, are poor government intervention - almost all of the ground wires were laid under government subsidy upwards of a hundred years ago for some phone channels, "

Most people in my state get their internet via cable wires laid in the past few decades.

"In addition, these private providers will contract with local governments to provide exclusive service, and will bribe the town council to block competition from laying their own lines (or heavens forbid, the township itself own the fucking wires running under their streets)."

Local governments are much closer to small market players than they are to the leviathan state. There are thousands of towns and cities, but usually only a couple cable companies in any area. The exclusivity contracts are usually given out of position of weak bargaining power.

"and even if you could, you are at an insurrmountable competitive disadvantage because not only does your competition already have all their wire laid decades ago, they can readily drop their prices to run you out of the market because they have barely any overhead in providing your service."

And here is the problem that has nothing to do with government - broadband wired internet is a natural monopoly. There are extreme capital expenses and the company that builds the first network has a huge advantage, it is usually not profitable for a second business to enter the market.

So yeah, competition is good. But initiating competition in the cable market might require government intervention. It might require the government to subsidize a second network. It might require the government to block mergers between the cable companies and content providers. And even in the best case you are probably not going to have more than two or three broadband options in one town. So the government would probably still want to regulate the internet providers as common carriers ( http://en.wikipedia.org/wiki/Common_carrier ) and ensure network neutrality.

"AT&T owned phone service for 60 years by government mandate"

Keep in mind that AT&T pretty much built its monopoly on its own. The government had the choice between breaking it up, and converting it to a regulated monopoly, and chose the latter. This may have been the wrong choice, but the country was probably better off for having at least some government intervention, and not allowing the monopoly to be completely unregulated and dedicated solely towards shareholder profits.

jfim3• 13 years ago

Cell service would be worse off if anyone could decide to broadcast on any frequency; just like the tragedy of the commons[1], putting more emitters in the same frequencies raises the noise floor until it's simply impossible to get a good signal to noise ratio. Fixed spectrum allocations might not appear to be the best solution, but the alternative is just much worse.

While ISPs in Canada suck, here, last mile infrastructure owners are forced to lease their infrastructure to competitors; it means that if I am unhappy with my cable provider's internet service, I can get cheaper service provided by someone else over the same physical infrastructure. As you mention, that competition is healthy, even though the infrastructure owners try to gimp their competitors in every way allowed under the law.

[1] http://en.wikipedia.org/wiki/Tragedy_of_the_commons

rayiner4• 13 years ago

> Cell service is compeltely broken because the government "sold" radio frequency spectrum.

Selling spectrum is precisely the approach that was espoused by free-market economists since the days of Ronald Coase. It's not "rigged" or "no competition" any more than any sort of private property is that way. It's a commons resource, and that's the classical economic approach to handling commons resources: privatize them and sell them, so the market can allocate the resource to the highest-value users. You can't farm in my back yard either--that doesn't mean anything is "rigged." It just means that if your farming is higher in economic value than my use of the property, we engage in a market transaction to transfer ownership that moves the resource towards your higher value use.

So this is my little pet area of policy, and I think selling spectrum is the wrong way to go. But then again, I'm not much of a true believer in competition or the free market either.

sliverstorm8• 13 years ago

if you stifle the ability for new players to enter a market, easily, and compete with the established ones you direly hurt the economy by creating artificial monopolies.

I agree with everything you say, but I think I come to a slightly different conclusion. It sounds like in the special case of natural monopolies, what we need is rather than simply trying not to stifle competitors, we need to work to empower competitors- because of the special nature of natural monopolies.

This is still a form of regulation, so it sounds like regulation is fine for natural monopolies, so long as it goes in the right "direction", i.e. regulation that opens up the market rather than closing it.

bokonist4• 13 years ago

The problem with the standard approach to monopolies is that in the long term the corporation ends up having power over government, while popular power is disorganized and diffuse. See Government's End by Jonathan Rauch or read about the Problem of Collection Action by Mancur Olson.

My current thinking is that the best route would be to alter corporate charters to give consumers voting power as the company increased in market share. So if a company had 70% market share, there might be a consumer elected board that had the power to veto anti-competitive acquisitions, changes to the terms of service, changes to privacy policies, revocation of open access, etc. If you have Congress trying to regulate the company, the company will end up controlling Congress. But an elected consumers board should have a better shot at representing the interests of the customers of that company.

johncarpinelli• 13 years ago

I like this idea. If any rent-seeking group achieves market dominance, the government should regulate their prices. For example, the price of prescription drugs and higher education should be set by the government. Laissez-faire capitalism only works in markets with price competition.

Ultimately, I think most industries will evolve into government regulated monopolies. Consolidation is a standard part of the life-cycle for most markets. We should embrace the efficiency that dominant players can achieve.

With regard to individuals, I think a universal basic income is the long-term solution. Let a few people become billionaires, while the masses are paid to relax at home. There is a large amount of wasted resource in industries like retail, marketing and sales. Society would probably be better off if those industries shrank.

zanny25• 13 years ago

I have another viewpoint and solution proposition - I think the vast majority of the reason politicians can sanely get away with completely fucking over the many for the interests of the powerful few is because the power and influence is so far disconnected from the people themselves.

I wrote a stupidly long copy paste here: http://zannyland.blogspot.com/2012/10/political-ranting-part...

On this topic though, people should have very specific direct election of one representative, per 500 - 1500 people, who would represent them in local voting and selecting higher representatives from their elected peers (ie, a local council of 10 would select one to go to the state, the state would select maybe 3 to go federal), and higher tiers of government can't impose laws not adopted by the lower branches (1/4 of local governments can't actively oppose in legislation something proposed in the state, 1/4 of states can't oppose something federal, etc).

That way, to corrupt the whole, you need to corrupt a majority of the people to elect from themselves (because in a pool of 1500, preferably with 1 2 - 4 year office term per official, so career politicians are harder to come by) corrupt politicians to work against the publics interest. Sadly, I think the modern American public would probably do just that and fuck themselves over. It would require an independently minded, free thinking populace that can understand the world to understand forces are working against them. They aren't there now, though.

zanny25• 13 years ago

I think this article nails a lot of key points, and it is really spot on. The sad thing is not many people are going to read it because it is a lot of true words.

I don't think the economic culture of the US bred global business, though. I think the trivialization of the distance did. Glottalization meant that it would be much cheaper for a US based company to enter a fledgling market (say, McDonalds) and reestablish themselves as the market force in that area, since it has a much cheaper barrier to entry than building an entire enterprise from the ground up. The economies of scale grow faster as you approach ludicrously global scale, because you can really streamline all aspects of your business.

There isn't really a correlation with global business and competition, either - I'd say global business is only possible when corruption enables rent seeking business (which has no competition and is rigged to the market dominator) OR when there is real competition, and the global business is so successful because of the economies of scale and significantly lower market entry barriers to new regions than a brand new business.

So you could have either. We have, sadly, a lot of the first, but the second can happen to.

And global business (with competition) is good. It means the competition and economies of scale drive profits to zero, and maximize the benefit to the consumer.

The problem with global business is that when our markets and economics are global but our politics and emotions are local, those super companies have significantly more influence than a tiny group of people in an isolated pocket economy artificially cut off by an imaginary line on a map. The global business that truly connect the world extract their clout from the entirety of the species, while a countries politics gets its validation from its people.

And no country has a population, GDP, productivity, or workforce, competitive with the global one. Of course they will be corrupted by global business. Their resources are much more limited and restricted, because our politics and cultures are outdated in the face of a modern economy.

But this is just one piece of a giant puzzle. Individually, the problems are obvious, stupid, an simple, and often the work of the greedy and corrupt rent seekers. But there are millennias worth of built up greed to lead us to where we are today with the rigged system we work with, and the individual parts complement each other and support one another to maintain the whole broken game. The problem isn't fixing one part, it is figuring out how to remove the tumors before they kill the host, and there are millions of small tumors that add up to a large cancer. And as you chip at the fringes of one, the rest keep on poisoning the system, and they all have to be somehow dealt with.

bayesianhorse2• 13 years ago

The fundamental fallacy in this article is to assume that risk management and avoidance of risk is unproductive, unhealthy and inherently worthless.

But it's not. The financial markets direct energy towards new ideas, old enterprises and value storage. To do that, they have to allocate investment and risk.

Good risk management (or at least moderately well done) generates the best growth for the least risk. Bad risk management can be seen in several countries' stagnating GDP curves.

Nature does this too, by the way. Imagine an ant colony: It grows exponentially, because the more ants are in that colony, the more food they bring in and the more larvae can be raised. But the super organism has to make decisions, with surprisingly intelligent mechanisms, how many of the current ants to risk for food foraging, how many to hold in reserve, how many larvae to raise etc. If they do it right, they grow exponentially, but if they for example risk half of their workers on a single day and loose them to a rain fall or predator, they falter.

geebee• 13 years ago

I don't think the article makes this assumption. I'd say the general thesis presented in the article is in this sentence:

"Wall Street hedge funds rarely make their fortunes by placing sound long term bets about the proper allocation of resources. "

Now, there's a lot of wiggle room in the word "rarely." I think that everyone would agree that there is some rent-seeking behavior on wall street, and everyone would agree that the banking sector plays a critical role in the economy (moving money from where it is to where it is needed, and managing risk). So the real disagreement is about the ratio.

This article seems to imply that only a quarter of wall street's activities produce economic value. That's very low, lower than I've read anywhere. However, Paul Woolley at the LSE estimates that the financial sector would be a "third to a half" of its size (see link below), though, if it were limited to the wealth-producing activities. It's a controversial statement, of course, but he's hardly alone in this estimate.

For anyone interested in this topic, I'd recommend starting with a New Yorker article titled "what good is wall street?"

http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_...

And follow the links to the researchers listed to read more about the details that are not included in the New Yorker article.

koalaman• 13 years ago

Wow, that's a hell of a preamble just to bitch about Facebook.

Facebook emerged in a competitive market and was successful because it was visionary and was extremely well executed. I think that they deserve the success that they've had, and you will have to do some more convincing to show me the 'rent' that they are extracting from me.

Now if you were to ask me whether I think a closed proprietary corporate system is the ideal identity provider for the internet, I would say no. But I expect something better and more open to emerge within the next few years.

The fact remains that the internet sector is fiercely competitive and open, and America's internet sector is the envy of the world, and plenty of well managed countries have been so far unable to come close to matching it. Lumping Facebook and Google in with the financial and regulated monopolies does a disservice to your argument.

rayiner4• 13 years ago

Do you use Facebook because it's the best social network product, or do you use it because all your friends are using it? Can you imagine someone coming along and writing a better Facebook? One with stronger privacy controls, better UI, etc? Why hasn't anyone done it? Maybe it's because everyone uses Facebook?

The article's point on this is sound: Facebook makes a ton of money because it operates in an industry where the network effect gives it a natural monopoly. A competitor doesn't just need to build a better product, but they have to overcome the tremendous advantage of Facebook's network.

As the article points out, there is no money in competitive markets. In a competitive market, once Facebook proved the concept, it would've been flooded with clones offering the service at lower prices (less advertising). There is certainly nothing about the Facebook product itself that isn't easily copied.

snowwrestler• 13 years ago

People said the same things about MySpace and their lunch was eaten by Facebook.

I use Facebook because most of my friends and family are on Facebook--true. But there was a time when I did not use Facebook, but still kept in touch with friends and family. I transitioned to Facebook because it worked better than the previous technologies I used (snail mail, phone, email, MySpace, etc.).

There was nothing magically unique about that transition; it could happen again if someone makes something better than Facebook.

I actually don't think Facebook is a great example of rent-seeking because Facebook makes so little rent...Zuckerberg is rich on paper because of how he played the investment market, not the rent he charges on his product. Facebook's profits are very small.

Microsoft or Apple are probably better examples, but even those fail the typical definition of "rent-seeking", which is economic activity that is captured by regulatory exclusion. Neither Microsoft nor Apple achieved their position because the government mandated that everyone must use Windows or iTunes. They achieved their position by out-competing the alternatives.

It's true that once they were on top, they were harder to defeat. But that does not make them rent-seekers. And historically this sort of advantage tends to be pretty temporary. History is full of dominant companies that are no longer around. I remember a time when Microsoft was the feared 800 lb gorilla that no one could beat...people don't think that anymore.

mempko• 13 years ago

You have it precisely backwards. It is "visionary and extremely well executed" because it got a crazy amount of investment before it became popular. Some rich people in the Valley thought it provided some social value (not to us, but to them). It became good after a ton of money was poured into it. It didn't get a ton of money because it was good....

throwaway1979• 13 years ago

A quote comes to mind ... Capitalism is the greatest system we know of for creating weath. It is also one of the worst systems for distributing weath.

It seems we are coming to the point where automation has significantly reduced the need for labor in producing basic commodities. It is particularly challenging when one has to advise college bound students as to what subjects offer a rewarding career. The essay speaks highly of the wages in the medical profession ... I think that part of the essay was misinformed. I don't know any medical professional who is not independently weathy and can get by on their salaries. They have massive loans to pay and if they have their own practice, they have to deal with TONS of crap .. insurance, marketing, and so on.

numbsafari• 13 years ago

I sometimes wonder if the state of many MDs finances isn't the result of their own egos rather than any larger failing of "the system".

Most of my friends who became MDs gave almost zero thought to what they were paying for school. They also took on huge amounts of credit card debt while in school trying to live like doctors before they were doctors. Being in a half-decent pre-med or med school entitled them to ridiculous credit card offers. In their minds they were all "roughing it" by driving their parents' hand-me-down Volvos, but in reality they all had new clothes and expensive computers.

When it comes to school, most of them never looked at how much someone graduating from institution X will earn vs. the cost. They all simply wanted to go to Penn or Harvard or Hopkins. If offered a full-ride at a second or third tier institution, but no ride at a top tier school, they all took the no ride option (with one exception, and he's a very well paid anesthesiologist who came out with very modest debt).

Can I tell you how many times I've looked at what school my personal physician went to? Zero.

wyqueshocec• 13 years ago

> Capitalism is the greatest system we know of for creating weath. It is also one of the worst systems for distributing weath.

This is an oxymoron. "Wealth" is just stuff. Loaves of bread. Cars. iPhones. TV shows. If you create stuff but just keep it in your warehouse, it's going to go moldy and you're going to lose money. You have to distribute it to make money.

Money itself is of no value. You can't eat dollars, and mine don't sing or dance to entertain me. I suppose you could burn them for heat, if you have actual paper dollars :-)

scotty792• 13 years ago

I think one of most severe abuses is renting apartments to workers.

You buy apartments and charge people significant part of their earnings for the privilege of having a roof over their heads.

Why is that bad?

As an owner you don't live there yourself so you only have an incentive to keep the place in shape good enough to be rented. Which is usually pretty low.

The worst part is that if you can't find the people to occupy your apartment your costs are pretty low (you don't have a profit but that's not the same as money being drained from your account). So you can buy and hold apartment for years at very low cost. This creates artificial scarcity (in addition to actual scarcity) of places to live that keeps the prices up.

I think progressive property tax would enliven real estate trade. Prices would drop and more ordinary people could afford to buy one on credit instead of renting. This could save working people a lot of money so they can actually start their lives instead of slaving on their first job with just enough money to pay the rent.

Tax should be constructed in such way that holding even large apartment, or even two or three would pose no burden or almost no burden, but you might be better of selling your fifth apartment even at 50% below market price than holding it for a year.

tempaccount9473• 13 years ago

Selling your property involves paying a 5% cut to the agent, buying a property involves paying 5% in fees as points, closing costs, inspections, legal fees, etc. I would hate to do that every year or two as I moved between employers, but being able to rent an apartment anywhere in the world means I can go where there is demand for my skills.

The reason why people spend 65% of their after-tax income on rent is because people are willing to spend 65% of their after-tax income on rent. Supply and demand is a bitch, and when you fuck with it, you create massive distortions that end up enriching a small minority at the expense of everyone else (for an example, see anyone paying $600/mo for a nice 2 bedroom rent-controlled apartment in Manhattan).

And I like the idea behind a progressive property tax, but it would never, ever, ever become law in the US. Not while there is a single breath of life in any lobbyist or congressman.

scotty792• 13 years ago

Mobility is important but I think additional costs involved in buying/selling an apartment could be reduced if lots of properties often changed hands. There even could be whole credit products that could follow you and adjust accordingly as you swap houses. I know there's high demand for apartments in some areas but prices of most houses lost touch with what ordinary men can afford and I think artificial scarcity played a role in this. I think such tax could break a lot of currently parasitically growing rent based fortunes.

If you want to see how sick accommodation can get you don't have to look further than Japan. House there is such a valuable asset that it's often shared between three adult generations. And if you have to rent an apartment you often have to pay additional half a year of rent up front as a non-refundable gift to the landlord. http://en.wikipedia.org/wiki/Key_money

I think government should try to put as much of the real estate in hands of as many different people as it can.

I'm not saying government should hit families that own two or three apartments or houses and rent some. I just don't like the ones that hold dozens of properties (lots of them empty) barely keeping them from falling apart. That's no good to anyone, apart from them.

JimboOmega• 13 years ago

I think he missed one of the most obvious rent-seeking behaviors - fees. And reducing price transparency in general

Whether you are flying across the country, visiting the doctor, or trying to get Internet installed at your house, a large portion of the actual cost will probably be hidden from you. The travel industry, in particular, lives and dies by how well it hides the true cost from you.

Finding ways to make people pay more for the same things is a large and ever growing component of the economy that is fundamentally non-productive.

The Rent Seeking Economy

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